§ 54.4980B-10 Interaction of FMLA and COBRA.
The following questions-and-answers address how the taking of leave under the Family and Medical Leave Act of 1993 (FMLA) (29 U.S.C. 2601-2619) affects the COBRA continuation coverage requirements:
Q-1: In what circumstances does a qualifying event occur if an employee does not return from leave taken under FMLA?
A-1: (a) The taking of leave under FMLA does not constitute a qualifying event. A qualifying event under Q&A-1 of § 54.4980B-4 occurs, however, if—
(1) An employee (or the spouse or a dependent child of the employee) is covered on the day before the first day of FMLA leave (or becomes covered during the FMLA leave) under a group health plan of the employee's employer;
(2) The employee does not return to employment with the employer at the end of the FMLA leave; and
(3) The employee (or the spouse or a dependent child of the employee) would, in the absence of COBRA continuation coverage, lose coverage under the group health plan before the end of the maximum coverage period.
(b) However, the satisfaction of the three conditions in paragraph (a) of this Q&A-1 does not constitute a qualifying event if the employer eliminates, on or before the last day of the employee's FMLA leave, coverage under a group health plan for the class of employees (while continuing to employ that class of employees) to which the employee would have belonged if the employee had not taken FMLA leave.
Q-2: If a qualifying event described in Q&A-1 of this section occurs, when does it occur, and how is the maximum coverage period measured?
A-2: A qualifying event described in Q&A-1 of this section occurs on the last day of FMLA leave. (The determination of when FMLA leave ends is not made under the rules of this section. See the FMLA regulations, 29 CFR Part 825 (§§ 825.100-825.800).) The maximum coverage period (see Q&A-4 of § 54.4980B-7) is measured from the date of the qualifying event (that is, the last day of FMLA leave). If, however, coverage under the group health plan is lost at a later date and the plan provides for the extension of the required periods (see paragraph (b) of Q&A-4 of § 54.4980B-7), then the maximum coverage period is measured from the date when coverage is lost. The rules of this Q&A-2 are illustrated by the following examples:
Example 1. (i) Employee B is covered under the group health plan of Employer X on January 31, 2001. B takes FMLA leave beginning February 1, 2001. B's last day of FMLA leave is 12 weeks later, on April 25, 2001, and B does not return to work with X at the end of the FMLA leave. If B does not elect COBRA continuation coverage, B will not be covered under the group health plan of X as of April 26, 2001.
(ii) B experiences a qualifying event on April 25, 2001, and the maximum coverage period is measured from that date. (This is the case even if, for part or all of the FMLA leave, B fails to pay the employee portion of premiums for coverage under the group health plan of X and is not covered under X's plan. See Q&A-3 of this section.)
Example 2. (i) Employee C and C's spouse are covered under the group health plan of Employer Y on August 15, 2001. C takes FMLA leave beginning August 16, 2001. C informs Y less than 12 weeks later, on September 28, 2001, that C will not be returning to work. Under the FMLA regulations, 29 CFR Part 825 (§§ 825.100-825.800), C's last day of FMLA leave is September 28, 2001. C does not return to work with Y at the end of the FMLA leave. If C and C's spouse do not elect COBRA continuation coverage, they will not be covered under the group health plan of Y as of September 29, 2001.
(ii) C and C's spouse experience a qualifying event on September 28, 2001, and the maximum coverage period (generally 18 months) is measured from that date. (This is the case even if, for part or all of the FMLA leave, C fails to pay the employee portion of premiums for coverage under the group health plan of Y and C or C's spouse is not covered under Y's plan. See Q&A-3 of this section.)
Q-3: If an employee fails to pay the employee portion of premiums for coverage under a group health plan during FMLA leave or declines coverage under a group health plan during FMLA leave, does this affect the determination of whether or when the employee has experienced a qualifying event?
A-3: No. Any lapse of coverage under a group health plan during FMLA leave is irrelevant in determining whether a set of circumstances constitutes a qualifying event under Q&A-1 of this section or when such a qualifying event occurs under Q&A-2 of this section.
Q-4: Is the application of the rules in Q&A-1 through Q&A-3 of this section affected by a requirement of state or local law to provide a period of coverage longer than that required under FMLA?
A-4: No. Any state or local law that requires coverage under a group health plan to be maintained during a leave of absence for a period longer than that required under FMLA (for example, for 16 weeks of leave rather than for the 12 weeks required under FMLA) is disregarded for purposes of determining when a qualifying event occurs under Q&A-1 through Q&A-3 of this section.
Q-5: May COBRA continuation coverage be conditioned upon reimbursement of the premiums paid by the employer for coverage under a group health plan during FMLA leave?
A-5: No. The U.S. Department of Labor has published rules describing the circumstances in which an employer may recover premiums it pays to maintain coverage, including family coverage, under a group health plan during FMLA leave from an employee who fails to return from leave. See 29 CFR 825.213. Even if recovery of premiums is permitted under 29 CFR 825.213, the right to COBRA continuation coverage cannot be conditioned upon the employee's reimbursement of the employer for premiums the employer paid to maintain coverage under a group health plan during FMLA leave.
[T.D. 8928, 66 FR 1855, Jan. 10, 2001]
§ 54.4980D-1 Requirement of return and time for filing of the excise tax under section 4980D.
Q-1: If a person is liable for the excise tax under section 4980D, what form must the person file and what is the due date for the filing and payment of the excise tax?
A-1: (a) In general. See §§ 54.6011-2 and 54.6151-1.
(b) Due date for filing of return by employers. See § 54.6071-1(b)(1).
(c) Due date for filing of return by multiemployer plans or multiple employer health plans. See § 54.6071-1(b)(2).
(d) Effective/applicability date. In the case of an employer or other person mentioned in paragraph (b) of this Q & A-1, the rules in this Q & A-1 are effective for taxable years beginning on or after January 1, 2010. In the case of a plan mentioned in paragraph (c) of this Q & A-1, the rules in this Q & A-1 are effective for plan years beginning on or after January 1, 2010.
[T.D. 9457, 74 FR 45997, Sept. 8, 2009]
§ 54.4980E-1 Requirement of return and time for filing of the excise tax under section 4980E.
Q-1: If a person is liable for the excise tax under section 4980E, what form must the person file and what is the due date for the filing and payment of the excise tax?
A-1: (a) In general. See §§ 54.6011-2, 54.6151-1 and 54.6071-1(c).
(b) Effective/applicability date. The rules in this Q & A-1 are effective for plan years beginning on or after January 1, 2010.
[T.D. 9457, 74 FR 45997, Sept. 8, 2009]
§ 54.4980F-1 Notice requirements for certain pension plan amendments significantly reducing the rate of future benefit accrual.
The following questions and answers concern the notification requirements imposed by 4980F of the Internal Revenue Code and section 204(h) of ERISA relating to a plan amendment of an applicable pension plan that significantly reduces the rate of future benefit accrual or that eliminates or significantly reduces an early retirement benefit or retirement-type subsidy.
List of Questions Q-1. What are the notice requirements of section 4980F(e) of the Internal Revenue Code and section 204(h) of ERISA? Q-2. What are the differences between section 4980F and section 204(h)? Q-3. What is an “applicable pension plan” to which section 4980F and section 204(h) apply? Q-4. What is “section 204(h) notice” and what is a “section 204(h) amendment”? Q-5. For which amendments is section 204(h) notice required? Q-6. What is an amendment that reduces the rate of future benefit accrual or reduces an early retirement benefit or retirement-type subsidy for purposes of determining whether section 204(h) notice is required? Q-7. What plan provisions are taken into account in determining whether an amendment is a section 204(h) amendment? Q-8. What is the basic principle used in determining whether a reduction in the rate of future benefit accrual or a reduction in an early retirement benefit or retirement-type subsidy is significant for purposes of section 4980F and section 204(h)? Q-9. When must section 204(h) notice be provided? Q-10. To whom must section 204(h) notice be provided? Q-11. What information is required to be provided in a section 204(h) notice? Q-12. What special rules apply if participants can choose between the old and new benefit formulas? Q-13. How may section 204(h) notice be provided? Q-14. What are the consequences if a plan administrator fails to provide section 204(h) notice? Q-15. What are some of the rules that apply with respect to the excise tax under section 4980F? Q-16. How do section 4980F and section 204(h) apply when a business is sold? Q-17. How are amendments to cease accruals and terminate a plan treated under section 4980F and section 204(h)? Q-18. What are the effective dates of section 4980F, section 204(h), as amended by EGTRRA, and these regulations?
Questions and Answers
Q-1. What are the notice requirements of section 4980F(e) of the Internal Revenue Code and section 204(h) of ERISA?
A-1. (a) Requirements of Internal Revenue Code section 4980F(e) and ERISA section 204(h). Section 4980F of the Internal Revenue Code (section 4980F) and section 204(h) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), 29 U.S.C. 1054(h) (section 204(h)) each generally requires notice of an amendment to an applicable pension plan that either provides for a significant reduction in the rate of future benefit accrual or that eliminates or significantly reduces an early retirement benefit or retirement-type subsidy. The notice is required to be provided to plan participants and alternate payees who are applicable individuals (as defined in Q&A-10 of this section), to certain employee organizations, and to contributing employers under a multiemployer plan (as described in Q&A-10(a) of this section). The plan administrator must generally provide the notice before the effective date of the plan amendment. Q&A-9 of this section sets forth the time frames for providing notice, Q&A-11 of this section sets forth the content requirements for the notice, and Q&A-12 of this section contains special rules for cases in which participants can choose between the old and new benefit formulas.
(b) Other notice requirements. Other provisions of law may require that certain parties be notified of a plan amendment. See, for example, sections 102 and 104 of ERISA, and the regulations thereunder, for requirements relating to summary plan descriptions and summaries of material modifications.
Q-2. What are the differences between section 4980F and section 204(h)?
A-2. The notice requirements of section 4980F generally are parallel to the notice requirements of section 204(h), as amended by the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 38) (2001) (EGTRRA). However, the consequences of the failure to satisfy the requirements of the two provisions differ: Section 4980F imposes an excise tax on a failure to satisfy the notice requirements, while section 204(h)(6), as amended by EGTRRA, contains a special rule with respect to an egregious failure to satisfy the notice requirements. See Q&A-14 and Q&A-15 of this section. Except to the extent specifically indicated, these regulations apply both to section 4980F and to section 204(h).
Q-3. What is an “applicable pension plan” to which section 4980F and section 204(h) apply?
A-3. (a) In general. Section 4980F and section 204(h) apply to an applicable pension plan. For purposes of section 4980F, an applicable pension plan means a defined benefit plan qualifying under section 401(a) or 403(a) of the Internal Revenue Code, or an individual account plan that is subject to the funding standards of section 412 of the Internal Revenue Code. For purposes of section 204(h), an applicable pension plan means a defined benefit plan that is subject to part 2 of subtitle B of title I of ERISA, or an individual account plan that is subject to such part 2 and to the funding standards of section 412 of the Internal Revenue Code. Accordingly, individual account plans that are not subject to the funding standards of section 412 of the Internal Revenue Code, such as profit-sharing and stock bonus plans and contracts under section 403(b) of the Internal Revenue Code, are not applicable pension plans to which section 4980F or section 204(h) apply. Similarly, a defined benefit plan that neither qualifies under section 401(a) or 403(a) of the Internal Revenue Code nor is subject to part 2 of subtitle B of title I of ERISA is not an applicable pension plan. Further, neither a governmental plan (within the meaning of section 414(d) of the Internal Revenue Code), nor a church plan (within the meaning of section 414(e) of the Internal Revenue Code) with respect to which no election has been made under section 410(d) of the Internal Revenue Code is an applicable pension plan.
(b) Section 204(h) notice not required for small plans covering no employees. Section 204(h) notice is not required for a plan under which no employees are participants covered under the plan, as described in § 2510.3-3(b) of the Department of Labor regulations, and which has fewer than 100 participants.
Q-4. What is “section 204(h) notice” and what is a “section 204(h) amendment”?
A-4. (a) Section 204(h) notice is notice that complies with section 4980F(e) of the Internal Revenue Code, section 204(h)(1) of ERISA, and this section.
(b) A section 204(h) amendment is an amendment for which section 204(h) notice is required under this section.
Q-5. For which amendments is section 204(h) notice required?
A-5. (a) Significant reduction in the rate of future benefit accrual. Section 204(h) notice is required for an amendment to an applicable pension plan that provides for a significant reduction in the rate of future benefit accrual.
(b) Early retirement benefits and retirement-type subsidies. Section 204(h) notice is also required for an amendment to an applicable pension plan that provides for the significant reduction of an early retirement benefit or retirement-type subsidy. For purposes of this section, early retirement benefit and retirement-type subsidy mean early retirement benefits and retirement-type subsidies within the meaning of section 411(d)(6)(B)(i).
(c) Elimination or cessation of benefits. For purposes of this section, the terms reduce or reduction include eliminate or cease or elimination or cessation.
(d) Delegation of authority to Commissioner. The Commissioner may provide in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter) that section 204(h) notice need not be provided for plan amendments otherwise described in paragraph (a) or (b) of this Q&A-5 that the Commissioner determines to be necessary or appropriate, as a result of changes in the law, to maintain compliance with the requirements of the Internal Revenue Code (including requirements for tax qualification), ERISA, or other applicable federal law.
Q-6. What is an amendment that reduces the rate of future benefit accrual or reduces an early retirement benefit or retirement-type subsidy for purposes of determining whether section 204(h) notice is required?
A-6. (a) In general. For purposes of determining whether section 204(h) notice is required, an amendment reduces the rate of future benefit accrual or reduces an early retirement benefit or retirement-type subsidy only as provided in paragraph (b) or (c) of this Q&A-6.
(b) Reduction in rate of future benefit accrual—(1) Defined benefit plans. For purposes of section 4980F and section 204(h), an amendment to a defined benefit plan reduces the rate of future benefit accrual only if it is reasonably expected that the amendment will reduce the amount of the future annual benefit commencing at normal retirement age (or at actual retirement age, if later) for benefits accruing for a year. For this purpose, the annual benefit commencing at normal retirement age is the benefit payable in the form in which the terms of the plan express the accrued benefit (or, in the case of a plan in which the accrued benefit is not expressed in the form of an annual benefit commencing at normal retirement age, the benefit payable in the form of a single life annuity commencing at normal retirement age that is the actuarial equivalent of the accrued benefit expressed under the terms of the plan, as determined in accordance with section 411(c)(3) of the Internal Revenue Code).
(2) Individual account plans. For purposes of section 4980F and section 204(h), an amendment to an individual account plan reduces the rate of future benefit accrual only if it is reasonably expected that the amendment will reduce the amount of contributions or forfeitures allocated for any future year. Changes in the investments or investment options under an individual account plan are not taken into account for this purpose.
(3) Determination of rate of future benefit accrual. The rate of future benefit accrual for purposes of this paragraph (b) is determined without regard to optional forms of benefit within the meaning of § 1.411(d)-4, Q&A-1(b) of this chapter (other than the annual benefit described in paragraph (b)(1) of this Q&A-6). The rate of future benefit accrual is also determined without regard to ancillary benefits and other rights or features as defined in § 1.401(a)(4)-4(e) of this chapter.
(c) Reduction of early retirement benefits or retirement-type subsidies. For purposes of section 4980F and section 204(h), an amendment reduces an early retirement benefit or retirement-type subsidy only if it is reasonably expected that the amendment will eliminate or reduce an early retirement benefit or retirement-type subsidy.
Q-7. What plan provisions are taken into account in determining whether an amendment is a section 204(h) amendment?
A-7. (a) Plan provisions taken into account—-(1) In general. All plan provisions that may affect the rate of future benefit accrual, early retirement benefits, or retirement-type subsidies of participants or alternate payees must be taken into account in determining whether an amendment is a section 204(h) amendment. For example, plan provisions that may affect the rate of future benefit accrual include the dollar amount or percentage of compensation on which benefit accruals are based; the definition of service or compensation taken into account in determining an employee's benefit accrual; the method of determining average compensation for calculating benefit accruals; the definition of normal retirement age in a defined benefit plan; the exclusion of current participants from future participation; benefit offset provisions; minimum benefit provisions; the formula for determining the amount of contributions and forfeitures allocated to participants' accounts in an individual account plan; in the case of a plan using permitted disparity under section 401(l) of the Internal Revenue Code, the amount of disparity between the excess benefit percentage or excess contribution percentage and the base benefit percentage or base contribution percentage (all as defined in section 401(l) of the Internal Revenue Code); and the actuarial assumptions used to determine contributions under a target benefit plan (as defined in § 1.401(a)(4)-8(b)(3)(i) of this chapter). Plan provisions that may affect early retirement benefits or retirement-type subsidies include the right to receive payment of benefits after severance from employment and before normal retirement age and actuarial factors used in determining optional forms for distribution of retirement benefits.
(2) Provisions incorporated by reference in plan. If all or a part of a plan's rate of future benefit accrual, or an early retirement benefit or retirement-type subsidy provided under the plan, depends on provisions in another document that are referenced in the plan document, a change in the provisions of the other document is an amendment of the plan.
(b) Plan provisions not taken into account—(1) In general. Plan provisions that do not affect the rate of future benefit accrual of participants or alternate payees are not taken into account in determining whether there has been a reduction in the rate of future benefit accrual.
(2) Interaction with section 411(d)(6). Any benefit that is not a section 411(d)(6) protected benefit as described in §§ 1.411(d)-3(g)(14) and 1.411(d)-4, Q&A-1(d) of this chapter, or that is a section 411(d)(6) protected benefit that may be eliminated or reduced as permitted under § 1.411(d)-3(c), (d), or (f), or under § 1.411(d)-4, Q&A-2(a)(2), (a)(3), (b)(1), or (b)(2)(ii) through (b)(2)(xi) of this chapter, is not taken into account in determining whether an amendment is a section 204(h) amendment. Thus, for example, provisions relating to the right to make after-tax deferrals are not taken into account.
(c) Examples. The following examples illustrate the rules in this Q&A-7:
Example 1. (i) Facts. A defined benefit plan provides a normal retirement benefit equal to 50% of highest 5-year average pay multiplied by a fraction (not in excess of one), the numerator of which equals the number of years of participation in the plan and the denominator of which is 20. A plan amendment is adopted that changes the numerator or denominator of that fraction.
(ii) Conclusion. The plan amendment must be taken into account in determining whether there has been a reduction in the rate of future benefit accrual.
Example 2. (i) Facts. Plan C is a multiemployer defined benefit plan subject to several collective bargaining agreements. The specific benefit formula under Plan C that applies to an employee depends on the hourly rate of contribution of the employee's employer, which is set forth in the provisions of the collective bargaining agreements that are referenced in the Plan C document. Collective Bargaining Agreement A between Employer B and the union representing employees of Employer B is renegotiated to provide that the hourly contribution rate for an employee of B who is subject to the Collective Bargaining Agreement A will decrease. That decrease will result in a decrease in the rate of future benefit accrual for employees of B.
(ii) Conclusion. Under paragraph (a)(2) of this Q&A-7, the change to Collective Bargaining Agreement A is a plan amendment that is a section 204(h) amendment if the reduction in the rate of future benefit accrual is significant.
Q-8. What is the basic principle used in determining whether a reduction in the rate of future benefit accrual or a reduction in an early retirement benefit or retirement-type subsidy is significant for purposes of section 4980F and section 204(h)?
A-8. (a) General rule. Whether an amendment reducing the rate of future benefit accrual or eliminating or reducing an early retirement benefit or retirement-type subsidy provides for a reduction that is significant for purposes of section 4980F (and section 204(h) of ERISA) is determined based on reasonable expectations taking into account the relevant facts and circumstances at the time the amendment is adopted, or, if earlier, at the effective date of the amendment.
(b) Application for determining significant reduction in the rate of future benefit accrual. For a defined benefit plan, the determination of whether an amendment provides for a significant reduction in the rate of future benefit accrual is made by comparing the amount of the annual benefit commencing at normal retirement age (or at actual retirement age, if later), as determined under Q&A-6(b)(1) of this section, under the terms of the plan as amended with the amount of the annual benefit commencing at normal retirement age (or at actual retirement age, if later), as determined under Q&A-6(b)(1) of this section, under the terms of the plan prior to amendment. For an individual account plan, the determination of whether an amendment provides for a significant reduction in the rate of future benefit accrual is made in accordance with Q&A-6(b)(2) of this section by comparing the amounts to be allocated in the future to participants' accounts under the terms of the plan as amended with the amounts to be allocated in the future to participants' accounts under the terms of the plan prior to amendment. An amendment to convert a money purchase pension plan to a profit-sharing or other individual account plan that is not subject to section 412 of the Internal Revenue Code is, in all cases, deemed to be an amendment that provides for a significant reduction in the rate of future benefit accrual.
(c) Application to certain amendments reducing early retirement benefits or retirement-type subsidies. Section 204(h) notice is not required for an amendment that reduces an early retirement benefit or retirement-type subsidy if the amendment is permitted under the third sentence of section 411(d)(6)(B) of the Internal Revenue Code and paragraphs (c), (d), and (f) of § 1.411(d)-3 of this chapter (relating to the elimination or reduction of benefits or subsidies which create significant burdens or complexities for the plan and plan participants unless the amendment adversely affects the rights of any participant in a more than de minimis manner). However, in determining whether an amendment reducing a retirement-type subsidy constitutes a significant reduction because it reduces a retirement-type subsidy as permitted under § 1.411(d)-3(e)(6) of this chapter, the amendment is treated in the same manner as an amendment that limits the retirement-type subsidy to benefits that accrue before the applicable amendment date (as defined at § 1.411(d)-3(g)(4) of this chapter) with respect to each participant or alternate payee to whom the reduction is reasonably expected to apply.
(d) Plan amendments reflecting a change in statutorily mandated minimum present value rules. If a defined benefit plan offers a distribution to which the minimum present value rules of section 417(e)(3) apply (other than a payment to which section 411(a)(13)(A) applies) and the plan is amended to reflect the changes to the applicable interest rate and applicable mortality table in section 417(e)(3) made by the Pension Protection Act of 2006, Public Law 109-780 (120 Stat. 780) (PPA '06) (and no change is made in the dates on which the payment will be made), no section 204(h) notice is required to be provided.
(e) Examples. The following examples illustrate the rules in this Q&A-8:
Example 1. (i) Facts. Pension Plan A is a defined benefit plan that provides a rate of benefit accrual of 1% of highest-5 years pay multiplied by years of service, payable annually for life commencing at normal retirement age (or at actual retirement age, if later). An amendment to Plan A is adopted on August 1, 2009, effective January 1, 2010, to provide that any participant who separates from service after December 31, 2009, and before January 1, 2015, will have the same number of years of service he or she would have had if his or her service continued to December 31, 2014.
(ii) Conclusion. In this example, the effective date of the plan amendment is January 1, 2010. While the amendment will result in a reduction in the annual rate of future benefit accrual from 2011 through 2014 (because, under the amendment, benefits based upon an additional 5 years of service accrue on January 1, 2010, and no additional service is credited after January 1, 2010 until January 1, 2015), the amendment does not result in a reduction that is significant because the amount of the annual benefit commencing at normal retirement age (or at actual retirement age, if later) under the terms of the plan as amended is not under any conditions less than the amount of the annual benefit commencing at normal retirement age (or at actual retirement age, if later) to which any participant would have been entitled under the terms of the plan had the amendment not been made.
Example 2. (i) Facts. The facts are the same as in Example 1, except that the 2009 amendment does not alter the plan provisions relating to a participant's number of years of service, but instead amends the plan's provisions relating to early retirement benefits. Before the amendment, the plan provides for distributions before normal retirement age to be actuarially reduced, but, if a participant retires after attainment of age 55 and completion of 10 years of service, the applicable early retirement reduction factor is 3% per year for the years between the ages 65 and 62 and 6% per year for the ages from 62 to 55. The amendment changes these provisions so that an actuarial reduction applies in all cases, but, in accordance with section 411(d)(6)(B), provides that no participant's early retirement benefit will be less than the amount provided under the plan as in effect on December 31, 2009 with respect to service before January 1, 2010. For participant X, the reduction is significant.
(ii) Conclusion. The amendment will result in a reduction in a retirement-type subsidy provided under Plan A (i.e., Plan A's early retirement subsidy). Section 204(h) notice must be provided to participant X and any other participant for whom the reduction is significant and the notice must be provided at least 45 days before January 1, 2010 (or by such other date as may apply under Q&A-9 of this section).
Example 3. (i) Facts. The facts are the same as in Example 2, except that, for participant X, the change does not go into effect for any annuity commencement date before January 1, 2011. Participant X continues employment through January 1, 2011.
(ii) Conclusion. The conclusion is the same as in Example 2. Taking into account the rule in the second sentence of Q&A-8(c) of this section, the reduction that occurs for participant X on January 1, 2011, is treated as the same reduction that occurs under Example 2. Accordingly, assuming that the reduction is significant, section 204(h) notice must be provided to participant X at least 45 days before the January 1, 2010 effective date of the amendment (or by such other date as may apply under Q&A-9 of this section).
Q-9. When must section 204(h) notice be provided?
A-9. (a) 45-day general rule. Except as otherwise provided in this Q&A-9, section 204(h) notice must be provided at least 45 days before the effective date of any section 204(h) amendment. See paragraph (e) of this Q&A-9 for special rules for amendments permitting participant choice.
(b) 15-day rule for small plans. Except for amendments described in paragraphs (d)(2) and (g) of this Q&A-9, section 204(h) notice must be provided at least 15 days before the effective date of any section 204(h) amendment in the case of a small plan. For purposes of this section, a small plan is a plan that the plan administrator reasonably expects to have, on the effective date of the section 204(h) amendment, fewer than 100 participants who have an accrued benefit under the plan.
(c) 15-day rule for multiemployer plans. Except for amendments described in paragraphs (d)(2) and (g) of this Q&A-9, section 204(h) notice must be provided at least 15 days before the effective date of any section 204(h) amendment in the case of a multiemployer plan. For purposes of this section, a multiemployer plan means a multiemployer plan as defined in section 414(f) of the Internal Revenue Code.
(d) Special timing rule for business transactions—(1) 15-day rule for section 204(h) amendment in connection with an acquisition or disposition. Except for amendments described in paragraphs (d)(2) and (g) of this Q&A-9, if a section 204(h) amendment is adopted in connection with an acquisition or disposition, section 204(h) notice must be provided at least 15 days before the effective date of the section 204(h) amendment.
(2) Later notice permitted for a section 204(h) amendment significantly reducing early retirement benefit or retirement-type subsidies in connection with certain plan transfers, mergers, or consolidations. If a section 204(h) amendment is adopted with respect to liabilities that are transferred to another plan in connection with a transfer, merger, or consolidation of assets or liabilities as described in section 414(l) of the Internal Revenue Code and § 1.414(l)-1 of this chapter, the amendment is adopted in connection with an acquisition or disposition, and the amendment significantly reduces an early retirement benefit or retirement-type subsidy, but does not significantly reduce the rate of future benefit accrual, then section 204(h) notice must be provided no later than 30 days after the effective date of the section 204(h) amendment.
(3) Definition of acquisition or disposition. For purposes of this paragraph (d), see § 1.410(b)-2(f) of this chapter for the definition of acquisition or disposition.
(e) Timing rule for amendments permitting participant choice. In general, section 204(h) notice of a section 204(h) amendment that provides applicable individuals with a choice between the old and the new benefit formulas (as described in Q&A-12 of this section) must be provided in accordance with the time period applicable under paragraphs (a) through (d) of this Q&A-9. See Q&A-12 of this section for additional guidance regarding section 204(h) notice in connection with participant choice.
(f) Special timing rule for certain plans maintained by commercial airlines. See section 402 of PPA '06 for a special rule that applies to certain plans maintained by an employer that is a commercial passenger airline or the principal business of which is providing catering services to a commercial passenger airline. Under this special rule, section 204(h) notice must be provided at least 15 days before the effective date of the amendment.
(g) Special timing rules relating to certain section 204(h) amendments that reduce section 411(d)(6) protected benefits—(1) Plan amendments permitted to reduce prior accruals. This paragraph (g) generally provides special rules with respect to a plan amendment that would not violate section 411(d)(6) even if the amendment were to reduce section 411(d)(6) protected benefits, which are limited to accrued benefits that are attributable to service before the applicable amendment date. For example, this paragraph (g) applies to amendments that are permitted to be effective retroactively under section 412(d)(2) of the Code (section 412(c)(8) for plan years beginning before January 1, 2008), section 418D of the Code, section 418E of the Code, section 4281 of ERISA, or section 1107 of PPA '06. See, generally, § 1.411(d)-3(a)(1).
(2) General timing rule for amendments to which this paragraph (g) applies. For an amendment to which this paragraph (g) applies, the amendment is effective on the first date on which the plan is operated as if the amendment were in effect. Thus, except as otherwise provided in this paragraph (g), a section 204(h) notice for an amendment to which paragraph (a) of this section applies that is adopted after the effective date of the amendment must be provided, with respect to any applicable individual, at least 45 days before (or such other date as may apply under paragraph (b), (c), (d), or (f) of this Q&A-9) the date the amendment is put into operational effect.
(3) Special rules for section 204(h) notices provided in connection with other disclosure requirements—(i) In general. Notwithstanding the requirements in this Q&A-9 and Q&A-11 of this section, if a plan provides one of the notices in paragraph (g)(3)(ii) of this Q&A-9, in accordance with the applicable timing and content rules for such notice, the plan is treated as timely providing a section 204(h) notice with respect to a section 204(h) amendment.
(ii) Notice requirements. The notices in this paragraph (g)(3)(ii) are—
(A) A notice required under any revenue ruling, notice, or other guidance published under the authority of the Commissioner in the Internal Revenue Bulletin to affected parties in connection with a retroactive plan amendment described in section 412(d)(2) (section 412(c)(8) for plan years beginning before January 1, 2008);
(B) A notice required under section 101(j) of ERISA if an amendment is adopted to comply with the benefit limitation requirements of section 206(g) of ERISA (section 436 of the Code);
(C) A notice required under section 432(b)(3)(D) of the Code for an amendment adopted to comply with the benefit restrictions under section 432(f)(2);
(D) A notice required under section 418D, or section 4244A(b) of ERISA, for an amendment that reduces or eliminates accrued benefits attributable to employer contributions with respect to a multiemployer plan in reorganization;
(E) A notice required under section 418E, or section 4245(e) of ERISA, relating to the effects of the insolvency status for a multiemployer plan; and
(F) A notice required under section 4281 of ERISA for an amendment of a multiemployer plan reducing benefits pursuant to section 4281(c) of ERISA.
(4) Delegation of authority to Commissioner. The Commissioner may provide special rules under section 4980F, in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter), that the Commissioner determines to be necessary or appropriate with respect to a section 204(h) amendment—
(A) That applies to benefits accrued before the applicable amendment date but that does not violate section 411(d)(6); or
(B) For which there is a required notice relating to a reduction in benefits and such notice has timing and content requirements similar to a section 204(h) notice with respect to a significant reduction in the rate of future benefit accruals.
Q-10. To whom must section 204(h) notice be provided?
A-10. (a) In general. Section 204(h) notice must be provided to each applicable individual, to each employee organization representing participants who are applicable individuals, and, for plan years beginning after December 31, 2007, to each employer that has an obligation to contribute (within the meaning of section 4212(a) of ERISA) to a multiemployer plan. A special rule is provided in paragraph (d) of this Q&A-10.
(b) Applicable individual. Applicable individual means each participant in the plan, and any alternate payee, whose rate of future benefit accrual under the plan is reasonably expected to be significantly reduced, or for whom an early retirement benefit or retirement-type subsidy under the plan may reasonably be expected to be significantly reduced, by the section 204(h) amendment. The determination is made with respect to individuals who are reasonably expected to be participants or alternate payees in the plan at the effective date of the section 204(h) amendment.
(c) Alternate payee. Alternate payee means a beneficiary who is an alternate payee (within the meaning of section 414(p)(8) of the Internal Revenue Code) under an applicable qualified domestic relations order (within the meaning of section 414(p)(1)(A) of the Internal Revenue Code).
(d) Designees. Section 204(h) notice may be provided to a person designated in writing by an applicable individual or by an employee organization representing participants who are applicable individuals, instead of being provided to that applicable individual or employee organization. Any designation of a representative made through an electronic method that satisfies standards similar to those of Q&A-13(c)(1) of this section satisfies the requirement that a designation be in writing.
(e) Facts and circumstances test. Whether a participant or alternate payee is an applicable individual is determined on a typical business day that is reasonably proximate to the time the section 204(h) notice is provided (or at the latest date for providing section 204(h) notice, if earlier), based on all relevant facts and circumstances.
(f) Examples. The following examples illustrate the rules in this Q&A-10:
Example 1. (i) Facts. A defined benefit plan requires an individual to complete 1 year of service to become a participant who can accrue benefits, and participants cease to accrue benefits under the plan at severance from employment with the employer. There are no alternate payees and employees are not represented by an employee organization. On November 18, 2004, the plan is amended effective as of January 1, 2005 to reduce significantly the rate of future benefit accrual. Section 204(h) notice is provided on November 1, 2004.
(ii) Conclusion. Section 204(h) notice is only required to be provided to individuals who, based on the facts and circumstances on November 1, 2004, are reasonably expected to have completed at least 1 year of service and to be employed by the employer on January 1, 2005.
Example 2. (i) Facts. The facts are the same as in Example 1, except that the sole effect of the plan amendment is to alter the pre-amendment plan provisions under which benefits payable to an employee who retires after 20 or more years of service are unreduced for commencement before normal retirement age. The amendment requires 30 or more years of service in order for benefits commencing before normal retirement age to be unreduced, but the amendment only applies for future benefit accruals.
(ii) Conclusion. Section 204(h) notice is only required to be provided to individuals who, on January 1, 2005, have completed at least 1 year of service but less than 30 years of service, are employed by the employer, have not attained normal retirement age, and will have completed 20 or more years of service before normal retirement age if their employment continues to normal retirement age.
Example 3. (i) Facts. A plan is amended to reduce significantly the rate of future benefit accrual for all current employees who are participants. Based on the facts and circumstances, it is reasonable to expect that the amendment will not reduce the rate of future benefit accrual of former employees who are currently receiving benefits or of former employees who are entitled to deferred vested benefits.
(ii) Conclusion. The plan administrator is not required to provide section 204(h) notice to any former employees.
Example 4. (i) Facts. The facts are the same as in Example 3, except that the plan covers two groups of alternate payees. The alternate payees in the first group are entitled to a certain percentage or portion of the former spouse's accrued benefit and, for this purpose, the accrued benefit is determined at the time the former spouse begins receiving retirement benefits under the plan. The alternate payees in the second group are entitled to a certain percentage or portion of the former spouse's accrued benefit and, for this purpose, the accrued benefit was determined at the time the qualified domestic relations order was issued by the court.
(ii) Conclusion. It is reasonable to expect that the benefits to be received by the second group of alternate payees will not be affected by any reduction in a former spouse's rate of future benefit accrual. Accordingly, the plan administrator is not required to provide section 204(h) notice to the alternate payees in the second group.
Example 5. (i) Facts. A plan covers hourly employees and salaried employees. The plan provides the same rate of benefit accrual for both groups. The employer amends the plan to reduce significantly the rate of future benefit accrual of the salaried employees only. At that time, it is reasonable to expect that only a small percentage of hourly employees will become salaried in the future.
(ii) Conclusion. The plan administrator is not required to provide section 204(h) notice to the participants who are currently hourly employees.
Example 6. (i) Facts. A plan covers employees in Division M and employees in Division N. The plan provides the same rate of benefit accrual for both groups. The employer amends the plan to reduce significantly the rate of future benefit accrual of employees in Division M. At that time, it is reasonable to expect that in the future only a small percentage of employees in Division N will be transferred to Division M.
(ii) Conclusion. The plan administrator is not required to provide section 204(h) notice to the participants who are employees in Division N.
Example 7. (i) Facts. The facts are the same facts as in Example 6, except that at the time the amendment is adopted, it is expected that thereafter Division N will be merged into Division M in connection with a corporate reorganization (and the employees in Division N will become subject to the plan's amended benefit formula applicable to the employees in Division M).
(ii) Conclusion. In this case, the plan administrator must provide section 204(h) notice to the participants who are employees in Division M and to the participants who are employees in Division N.
Example 8. (i) Facts. A plan is amended to reduce significantly the rate of future benefit accrual for all current employees who are participants. The plan amendment will be effective on January 1, 2004. The plan will provide the notice to applicable individuals on October 31, 2003. In determining which current employees are applicable individuals, the plan administrator determines that October 1, 2003, is a typical business day that is reasonably proximate to the time the section 204(h) notice is provided.
(ii) Conclusion. In this case, October 1, 2003 is a typical business day that satisfies the requirements of Q&A-10(e) of this section.
Q-11. What information is required to be provided in a section 204(h) notice?
A-11. (a) Explanation of notice requirements—(1) In general. Section 204(h) notice must include sufficient information to allow applicable individuals to understand the effect of the plan amendment. In order to satisfy this rule, a plan administrator providing section 204(h) notice must generally satisfy paragraphs (a)(2), (a)(3), (a)(4), (a)(5), and (a)(6) of this Q&A-11. See paragraph (g)(3) of Q&A-9 of this section for special rules relating to section 204(h) notices provided in connection with certain other written notices. See also paragraph (g)(4) of Q&A-9 of this section for a delegation of authority to the Commissioner to provide special rules.
(2) Information in section 204(h) notice. The information in a section 204(h) notice must be written in a manner calculated to be understood by the average plan participant and to apprise the applicable individual of the significance of the notice.
(3) Required narrative description of amendment—(i) Reduction in rate of future benefit accrual. In the case of an amendment reducing the rate of future benefit accrual, the notice must include a description of the benefit or allocation formula prior to the amendment, a description of the benefit or allocation formula under the plan as amended, and the effective date of the amendment.
(ii) Reduction in early retirement benefit or retirement-type subsidy. In the case of an amendment that reduces an early retirement benefit or retirement-type subsidy (other than as a result of an amendment reducing the rate of future benefit accrual), the notice must describe how the early retirement benefit or retirement-type subsidy is calculated from the accrued benefit before the amendment, how the early retirement benefit or retirement-type subsidy is calculated from the accrued benefit after the amendment, and the effective date of the amendment. For example, if, for a plan with a normal retirement age of 65, the change is from an unreduced normal retirement benefit at age 55 to an unreduced normal retirement benefit at age 60 for benefits accrued in the future, with an actuarial reduction to apply for benefits accrued in the future to the extent that the early retirement benefit begins before age 60, the notice must state the change and specify the factors that apply in calculating the actuarial reduction (for example, a 5% per year reduction applies for early retirement before age 60).
(4) Sufficient information to determine the approximate magnitude of reduction—(i) General rule. (A) Section 204(h) notice must include sufficient information for each applicable individual to determine the approximate magnitude of the expected reduction for that individual. Thus, in any case in which it is not reasonable to expect that the approximate magnitude of the reduction for each applicable individual will be reasonably apparent from the description of the amendment provided in accordance with paragraph (a)(3) of this Q&A-11, further information is required. The further information may be provided by furnishing additional narrative information or in other information that satisfies this paragraph of this section.
(B) To the extent any expected reduction is not uniformly applicable to all participants, the notice must either identify the general classes of participants to whom the reduction is expected to apply, or by some other method include sufficient information to allow each applicable individual receiving the notice to determine which reductions are expected to apply to that individual.
(ii) Illustrative examples—(A) Requirement generally. The requirement to include sufficient information for each applicable individual to determine the approximate magnitude of the expected reduction for that individual under (a)(4)(i)(A) of this Q&A-11 is deemed satisfied if the notice includes one or more illustrative examples showing the approximate magnitude of the reduction in the examples, as provided in this paragraph (a)(4)(ii). Illustrative examples are in any event required to be provided for any change from a traditional defined benefit formula to a cash balance formula or a change that results in a period of time during which there are no accruals (or minimal accruals) with regard to normal retirement benefits or an early retirement subsidy (a wear-away period).
(B) Examples must bound the range of reductions. Where an amendment results in reductions that vary (either among participants, as would occur for an amendment converting a traditional defined benefit formula to a cash balance formula, or over time as to any individual participant, as would occur for an amendment that results in a wear-away period), the illustrative example(s) provided in accordance with this paragraph (a)(4)(ii) must show the approximate range of the reductions. However, any reductions that are likely to occur in only a de minimis number of cases are not required to be taken into account in determining the range of the reductions if a narrative statement is included to that effect and examples are provided that show the approximate range of the reductions in other cases. Amendments for which the maximum reduction occurs under identifiable circumstances, with proportionately smaller reductions in other cases, may be illustrated by one example illustrating the maximum reduction, with a statement that smaller reductions also occur. Further, assuming that the reduction varies from small to large depending on service or other factors, two illustrative examples may be provided showing the smallest likely reduction and the largest likely reduction.
(C) Assumptions used in examples. The examples provided under this paragraph (a)(4)(ii) are not required to be based on any particular form of payment (such as a life annuity or a single sum), but may be based on whatever form appropriately illustrates the reduction. The examples generally may be based on any reasonable assumptions (for example, assumptions relating to the representative participant's age, years of service, and compensation, along with any interest rate and mortality table used in the illustrations, as well as salary scale assumptions used in the illustrations for amendments that alter the compensation taken into account under the plan), but the section 204(h) notice must identify those assumptions. However, if a plan's benefit provisions include a factor that varies over time (such as a variable interest rate), the determination of whether an amendment is reasonably expected to result in a wear-away period must be based on the value of the factor applicable under the plan at a time that is reasonably close to the date section 204(h) notice is provided, and any wear-away period that is solely a result of a future change in the variable factor may be disregarded. For example, to determine whether a wear-away occurs as a result of a section 204(h) amendment that converts a defined benefit plan to a cash balance pension plan that will credit interest based on a variable interest factor specified in the plan, the future interest credits must be projected based on the interest rate applicable under the variable factor at the time section 204(h) notice is provided.
(D) Individual statements. This paragraph (a)(4)(ii) may be satisfied by providing a statement to each applicable individual projecting what that individual's future benefits are reasonably expected to be at various future dates and what that individual's future benefits would have been under the terms of the plan as in effect before the section 204(h) amendment, provided that the statement includes the same information required for examples under paragraphs (a)(4)(ii)(A) through (C) of this Q&A-11, including showing the approximate range of the reductions for the individual if the reductions vary over time and identification of the assumptions used in the projections.
(5) No false or misleading information. A section 204(h) notice may not include materially false or misleading information (or omit information so as to cause the information provided to be misleading).
(6) Additional information when reduction not uniform—(i) In general. If an amendment by its terms affects different classes of participants differently (e.g., one new benefit formula will apply to Division A and another to Division B), then the requirements of paragraph (a) of this Q&A-11 apply separately with respect to each such general class of participants. In addition, the notice must include sufficient information to enable an applicable individual who is a participant to understand which class he or she is a member of.
(ii) Option for different section 204(h) notices. If a section 204(h) amendment affects different classes of applicable individuals differently, the plan administrator may provide to differently affected classes of applicable individuals a section 204(h) notice appropriate to those individuals. Such section 204(h) notice may omit information that does not apply to the applicable individuals to whom it is furnished, but must identify the class or classes of applicable individuals to whom it is provided.
(b) Examples. The following examples illustrate the requirements paragraph (a) of this Q&A-11. In each example, it is assumed that the actual notice provided is written in a manner calculated to be understood by the average plan participant and to apprise the applicable individual of the significance of the notice in accordance with paragraph (a)(2) of this Q&A-11. The examples are as follows:
Example 1. (i) Facts. Plan A provides that a participant is entitled to a normal retirement benefit of 2% of the participant's average pay over the 3 consecutive years for which the average is the highest (highest average pay) multiplied by years of service. Plan A is amended to provide that, effective January 1, 2004, the normal retirement benefit will be 2% of the participant's highest average pay multiplied by years of service before the effective date, plus 1% of the participant's highest average pay multiplied by years of service after the effective date. The plan administrator provides notice that states: “Under the Plan's current benefit formula, a participant's normal retirement benefit is 2% of the participant's average pay over the 3 consecutive years for which the average is the highest multiplied by the participant's years of service. This formula is being changed by a plan amendment. Under the Plan as amended, a participant's normal retirement benefit will be the sum of 2% of the participant's average pay over the 3 consecutive years for which the average is the highest multiplied by years of service before the January 1, 2004 effective date, plus 1% of the participant's average pay over the 3 consecutive years for which the average is the highest multiplied by the participant's years of service after December 31, 2003. This change is effective on January 1, 2004.” The notice does not contain any additional information.
(ii) Conclusion. The notice satisfies the requirements of paragraph (a) of this Q&A-11.
Example 2. (i) Facts. Plan B provides that a participant is entitled to a normal retirement benefit at age 64 of 2.2% of the participant's career average pay multiplied by years of service. Plan B is amended to cease all accruals, effective January 1, 2004. The plan administrator provides notice that includes a description of the old benefit formula, a statement that, after December 31, 2003, no participant will earn any further accruals, and the effective date of the amendment. The notice does not contain any additional information.
(ii) Conclusion. The notice satisfies the requirements of paragraph (a) of this Q&A-11.
Example 3. (i) Facts. Plan C provides that a participant is entitled to a normal retirement benefit at age 65 of 2% of career average compensation multiplied by years of service. Plan C is amended to provide that the normal retirement benefit will be 1% of average pay over the 3 consecutive years for which the average is the highest multiplied by years of service. The amendment only applies to accruals for years of service after the amendment, so that each employee's accrued benefit is equal to the sum of the benefit accrued as of the effective date of the amendment plus the accrued benefit equal to the new formula applied to years of service beginning on or after the effective date. The plan administrator provides notice that describes the old and new benefit formulas and also explains that for an individual whose compensation increases over the individual's career such that the individual's highest 3-year average exceeds the individual's career average, the reduction will be less or there may be no reduction. The notice does not contain any additional information.
(ii) Conclusion. The notice satisfies the requirements of paragraph (a) of this Q&A-11.
Example 4. (i) Facts. (A) Plan D is a defined benefit pension plan under which each participant accrues a normal retirement benefit, as a life annuity beginning at the normal retirement age of 65, equal to the participant's number of years of service multiplied by 1.5 percent multiplied by the participant's average pay over the 3 consecutive years for which the average is the highest. Plan D provides early retirement benefits for former employees beginning at or after age 55 in the form of an early retirement annuity that is actuarially equivalent to the normal retirement benefit, with the reduction for early commencement based on reasonable actuarial assumptions that are specified in Plan D. Plan D provides for the suspension of benefits of participants who continue in employment beyond normal retirement age, in accordance with section 203(a)(3)(B) of ERISA and regulations thereunder issued by the Department of Labor. The pension of a participant who retires after age 65 is calculated under the same normal retirement benefit formula, but is based on the participant's service credit and highest 3-year pay at the time of late retirement with any appropriate actuarial increases.
(B) Plan D is amended, effective July 1, 2005, to change the formula for all future accruals to a cash balance formula under which the opening account balance for each participant on July 1, 2005, is zero, hypothetical pay credits equal to 5 percent of pay are credited to the account thereafter, and hypothetical interest is credited monthly based on the applicable interest rate under section 417(e)(3) of the Internal Revenue Code at the beginning of the quarter. Any participant who terminates employment with vested benefits can receive an actuarially equivalent annuity (based on the same reasonable actuarial assumptions that are specified in Plan D) commencing at any time after termination of employment and before the plan's normal retirement age of 65. The benefit resulting from the hypothetical account balance is in addition to the benefit accrued before July 1, 2005 (taking into account only service and highest 3-year pay before July 1, 2005), so that it is reasonably expected that no wear-away period will result from the amendment. The plan administrator expects that, as a general rule, depending on future pay increases and future interest rates, the rate of future benefit accrual after the conversion is higher for participants who accrue benefits before approximately age 50 and after approximately age 70, but is lower for participants who accrue benefits between approximately age 50 and age 70.
(C) The plan administrator of Plan D announces the conversion to a cash balance formula on May 16, 2005. The announcement is delivered to all participants and includes a written notice that describes the old formula, the new formula, and the effective date.
(D) In addition, the notice states that the Plan D formula before the conversion provided a normal retirement benefit equal to the product of a participant's number of years of service multiplied by 1.5 percent multiplied by the participant's average pay over the 3 years for which the average is the highest (highest 3-year pay). The notice includes an example showing the normal retirement benefit that will be accrued after June 30, 2005 for a participant who is age 49 with 10 years of service at the time of the conversion. The plan administrator reasonably believes that such a participant is representative of the participants whose rate of future benefit accrual will be reduced as a result of the amendment. The example estimates that, if the participant continues employment to age 65, the participant's normal retirement benefit for service from age 49 to age 65 will be $657 per month for life. The example assumes that the participant's pay is $50,000 at age 49. The example states that the estimated $657 monthly pension accrues over the 16-year period from age 49 to age 65 and that, based on assumed future pay increases, this amount annually would be 9.1 percent of the participant's highest 3-year pay at age 65, which over the 16 years from age 49 to age 65 averages 0.57 percent per year multiplied by the participant's highest 3-year pay. The example also states that the sum of the monthly annuity accrued before the conversion in the 10-year period from age 39 to age 49 plus the $657 monthly annuity estimated to be accrued over the 16-year period from age 49 to age 65 is $1,235 and that, based on assumed future increases in pay, this would be 17.1 percent of the participant's highest 3-year pay at age 65, which over the employee's career from age 39 to age 65 averages 0.66 percent per year multiplied by the participant's highest 3-year pay. The notice also includes two other examples with similar information, one of which is intended to show the circumstances in which a small reduction may occur and the other of which shows the largest reduction that the plan administrator thinks is likely to occur. The notice states that the estimates are based on the assumption that pay increases annually after June 30, 2005, at a 4 percent rate. The notice also specifies that the applicable interest rate under section 417(e) for hypothetical interest credits after June 30, 2005 is assumed to be 6 percent, which is the section 417(e) of the Internal Revenue Code applicable interest rate under the plan for 2005.
(ii) Conclusion. The information in the notice, as described in paragraph (i)(C) and (i)(D) of this Example 4, satisfies the requirements of paragraph (a)(3) of this Q&A-11 with respect to applicable individuals who are participants. The requirements of paragraph (a)(4) of this Q&A-11 are satisfied because, as noted in paragraph (i)(D) of this Example 4, the notice describes the old formula and describes the estimated future accruals under the new formula in terms that can be readily compared to the old formula, i.e., the notice states that the estimated $657 monthly pension accrued over the 16-year period from age 49 to age 65 averages 0.57 percent of the participant's highest 3-year pay at age 65. The requirement in paragraph (a)(4)(ii) of this Q&A-11 that the examples include sufficient information to be able to determine the approximate magnitude of the reduction would also be satisfied if the notice instead directly stated the amount of the monthly pension that would have accrued over the 16-year period from age 49 to age 65 under the old formula.
Example 5. (i) Facts. The facts are the same as in Example 4, except that, under the plan as in effect before the amendment, the early retirement pension for a participant who terminates employment after age 55 with at least 20 years of service is equal to the normal retirement benefit without reduction from age 65 to age 62 and reduced by only 5 percent per year for each year before age 62. As a result, early retirement benefits for such a participant constitute a retirement-type subsidy. The plan as in effect after the amendment provides an early retirement benefit equal to the sum of the early retirement benefit payable under the plan as in effect before the amendment taking into account only service and highest 3-year pay before July 1, 2005, plus an early retirement annuity that is actuarially equivalent to the account balance for service after June 30, 2005. The notice provided by the plan administrator describes the old early retirement annuity, the new early retirement annuity, and the effective date. The notice includes an estimate of the early retirement annuity payable to the illustrated participant for service after the conversion if the participant were to retire at age 59 (which the plan administrator believes is a typical early retirement age) and elect to begin receiving an immediate early retirement annuity. The example states that the normal retirement benefit expected to be payable at age 65 as a result of service from age 49 to age 59 is $434 per month for life beginning at age 65 and that the early retirement annuity expected to be payable as a result of service from age 49 to age 59 is $270 per month for life beginning at age 59. The example states that the monthly early retirement annuity of $270 is 38 percent less than the monthly normal retirement benefit of $434, whereas a 15 percent reduction would have applied under the plan as in effect before the amendment. The notice also includes similar information for examples that show the smallest and largest reduction that the plan administrator thinks is likely to occur in the early retirement benefit. The notice also specifies the applicable interest rate, mortality table, and salary scale used in the example to calculate the early retirement reductions.
(ii) Conclusion. The information in the notice, as described in paragraphs (i)(C) and (D) of Example 4 and paragraph (i) of this Example 5, satisfies the requirements of paragraph (a)(3) of this Q&A-11 with respect to applicable individuals who are participants. The requirements of paragraph (a)(4) of this Q&A-11 are satisfied because, as noted in paragraph (i) of this Example 5, the notice describes the early retirement subsidy under the old formula and describes the estimated early retirement pension under the new formula in terms that can be readily compared to the old formula, i.e., the notice states that the monthly early retirement pension of $270 is 38 percent less than the monthly normal retirement benefit of $434, whereas a 15 percent reduction would have applied under the plan as in effect before the amendment. The requirements of paragraph (a)(4)(ii) of this Q&A-11 that the examples include sufficient information to be able to determine the approximate magnitude of the reduction would also be satisfied if the notice instead directly stated the amount of the monthly early retirement pension that would be payable at age 59 under the old formula.
Q-12. What special rules apply if participants can choose between the old and new benefit formulas?
A-12. In any case in which an applicable individual can choose between the benefit formula (including any early retirement benefit or retirement-type subsidy) in effect before the section 204(h) amendment (old formula) or the benefit formula in effect after the section 204(h) amendment (new formula), section 204(h) notice has not been provided unless the applicable individual has been provided the information required under Q&A-11 of this section, and has also been provided sufficient information to enable the individual to make an informed choice between the old and new benefit formulas. The information required under Q&A-11 of this section must be provided by the date otherwise required under Q&A-9 of this section. The information sufficient to enable the individual to make an informed choice must be provided within a period that is reasonably contemporaneous with the date by which the individual is required to make his or her choice and that allows sufficient advance notice to enable the individual to understand and consider the additional information before making that choice.
Q-13. How may section 204(h) notice be provided?
A-13. (a) Delivering section 204(h) notice. A plan administrator (including a person acting on behalf of the plan administrator, such as the employer or plan trustee) must provide section 204(h) notice through a method that results in actual receipt of the notice or the plan administrator must take appropriate and necessary measures reasonably calculated to ensure that the method for providing section 204(h) notice results in actual receipt of the notice. Section 204(h) notice must be provided either in the form of a paper document or in an electronic form that satisfies the requirements of paragraph (c) of this Q&A-13. First class mail to the last known address of the party is an acceptable delivery method. Likewise, hand delivery is acceptable. However, the posting of notice is not considered provision of section 204(h) notice. Section 204(h) notice may be enclosed with or combined with other notice provided by the employer or plan administrator (for example, a notice of intent to terminate under title IV of ERISA). Except as provided in paragraph (c) of this Q&A-13, a section 204(h) notice is deemed to have been provided on a date if it has been provided by the end of that day. When notice is delivered by first class mail, the notice is considered provided as of the date of the United States postmark stamped on the cover in which the document is mailed.
(b) Example. The following example illustrates the provisions of paragraph (a) of this Q&A-13:
Example. (i) Facts. Plan A is amended to reduce significantly the rate of future benefit accrual effective January 1, 2005. Under Q&A-9 of this section, section 204(h) notice is required to be provided at least 45 days before the effective date of the amendment. The plan administrator causes section 204(h) notice to be mailed to all affected participants. The mailing is postmarked November 16, 2004.
(ii) Conclusion. Because section 204(h) notice is given 45 days before the effective date of the plan amendment, it satisfies the timing requirement of Q&A-9 of this section.
(c) New technologies—(1) General rule. A section 204(h) notice may be provided to an applicable individual through an electronic method (other than an oral communication or a recording of an oral communication), provided that all of the following requirements are satisfied:
(i) Either the notice is actually received by the applicable individual or the plan administrator takes appropriate and necessary measures reasonably calculated to ensure that the method for providing section 204(h) notice results in actual receipt of the notice by the applicable individual.
(ii) The section 204(h) notice is delivered using an electronic medium (other than an oral communication or a recording of an oral communication) under an electronic system that satisfies the applicable notice requirements of § 1.401(a)-21.
(iii) Special effective date. For plan years beginning prior to January 1, 2007, Q&A-13 of this section, as it appeared in the April 1, 2006 edition of 26 CFR part 1, applies.
(2) Examples. The following examples illustrate the requirement in paragraph (c)(1)(i) of this Q&A-13. In these examples, it is assumed that the notice satisfies the requirements in paragraphs (c)(1)(ii) of this section. The examples are as follows:
Example 1. (i) Facts. On July 1, 2003, M, a plan administrator of Company N's plan, sends notice intended to constitute section 204(h) notice to A, an employee of Company N and a participant in the plan. The notice is sent through e-mail to A's e-mail address on Company N's electronic information system. Accessing Company N's electronic information system is not an integral part of A's duties. M sends the e-mail with a request for a computer-generated notification that the message was received and opened. M receives notification indicating that the e-mail was received and opened by A on July 9, 2003.
(ii) Conclusion. With respect to A, although M has failed to take appropriate and necessary measures reasonably calculated to ensure that the method for providing section 204(h) notice results in actual receipt of the notice, M satisfies the requirement of paragraph (c)(1)(i) of this Q&A-13 on July 9, 2003, which is when A actually receives the notice.
Example 2. (i) Facts. On August 1, 2003, O, a plan administrator of Company P's plan, sends a notice intended to constitute section 204(h) notice of ERISA to B, who is an employee of Company P and a participant in Company P's plan. The notice is sent through e-mail to B's e-mail address on Company P's electronic information system. B has the ability to effectively access electronic documents from B's e-mail address on Company P's electronic information system and accessing the system is an integral part of B's duties.
(ii) Conclusion. Because access to the system is an integral part of B's duties, O has taken appropriate and necessary measures reasonably calculated to ensure that the method for providing section 204(h) notice results in actual receipt of the notice. Thus, regardless of whether B actually accesses B's email on that date, O satisfies the requirement of paragraph (c)(1)(i) of this Q&A-13 on August 1, 2003, with respect to B.
Q-14. What are the consequences if a plan administrator fails to provide section 204(h) notice?
A-14. (a) Egregious failures—(1) Effect of egregious failure to provide section 204(h) notice. Section 204(h)(6)(A) of ERISA provides that, in the case of any egregious failure to meet the notice requirements with respect to any plan amendment, the plan provisions are applied so that all applicable individuals are entitled to the greater of the benefit to which they would have been entitled without regard to the amendment, or the benefit under the plan with regard to the amendment. For a special rule applicable in the case of a plan termination, see Q&A-17(b) of this section.
(2) Definition of egregious failure. For purposes of section 204(h) of ERISA and this Q&A-14, there is an egregious failure to meet the notice requirements if a failure to provide required notice is within the control of the plan sponsor and is either an intentional failure or a failure, whether or not intentional, to provide most of the individuals with most of the information they are entitled to receive. For this purpose, an intentional failure includes any failure to promptly provide the required notice or information after the plan administrator discovers an unintentional failure to meet the requirements. A failure to give section 204(h) notice is deemed not to be egregious if the plan administrator reasonably determines, taking into account section 4980F, section 204(h), these regulations, other administrative pronouncements, and relevant facts and circumstances, that the reduction in the rate of future benefit accrual resulting from an amendment is not significant (as described in Q&A-8 of this section), or that an amendment does not significantly reduce an early retirement benefit or retirement-type subsidy.
(3) Example. The following example illustrates the provisions of this paragraph (a):
Example. (i) Facts. Plan A is amended to reduce significantly the rate of future benefit accrual effective January 1, 2003. Section 204(h) notice is required to be provided 45 days before January 1, 2003. Timely section 204(h) notice is provided to all applicable individuals (and to each employee organization representing participants who are applicable individuals), except that the employer intentionally fails to provide section 204(h) notice to certain participants until May 16, 2003.
(ii) Conclusion. The failure to provide section 204(h) notice is egregious. Accordingly, for the period from January 1, 2003 through June 30, 2003 (which is the date that is 45 days after May 16, 2003), all participants and alternate payees are entitled to the greater of the benefit to which they would have been entitled under Plan A as in effect before the amendment or the benefit under the plan as amended.
(b) Effect of non-egregious failure to provide section 204(h) notice. If an egregious failure has not occurred, the amendment with respect to which section 204(h) notice is required may become effective with respect to all applicable individuals. However, see section 502 of ERISA for civil enforcement remedies. Thus, where there is a failure, whether or not egregious, to provide section 204(h) notice in accordance with this section, individuals may have recourse under section 502 of ERISA.
(c) Excise taxes. See section 4980F and Q&A-15 of this section for excise taxes that may apply to a failure to notify applicable individuals of a pension plan amendment that provides for a significant reduction in the rate of future benefit accrual or eliminates or significantly reduces an early retirement benefit or retirement-type subsidy, regardless of whether or not the failure is egregious.
Q-15. What are some of the rules that apply with respect to the excise tax under section 4980F?
A-15. (a) Person responsible for excise tax. In the case of a plan other than a multiemployer plan, the employer is responsible for reporting and paying the excise tax. In the case of a multiemployer plan, the plan is responsible for reporting and paying the excise tax.
(b) Excise tax inapplicable in certain cases. Under section 4980F(c)(1) of the Internal Revenue Code, no excise tax is imposed on a failure for any period during which it is established to the satisfaction of the Commissioner that the employer (or other person responsible for the tax) exercised reasonable diligence, but did not know that the failure existed. Under section 4980F(c)(2) of the Internal Revenue Code, no excise tax applies to a failure to provide section 204(h) notice if the employer (or other person responsible for the tax) exercised reasonable diligence and corrects the failure within 30 days after the employer (or other person responsible for the tax) first knew, or exercising reasonable diligence would have known, that such failure existed. For purposes of section 4980F(c)(1) of the Internal Revenue Code, a person has exercised reasonable diligence, but did not know that the failure existed if and only if—
(1) The person exercised reasonable diligence in attempting to deliver section 204(h) notice to applicable individuals by the latest date permitted under this section; and
(2) At the latest date permitted for delivery of section 204(h) notice, the person reasonably believes that section 204(h) notice was actually delivered to each applicable individual by that date.
(c) Example. The following example illustrates the provisions of paragraph (b) of this Q&A-15:
Example. (i) Facts. Plan A is amended to reduce significantly the rate of future benefit accrual. The employer sends out a section 204(h) notice to all affected participants and other applicable individuals and to any employee organization representing applicable individuals, including actual delivery by hand to employees at worksites and by first-class mail for any other applicable individual and to any employee organization representing applicable individuals. However, although the employer exercises reasonable diligence in seeking to deliver the notice, the notice is not delivered to any participants at one worksite due to a failure of an overnight delivery service to provide the notice to appropriate personnel at that site for them to timely hand deliver the notice to affected employees. The error is discovered when the employer subsequently calls to confirm delivery. Appropriate section 204(h) notice is then promptly delivered to all affected participants at the worksite.
(ii) Conclusion. Because the employer exercised reasonable diligence, but did not know that a failure existed, no excise tax applies, assuming that participants at the worksite receive section 204(h) notice within 30 days after the employer first knew, or exercising reasonable diligence would have known, that the failure occurred.
Q-16. How do section 4980F and section 204(h) apply when a business is sold?
A-16. (a) Generally. Whether section 204(h) notice is required in connection with the sale of a business depends on whether a plan amendment is adopted that significantly reduces the rate of future benefit accrual or significantly reduces an early retirement benefit or retirement-type subsidy.
(b) Examples. The following examples illustrate the rules of this Q&A-16:
Example 1. (i) Facts. Corporation Q maintains Plan A, a defined benefit plan that covers all employees of Corporation Q, including employees in its Division M. Plan A provides that participating employees cease to accrue benefits when they cease to be employees of Corporation Q. On January 1, 2006, Corporation Q sells all of the assets of Division M to Corporation R. Corporation R maintains Plan B, which covers all of the employees of Corporation R. Under the sale agreement, employees of Division M become employees of Corporation R on the date of the sale (and cease to be employees of Corporation Q), Corporation Q continues to maintain Plan A following the sale, and the employees of Division M become participants in Plan B.
(ii) Conclusion. No section 204(h) notice is required because no plan amendment was adopted that reduced the rate of future benefit accrual. The employees of Division M who become employees of Corporation R ceased to accrue benefits under Plan A because their employment with Corporation Q terminated.
Example 2. (i) Facts. Subsidiary Y is a wholly owned subsidiary of Corporation S. Subsidiary Y maintains Plan C, a defined benefit plan that covers employees of Subsidiary Y. Corporation S sells all of the stock of Subsidiary Y to Corporation T. At the effective date of the sale of the stock of Subsidiary Y, in accordance with the sale agreement between Corporation S and Corporation T, Subsidiary Y amends Plan C so that all benefit accruals cease.
(ii) Conclusion. Section 204(h) notice is required to be provided because Subsidiary Y adopted a plan amendment that significantly reduced the rate of future benefit accrual in Plan C.
Example 3. (i) Facts. As a result of an acquisition, Corporation U maintains two defined benefit plans: Plan D covers employees of Division N and Plan E covers the rest of the employees of Corporation U. Plan E provides a significantly lower rate of future benefit accrual than Plan D. Plan D is merged with Plan E, and all of the employees of Corporation U will accrue benefits under the merged plan in accordance with the benefit formula of former Plan E.
(ii) Conclusion. Section 204(h) notice is required.
Example 4. (i) Facts. The facts are the same as in Example 3, except that the rate of future benefit accrual in Plan E is not significantly lower. In addition, Plan D has a retirement-type subsidy that Plan E does not have and the Plan D employees' rights to the subsidy under the merged plan are limited to benefits accrued before the merger.
(ii) Conclusion. Section 204(h) notice is required for any participants or beneficiaries for whom the reduction in the retirement-type subsidy is significant (and for any employee organization representing such participants).
Example 5. (i) Facts. Corporation V maintains several plans, including Plan F, which covers employees of Division P. Plan F provides that participating employees cease to accrue further benefits under the plan when they cease to be employees of Corporation V. Corporation V sells all of the assets of Division P to Corporation W, which maintains Plan G for its employees. Plan G provides a significantly lower rate of future benefit accrual than Plan F. Plan F is merged with Plan G as part of the sale, and employees of Division P who become employees of Corporation W will accrue benefits under the merged plan in accordance with the benefit formula of former Plan G.
(ii) Conclusion. No section 204(h) notice is required because no plan amendment was adopted that reduces the rate of future benefit accrual or eliminates or significantly reduces an early retirement benefit or retirement-type subsidy. Under the terms of Plan F as in effect prior to the merger, employees of Division P cease to accrue any further benefits (including benefits with respect to early retirement benefits and any retirement-type subsidy) under Plan F after the date of the sale because their employment with Corporation V terminated.
Q-17. How are amendments to cease accruals and terminate a plan treated under section 4980F and section 204(h)?
A-17. (a) General rule—(1) Rule. An amendment providing for the cessation of benefit accruals on a specified future date and for the termination of a plan is subject to section 4980F and section 204(h).
(2) Example. The following example illustrates the rule of paragraph (a)(1) of this Q&A-17:
Example. (i) Facts. An employer adopts an amendment that provides for the cessation of benefit accruals under a defined benefit plan on December 31, 2003, and for the termination of the plan pursuant to title IV of ERISA as of a proposed termination date that is also December 31, 2003. As part of the notice of intent to terminate required under title IV in order to terminate the plan, the plan administrator gives section 204(h) notice of the amendment ceasing accruals, which states that benefit accruals will cease “on December 31, 2003 whether or not the plan is terminated on that date.” However, because all the requirements of title IV for a plan termination are not satisfied, the plan cannot be terminated until a date that is later than December 31, 2003.
(ii) Conclusion. Nonetheless, because section 204(h) notice was given stating that the plan was amended to cease accruals on December 31, 2003, section 204(h) does not prevent the amendment to cease accruals from being effective on December 31, 2003. The result would be the same had the section 204(h) notice informed the participants that the plan was amended to provide for a proposed termination date of December 31, 2003 and to provide that “benefit accruals will cease on the proposed termination date whether or not the plan is terminated on that date.” However, neither section 4980F nor section 204(h) would be satisfied with respect to the December 31, 2003 effective date if the section 204(h) notice had merely stated that benefit accruals would cease “on the termination date” or “on the proposed termination date.”
(3) Additional requirements under title IV of ERISA. See 29 CFR 4041.23(b)(4) and 4041.43(b)(5) for special rules applicable to plans terminating under title IV of ERISA.
(b) Terminations in accordance with title IV of ERISA. A plan that is terminated in accordance with title IV of ERISA is deemed to have satisfied section 4980F and section 204(h) not later than the termination date (or date of termination, as applicable) established under section 4048 of ERISA. Accordingly, neither section 4980F nor section 204(h) would in any event require that any additional benefits accrue after the effective date of the termination.
(c) Amendment effective before termination date of a plan subject to title IV of ERISA. To the extent that an amendment providing for a significant reduction in the rate of future benefit accrual or a significant reduction in an early retirement benefit or retirement-type subsidy has an effective date that is earlier than the termination date (or date of termination, as applicable) established under section 4048 of ERISA, that amendment is subject to section 4980F and section 204(h). Accordingly, the plan administrator must provide section 204(h) notice (either separately, with, or as part of the notice of intent to terminate) with respect to such an amendment.
Q-18. What are the effective dates of section 4980F, section 204(h), as amended by EGTRRA, and these regulations?
A-18. (a) Statutory effective date—(1) General rule. Section 4980F and section 204(h), as amended by EGTRRA, apply to plan amendments taking effect on or after June 7, 2001 (statutory effective date), which is the date of enactment of EGTRRA.
(2) Transition rule. For amendments applying after the statutory effective date in paragraph (a)(1) of this Q&A-18 and prior to the regulatory effective date in paragraph (c) of this Q&A-18, the requirements of section 4980F(e)(2) and (3) of the Internal Revenue Code and section 204(h), as amended by EGTRRA, are treated as satisfied if the plan administrator makes a reasonable, good faith effort to comply with those requirements.
(3) Special notice rule—(i) In general. Notwithstanding Q&A-9 of this section, section 204(h) notice is not required by section 4980F(e) of the Internal Revenue Code or section 204(h), as amended by EGTRRA, to be provided prior to September 7, 2001 (the date that is three months after the date of enactment of EGTRRA).
(ii) Reasonable notice. The requirements of section 4980F and section 204(h), as amended by EGTRRA, do not apply to any plan amendment that takes effect on or after June 7, 2001 if, before April 25, 2001, notice was provided to participants and beneficiaries adversely affected by the plan amendment (and their representatives) which was reasonably expected to notify them of the nature and effective date of the plan amendment. For purposes of this paragraph (a)(3)(ii), notice that complies with § 1.411(d)-6 of this chapter, as it appeared in the April 1, 2001 edition of 26 CFR part 1, is deemed to be notice which was reasonably expected to notify participants and beneficiaries adversely affected by the plan amendment (and their representatives) of the nature and effective date of the plan amendment.
(4) Special effective date for certain section 204(h) amendments made by plans of commercial airlines. Section 402 of PPA '06 applies to section 204(h) amendments adopted in plan years ending after August 17, 2006.
(5) Special effective date for rule relating to contributing employers. Section 502(c) of PPA '06, which amended section 4980F(e)(1) of the Internal Revenue Code, applies to section 204(h) amendments adopted in plan years beginning after December 31, 2007.
(b) Regulatory effective date—(1) General effective date. Except as otherwise provided in this paragraph (b) of this section, Q&A-1 through Q&A-18 of this section apply to amendments with an effective date that is on or after September 1, 2003.
(2) Effective date for Q&A-7(a)(2). Q&A-7(a)(2) of this section applies to amendments with an effective date that is on or after January 1, 2004.
(3) Effective dates for Q&A-9(g)(1), (g)(3), and (g)(4)—(i) General effective date. Except as otherwise provided in Q&A-18(b)(3)(ii) or (b)(3)(iii) of this section, Q&A-9(g)(1), (g)(3), and (g)(4) of this section apply to amendments that are effective on or after January 1, 2008.
(ii) Effective dates for Q&A-9(g)(2) and Q&A-7(b). Except as otherwise provided in Q&A-18(b)(3)(iii) of this section, Q&A-9(g)(2) and Q&A-7(b) of this section apply to section 204(h) amendments adopted in plan years beginning after July 1, 2008.
(iii) Special rules for section 204(h) amendments to an applicable defined benefit plan. Except as otherwise provided in paragraph (b)(3)(i) or (b)(3)(ii) of this Q&A-18, with respect to any section 204(h) notice provided in connection with a section 204(h) amendment to an applicable defined benefit plan within the meaning of section 411(a)(13)(C)(i) to limit distributions as permitted under section 411(a)(13)(A) for distributions made after August 17, 2006, that is made pursuant to section 701 of PPA '06, paragraphs (g)(1) and (g)(2) of Q&A-9 of this section apply to amendments that are effective after December 21, 2006. For such an amendment that is effective not later than December 31, 2008, section 204(h) notice does not fail to be timely if the notice is provided at least 30 days, rather than 45 days, before the date that the amendment is first effective.
(c) Amendments taking effect prior to June 7, 2001. For rules applicable to amendments taking effect prior to June 7, 2001, see § 1.411(d)-6 of this chapter, as it appeared in the April 1, 2001 edition of 26 CFR part 1.
[T.D. 9052, 68 FR 17281, Apr. 9, 2003, as amended by T.D. 9219, 70 FR 47126, Aug. 12, 2005; T.D. 9294, 71 FR 61888, Oct. 20, 2006; T.D. 9472, 74 FR 61276, Nov. 24, 2009]
§ 54.4980G-0 Table of contents.
This section contains the questions for §§ 54.4980G-1, 54.4980G-2, 54.4980G-3, 54.4980G-4, and 54.4980G-5.
§ 54.4980G-1 Failure of employer to make comparable health savings account contributions.
Q-1: What are the comparability rules that apply to employer contributions to Health Savings Accounts (HSAs)?
Q-2: What are the categories of HDHP coverage for purposes of applying the comparability rules?
Q-3: What is the testing period for making comparable contributions to employees' HSAs?
Q-4: How is the excise tax computed if employer contributions do not satisfy the comparability rules for a calendar year?
§ 54.4980G-2 Employer contribution defined.
Q-1: Do the comparability rules apply to amounts rolled over from an employee's HSA or Archer Medical Savings Account (Archer MSA)?
Q-2: If an employee requests that his or her employer deduct after-tax amounts from the employee's compensation and forward these amounts as employee contributions to the employee's HSA, do the comparability rules apply to these amounts?
§ 54.4980G-3 Employee for comparability testing.
Q-1: Do the comparability rules apply to contributions that an employer makes to the HSAs of independent contractors or self-employed individuals?
Q-2: May a sole proprietor who is an eligible individual contribute to his or her own HSA without contributing to the HSAs of his or her employees who are eligible individuals?
Q-3: Do the comparability rules apply to contributions by a partnership to a partner's HSA?
Q-4: How are members of controlled groups treated when applying the comparability rules?
Q-5: What are the categories of employees for comparability testing?
Q-6: Are employees who are included in a unit of employees covered by a collective bargaining agreement comparable participating employees?
Q-7: Is an employer permitted to make comparable contributions only to the HSAs of comparable participating employees who have coverage under the employer's HDHP?
Q-8: If an employee and his or her spouse are eligible individuals who work for the same employer and one employee-spouse has family coverage for both employees under the employer's HDHP, must the employer make comparable contributions to the HSAs of both employees?
Q-9: Does an employer that makes HSA contributions only for one class of non-collectively bargained employees who are eligible individuals, but not for another class of non-collectively bargained employees who are eligible individuals (for example, management v. non-management) satisfy the requirement that the employer make comparable contributions?
Q-10: If an employer contributes to the HSAs of former employees who are eligible individuals, do the comparability rules apply to these contributions?
Q-11: Is an employer permitted to make comparable contributions only to the HSAs of comparable participating former employees who have coverage under the employer's HDHP?
Q-12: If an employer contributes only to the HSAs of former employees who are eligible individuals with coverage under the employer's HDHP, must the employer make comparable contributions to the HSAs of former employees who are eligible individuals with coverage under the employer's HDHP because of an election under a COBRA continuation provision (as defined in section 9832(d)(1))?
Q-13: How do the comparability rules apply if some employees have HSAs and other employees have Archer MSAs?
§ 54.4980G-4 Calculating comparable contributions.
Q-1: What are comparable contributions?
Q-2: How does an employer comply with the comparability rules when some non-collectively bargained employees who are eligible individuals do not work for the employer during the entire calendar year?
Q-3: How do the comparability rules apply to employer contributions to employees' HSAs if some non-collectively bargained employees work full-time during the entire calendar year, and other non-collectively bargained employees work full-time for less than the entire calendar year?
Q-4: May an employer make contributions for the entire year to the HSAs of its employees who are eligible individuals at the beginning of the calendar year (i.e., on a pre-funded basis) instead of contributing on a pay-as-you-go or on a look-back basis?
Q-5: Must an employer use the same contribution method as described in Q & A-2 and Q & A-4 of this section for all employees for any month during the calendar year?
Q-6: How does an employer comply with the comparability rules if an employee has not established an HSA at the time the employer contributes to its employees' HSAs?
Q-7: If an employer bases its contributions on a percentage of the HDHP deductible, how is the correct percentage or dollar amount computed?
Q-8: Does an employer that contributes to the HSA of each comparable participating employee in an amount equal to the employee's HSA contribution or a percentage of the employee's HSA contribution (matching contributions) satisfy the rule that all comparable participating employees receive comparable contributions?
Q-9: If an employer conditions contributions by the employer to an employee's HSA on an employee's participation in health assessments, disease management programs or wellness programs and makes the same contributions available to all employees who participate in the programs, do the contributions satisfy the comparability rules?
Q-10: If an employer makes additional contributions to the HSAs of all comparable participating employees who have attained a specified age or who have worked for the employer for a specified number of years, do the contributions satisfy the comparability rules?
Q-11: If an employer makes additional contributions to the HSAs of all comparable participating employees who are eligible to make the additional contributions (HSA catch-up contributions) under section 223(b)(3), do the contributions satisfy the comparability rules?
Q-12: If an employer's contributions to an employee's HSA result in non-comparable contributions, may the employer recoup the excess amount from the employee's HSA?
Q-13: What constitutes a reasonable interest rate for purposes of making comparable contributions?
Q-14: How does an employer comply with the comparability rules if an employee has not established an HSA by December 31st?
Q-15: For any calendar year, may an employer accelerate part or all of its contributions for the entire year to the HSAs of employees who have incurred, during the calendar year, qualified medical expenses (as defined in section 223(d)(2)) exceeding the employer's cumulative HSA contributions at that time?
Q-16: What is the effective date for the rules in Q & A-14 and Q & A-15 of this section?
§ 54.4980G-5 HSA comparability rules and cafeteria plans and waiver of excise tax.
Q-1: If an employer makes contributions through a section 125 cafeteria plan to the HSA of each employee who is an eligible individual, are the contributions subject to the comparability rules?
Q-2: If an employer makes contributions through a cafeteria plan to the HSA of each employee who is an eligible individual in an amount equal to the amount of the employee's HSA contribution or a percentage of the amount of the employee's HSA contribution (i.e., matching contributions), are the contributions subject to the section 4980G comparability rules?
Q-3: If under the employer's cafeteria plan, employees who are eligible individuals and who participate in health assessments, disease management programs or wellness programs receive an employer contribution to an HSA and the employees have the right to elect to make pre-tax salary reduction contributions to their HSAs, are the contributions subject to the comparability rules?
Q-4: May all or part of the excise tax imposed under section 4980G be waived?
[T.D. 9277, 71 FR 43058, July 31, 2006; 71 FR 53967, Sept. 13, 2006, as amended by T.D. 9393, 73 FR 20795, Apr. 17, 2008]
§ 54.4980G-1 Failure of employer to make comparable health savings account contributions.
Q-1: What are the comparability rules that apply to employer contributions to Health Savings Accounts (HSAs)?
A-1: If an employer makes contributions to any employee's HSA, the employer must make comparable contributions to the HSAs of all comparable participating employees. See Q & A-1 in § 54.4980G-4 for the definition of comparable contributions. Comparable participating employees are eligible individuals (as defined in section 223(c)(1)) who are in the same category of employees and who have the same category of high deductible health plan (HDHP) coverage. See sections 4980G(b) and 4980E(d)(3). See section 223(c)(2) and (g) for the definition of an HDHP. See also Q & A-5 in § 54.4980G-3 for the categories of employees and Q & A-2 of this section for the categories of HDHP coverage. But see Q & A-6 in § 54.4980G-3 for treatment of collectively bargained employees and Q & A-1 in § 54.4980G-6 for the rules allowing larger comparable contributions to nonhighly compensated employees.
Q-2: What are the categories of HDHP coverage for purposes of applying the comparability rules?
A-2: (a) In general. Generally, the categories of coverage are self-only HDHP coverage and family HDHP coverage. Family HDHP coverage means any coverage other than self-only HDHP coverage. The comparability rules apply separately to self-only HDHP coverage and family HDHP coverage. In addition, if an HDHP has family coverage options meeting the descriptions listed in paragraph (b) of this Q & A-2, each such coverage option may be treated as a separate category of coverage and the comparability rules may be applied separately to each category. However, if the HDHP has more than one category that provides coverage for the same number of individuals, all such categories are treated as a single category for purposes of the comparability rules. Thus, the categories of “employee plus spouse” and “employee plus dependent,” each providing coverage for two individuals, are treated as the single category “self plus one” for comparability purposes. See, however, the final sentence of paragraph (a) of Q & A-1 of § 54.4980G-4 for a special rule that applies if different amounts are contributed for different categories of family coverage. See also § 54.4980G-6 for the rules allowing larger comparable contributions to nonhighly compensated employees.
(b) HDHP Family coverage categories. The coverage categories are—
(1) Self plus one;
(2) Self plus two; and
(3) Self plus three or more.
(c) Examples. The rules of this Q & A-2 are illustrated by the following examples:
Example 1.Employer A maintains an HDHP and contributes to the HSAs of eligible employees who elect coverage under the HDHP. The HDHP has self-only coverage and family coverage. Thus, the categories of coverage are self-only and family coverage. Employer A contributes $750 to the HSA of each eligible employee with self-only HDHP coverage and $1,000 to the HSA of each eligible employee with family HDHP coverage. Employer A's contributions satisfy the comparability rules.
Example 2. (i) Employer B maintains an HDHP and contributes to the HSAs of eligible employees who elect coverage under the HDHP. The HDHP has the following coverage options:
(A) Self-only;
(B) Self plus spouse;
(C) Self plus dependent;
(D) Self plus spouse plus one dependent;
(E) Self plus two dependents; and
(F) Self plus spouse and two or more dependents.
(ii) The self plus spouse category and the self plus dependent category constitute the same category of HDHP coverage (self plus one) and Employer B must make the same comparable contributions to the HSAs of all eligible individuals who are in either the self plus spouse category of HDHP coverage or the self plus dependent category of HDHP coverage. Likewise, the self plus spouse plus one dependent category and the self plus two dependents category constitute the same category of HDHP coverage (self plus two) and Employer B must make the same comparable contributions to the HSAs of all eligible individuals who are in either the self plus spouse plus one dependent category of HDHP coverage or the self plus two dependents category of HDHP coverage.
Example 3. (i) Employer C maintains an HDHP and contributes to the HSAs of eligible employees who elect coverage under the HDHP. The HDHP has the following coverage options:
(A) Self-only;
(B) Self plus one;
(C) Self plus two; and
(D) Self plus three or more.
(ii) Employer C contributes $500 to the HSA of each eligible employee with self-only HDHP coverage, $750 to the HSA of each eligible employee with self plus one HDHP coverage, $900 to the HSA of each eligible employee with self plus two HDHP coverage and $1,000 to the HSA of each eligible employee with self plus three or more HDHP coverage. Employer C's contributions satisfy the comparability rules.
Q-3: What is the testing period for making comparable contributions to employees' HSAs?
A-3: To satisfy the comparability rules, an employer must make comparable contributions for the calendar year to the HSAs of employees who are comparable participating employees. See section 4980G(a). See Q & A-3 and Q & A-4 in § 54.4980G-4 for a discussion of HSA contribution methods.
Q-4: How is the excise tax computed if employer contributions do not satisfy the comparability rules for a calendar year?
A-4: (a) Computation of tax. If employer contributions do not satisfy the comparability rules for a calendar year, the employer is subject to an excise tax equal to 35% of the aggregate amount contributed by the employer to HSAs for that period.
(b) Example. The following example illustrates the rules in paragraph (a) of this Q & A-4:
Example.During the 2007 calendar year, Employer D has 8 employees who are eligible individuals with self-only coverage under an HDHP provided by Employer D. The deductible for the HDHP is $2,000. For the 2007 calendar year, Employer D contributes $2,000 each to the HSAs of two employees and $1,000 each to the HSAs of the other six employees, for total HSA contributions of $10,000. Employer D's contributions do not satisfy the comparability rules. Therefore, Employer D is subject to an excise tax of $3,500 (35% of $10,000) for its failure to make comparable contributions to its employees' HSAs.
Q-5: If a person is liable for the excise tax under section 4980G, what form must the person file and what is the due date for the filing and payment of the excise tax?
A-5: (a) In general. §§ 54.6011-2, 54.6151-1 and 54.6071-1(d).
(b) Effective/applicability date. The rules in this Q & A-5 are effective for employer contributions made for calendar years beginning on or after January 1, 2010.
[T.D. 9277, 71 FR 43058, July 31, 2006, as amended by T.D. 9457, 74 FR 45997, Sept. 8, 2009]
§ 54.4980G-2 Employer contribution defined.
Q-1: Do the comparability rules apply to amounts rolled over from an employee's HSA or Archer Medical Savings Account (Archer MSA)?
A-1: No. The comparability rules do not apply to amounts rolled over from an employee's HSA or Archer MSA.
Q-2: If an employee requests that his or her employer deduct after-tax amounts from the employee's compensation and forward these amounts as employee contributions to the employee's HSA, do the comparability rules apply to these amounts?
A-2: No. Section 106(d) provides that amounts contributed by an employer to an eligible employee's HSA shall be treated as employer-provided coverage for medical expenses and are excludible from the employee's gross income up to the limit in section 223(b). After-tax employee contributions to an HSA are not subject to the comparability rules because they are not employer contributions under section 106(d).
[T.D. 9277, 71 FR 43058, July 31, 2006]
§ 54.4980G-3 Failure of employer to make comparable health savings account contributions.
Q-1: Do the comparability rules apply to contributions that an employer makes to the HSAs of independent contractors or self-employed individuals?
A-1: No. The comparability rules apply only to contributions that an employer makes to the HSAs of employees.
Q-2: May a sole proprietor who is an eligible individual contribute to his or her own HSA without contributing to the HSAs of his or her employees who are eligible individuals?
A-2: (a) Sole proprietor not an employee. Yes. The comparability rules apply only to contributions made by an employer to the HSAs of employees. Because a sole proprietor is not an employee, the comparability rules do not apply to contributions the sole proprietor makes to his or her own HSA. However, if a sole proprietor contributes to any employee's HSA, the sole proprietor must make comparable contributions to the HSAs of all comparable participating employees. In determining whether the comparability rules are satisfied, contributions that a sole proprietor makes to his or her own HSA are not taken into account.
(b) Example. The following example illustrates the rules in paragraph (a) of this Q & A-2:
Example.In a calendar year, B, a sole proprietor is an eligible individual and contributes $1,000 to B's own HSA. B also contributes $500 for the same calendar year to the HSA of each employee who is an eligible individual. The comparability rules are not violated by B's $1,000 contribution to B's own HSA.
Q-3: Do the comparability rules apply to contributions by a partnership to a partner's HSA?
A-3: (a) Partner not an employee. No. Contributions by a partnership to a bona fide partner's HSA are not subject to the comparability rules because the contributions are not contributions by an employer to the HSA of an employee. The contributions are treated as either guaranteed payments under section 707(c) or distributions under section 731. However, if a partnership contributes to the HSAs of any employee who is not a partner, the partnership must make comparable contributions to the HSAs of all comparable participating employees.
(b) Example. The following example illustrates the rules in paragraph (a) of this Q & A-3:
Example. (i) Partnership X is a limited partnership with three equal individual partners, A (a general partner), B (a limited partner), and C (a limited partner). C is to be paid $300 annually for services rendered to Partnership X in her capacity as a partner without regard to partnership income (a section 707(c) guaranteed payment). D and E are the only employees of Partnership X and are not partners in Partnership X. A, B, C, D, and E are eligible individuals and each has an HSA. During Partnership X's Year 1 taxable year, which is also a calendar year, Partnership X makes the following contributions—
(A) A $300 contribution to each of A's and B's HSAs which are treated as section 731 distributions to A and B;
(B) A $300 contribution to C's HSA in lieu of paying C the guaranteed payment directly; and
(C) A $200 contribution to each of D's and E's HSAs, who are comparable participating employees.
(ii) Partnership X's contributions to A's and B's HSAs are section 731 distributions, which are treated as cash distributions. Partnership X's contribution to C's HSA is treated as a guaranteed payment under section 707(c). The contribution is not excludible from C's gross income under section 106(d) because the contribution is treated as a distributive share of partnership income for purposes of all Code sections other than sections 61(a) and 162(a), and a guaranteed payment to a partner is not treated as compensation to an employee. Thus, Partnership X's contributions to the HSAs of A, B, and C are not subject to the comparability rules. Partnership X's contributions to D's and E's HSAs are subject to the comparability rules because D and E are employees of Partnership X and are not partners in Partnership X. Partnership X's contributions satisfy the comparability rules.
Q-4: How are members of controlled groups treated when applying the comparability rules?
A-4: All persons or entities treated as a single employer under section 414 (b), (c), (m), or (o) are treated as one employer. See sections 4980G(b) and 4980E(e).
Q-5: What are the categories of employees for comparability testing?
A-5: (a) Categories. The categories of employees for comparability testing are as follows (but see Q & A-6 of this section for the treatment of collectively bargained employees and Q & A-1 of § 54.4980G-6 for a special rule for contributions made to the HSAs of nonhighly compensated employees)—
(1) Current full-time employees;
(2) Current part-time employees; and
(3) Former employees (except for former employees with coverage under the employer's HDHP because of an election under a COBRA continuation provision (as defined in section 9832(d)(1)).
(b) Part-time and full-time employees. For purposes of section 4980G, part-time employees are customarily employed for fewer than 30 hours per week and full-time employees are customarily employed for 30 or more hours per week. See sections 4980G(b) and 4980E(d)(4)(A) and (B).
(c) In general. Except as provided in Q & A-6 of this section, the categories of employees in paragraph (a) of this Q & A-5 are the exclusive categories of employees for comparability testing. An employer must make comparable contributions to the HSAs of all comparable participating employees (eligible individuals who are in the same category of employees with the same category of HDHP coverage) during the calendar year without regard to any classification other than these categories. For example, full-time eligible employees with self-only HDHP coverage and part-time eligible employees with self-only HDHP coverage are separate categories of employees and different amounts can be contributed to the HSAs for each of these categories. But see § 54.4980G-6 for a special rule for contributions made to the HSAs of nonhighly compensated employees.
Q-6: Are employees who are included in a unit of employees covered by a collective bargaining agreement comparable participating employees?
A-6: (a) In general. No. Collectively bargained employees who are covered by a bona fide collective bargaining agreement between employee representatives and one or more employers are not comparable participating employees, if health benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. Former employees covered by a collective bargaining agreement also are not comparable participating employees.
(b) Examples. The following examples illustrate the rules in paragraph (a) of this Q & A-6. The examples read as follows:
Example 1.Employer A offers its employees an HDHP with a $1,500 deductible for self-only coverage. Employer A has collectively bargained and non-collectively bargained employees. The collectively bargained employees are covered by a collective bargaining agreement under which health benefits were bargained in good faith. In the 2007 calendar year, Employer A contributes $500 to the HSAs of all eligible non-collectively bargained employees with self-only coverage under Employer A's HDHP. Employer A does not contribute to the HSAs of the collectively bargained employees. Employer A's contributions to the HSAs of non-collectively bargained employees satisfy the comparability rules. The comparability rules do not apply to collectively bargained employees.
Example 2.Employer B offers its employees an HDHP with a $1,500 deductible for self-only coverage. Employer B has collectively bargained and non-collectively bargained employees. The collectively bargained employees are covered by a collective bargaining agreement under which health benefits were bargained in good faith. In the 2007 calendar year and in accordance with the terms of the collective bargaining agreement, Employer B contributes to the HSAs of all eligible collectively bargained employees. Employer B does not contribute to the HSAs of the non-collectively bargained employees. Employer B's contributions to the HSAs of collectively bargained employees are not subject to the comparability rules because the comparability rules do not apply to collectively bargained employees. Accordingly, Employer B's failure to contribute to the HSAs of the non-collectively bargained employees does not violate the comparability rules.
Example 3.Employer C has two units of collectively bargained employees—unit Q and unit R—each covered by a collective bargaining agreement under which health benefits were bargained in good faith. In the 2007 calendar year and in accordance with the terms of the collective bargaining agreement, Employer C contributes to the HSAs of all eligible collectively bargained employees in unit Q. In accordance with the terms of the collective bargaining agreement, Employer C makes no HSA contributions for collectively bargained employees in unit R. Employer C's contributions to the HSAs of collectively bargained employees are not subject to the comparability rules because the comparability rules do not apply to collectively bargained employees.
Example 4.Employer D has a unit of collectively bargained employees that are covered by a collective bargaining agreement under which health benefits were bargained in good faith. In accordance with the terms of the collective bargaining agreement, Employer D contributes an amount equal to a specified number of cents per hour for each hour worked to the HSAs of all eligible collectively bargained employees. Employer D's contributions to the HSAs of collectively bargained employees are not subject to the comparability rules because the comparability rules do not apply to collectively bargained employees.
Q-7: Is an employer permitted to make comparable contributions only to the HSAs of comparable participating employees who have coverage under the employer's HDHP?
A-7: (a) Employer-provided HDHP coverage. If during a calendar year, an employer contributes to the HSA of any employee who is an eligible individual covered under an HDHP provided by the employer, the employer is required to make comparable contributions to the HSAs of all comparable participating employees with coverage under any HDHP provided by the employer. An employer that contributes only to the HSAs of employees who are eligible individuals with coverage under the employer's HDHP is not required to make comparable contributions to HSAs of employees who are eligible individuals but are not covered under the employer's HDHP.
(b) Non-employer provided HDHP coverage. An employer that contributes to the HSA of any employee who is an eligible individual with coverage under any HDHP that is not an HDHP provided by the employer, must make comparable contributions to the HSAs of all comparable participating employees whether or not covered under the employer's HDHP. An employer that makes a reasonable good faith effort to identify all comparable participating employees with non-employer provided HDHP coverage and makes comparable contributions to the HSAs of such employees satisfies the requirements in paragraph (b) of this Q & A-7.
(c) Examples. The following examples illustrate the rules in this Q & A-7. None of the employees in the following examples are covered by a collective bargaining agreement. The examples read as follows:
Example 1.In a calendar year, Employer E offers an HDHP to its full-time employees. Most full-time employees are covered under Employer E's HDHP and Employer E makes comparable contributions only to these employees' HSAs. Employee W, a full-time employee of Employer E and an eligible individual, is covered under an HDHP provided by the employer of W's spouse and not under Employer E's HDHP. Employer E is not required to make comparable contributions to W's HSA.
Example 2.In a calendar year, Employer F does not offer an HDHP. Several full-time employees of Employer F, who are eligible individuals, have HSAs. Employer F contributes to these employees' HSAs. Employer F must make comparable contributions to the HSAs of all full-time employees who are eligible individuals.
Example 3.In a calendar year, Employer G offers an HDHP to its full-time employees. Most full-time employees are covered under Employer G's HDHP and Employer G makes comparable contributions to these employees' HSAs and also to the HSAs of full-time employees who are eligible individuals and who are not covered under Employer G's HDHP. Employee S, a full-time employee of Employer G and a comparable participating employee, is covered under an HDHP provided by the employer of S's spouse and not under Employer G's HDHP. Employer G must make comparable contributions to S's HSA.
Q-8: If an employee and his or her spouse are eligible individuals who work for the same employer and one employee-spouse has family coverage for both employees under the employer's HDHP, must the employer make comparable contributions to the HSAs of both employees?
A-8: (a) In general. If the employer makes contributions only to the HSAs of employees who are eligible individuals covered under its HDHP where only one employee-spouse has family coverage for both employees under the employer's HDHP, the employer is not required to contribute to the HSAs of both employee-spouses. The employer is required to contribute to the HSA of the employee-spouse with coverage under the employer's HDHP, but is not required to contribute to the HSA of the employee-spouse covered under the employer's HDHP by virtue of his or her spouse's coverage. However, if the employer contributes to the HSA of any employee who is an eligible individual with coverage under an HDHP that is not an HDHP provided by the employer, the employer must make comparable contributions to the HSAs of both employee-spouses if they are both eligible individuals. If an employer is required to contribute to the HSAs of both employee-spouses, the employer is not required to contribute amounts in excess of the annual contribution limits in section 223(b).
(b) Examples. The following examples illustrate the rules in paragraph (a) of this Q & A-8. None of the employees in the following examples are covered by a collective bargaining agreement. The examples read as follows:
Example 1.In a calendar year, Employer H offers an HDHP to its full-time employees. Most full-time employees are covered under Employer H's HDHP and Employer H makes comparable contributions only to these employees' HSAs. T and U are a married couple. Employee T, who is a full-time employee of Employer H and an eligible individual, has family coverage under Employer H's HDHP for T and T's spouse. Employee U, who is also a full-time employee of Employer H and an eligible individual, does not have coverage under Employer H's HDHP except as the spouse of Employee T. Employer H is required to make comparable contributions to T's HSA, but is not required to make comparable contributions to U's HSA.
Example 2.In a calendar year, Employer J offers an HDHP to its full-time employees. Most full-time employees are covered under Employer J's HDHP and Employer J makes comparable contributions to these employees' HSAs and to the HSAs of full-time employees who are eligible individuals but are not covered under Employer J's HDHP. R and S are a married couple. Employee S, who is a full-time employee of Employer J and an eligible individual, has family coverage under Employer J's HDHP for S and S's spouse. Employee R, who is also a full-time employee of Employer J and an eligible individual, does not have coverage under Employer J's HDHP except as the spouse of Employee S. Employer J must make comparable contributions to S's HSA and to R's HSA.
Q-9: Does an employer that makes HSA contributions only for one class of non-collectively bargained employees who are eligible individuals, but not for another class of non-collectively bargained employees who are eligible individuals (for example, management v. non-management) satisfy the requirement that the employer make comparable contributions?
A-9: (a) Different classes of employees. No. If the two classes of employees are comparable participating employees, the comparability rules are not satisfied. The only categories of employees for comparability purposes are current full-time employees, current part-time employees, and former employees. Collectively bargained employees are not comparable participating employees. But see Q & A-1 in 54.4980G-5 on contributions made through a cafeteria plan. See § 54.4980G-6 for a special rule for contributions made to the HSAs of nonhighly compensated employees.
(b) Examples. The following examples illustrate the rules in paragraph (a) of this Q & A-9. None of the employees in the following examples are covered by a collective bargaining agreement. The examples read as follows:
Example 1.In a calendar year, Employer K maintains an HDHP covering all management and non-management employees. Employer K contributes to the HSAs of non-management employees who are eligible individuals covered under its HDHP. Employer K does not contribute to the HSAs of its management employees who are eligible individuals covered under its HDHP. The comparability rules are not satisfied.
Example 2.All of Employer L's employees are located in city X and city Y. In a calendar year, Employer L maintains an HDHP for all employees working in city X only. Employer L does not maintain an HDHP for its employees working in city Y. Employer L contributes $500 to the HSAs of city X employees who are eligible individuals with coverage under its HDHP. Employer L does not contribute to the HSAs of any of its city Y employees. The comparability rules are satisfied because none of the employees in city Y are covered under an HDHP of Employer L. (However, if any employees in city Y were covered by an HDHP of Employer L, Employer L could not fail to contribute to their HSAs merely because they work in a different city.)
Example 3.Employer M has two divisions—division N and division O. In a calendar year, Employer M maintains an HDHP for employees working in division N and division O. Employer M contributes to the HSAs of division N employees who are eligible individuals with coverage under its HDHP. Employer M does not contribute to the HSAs of division O employees who are eligible individuals covered under its HDHP. The comparability rules are not satisfied.
Q-10: If an employer contributes to the HSAs of former employees who are eligible individuals, do the comparability rules apply to these contributions?
A-10: (a) Former employees. Yes. The comparability rules apply to contributions an employer makes to former employees' HSAs. Therefore, if an employer contributes to any former employee's HSA, it must make comparable contributions to the HSAs of all comparable participating former employees (former employees who are eligible individuals with the same category of HDHP coverage). However, an employer is not required to make comparable contributions to the HSAs of former employees with coverage under the employer's HDHP because of an election under a COBRA continuation provision (as defined in section 9832(d)(1)). See Q & A-5 and Q & A-12 of this section. The comparability rules apply separately to former employees because they are a separate category of covered employee. See Q & A-5 of this section. Also, former employees who were covered by a collective bargaining agreement immediately before termination of employment are not comparable participating employees. See Q & A-6 of this section.
(b) Locating former employees. An employer making comparable contributions to former employees must take reasonable actions to locate any missing comparable participating former employees. In general, such actions include the use of certified mail, the Internal Revenue Service Letter Forwarding Program or the Social Security Administration's Letter Forwarding Service.
(c) Examples. The following examples illustrate the rules in paragraph (a) of this Q & A-10. None of the employees in the following examples are covered by a collective bargaining agreement. The examples read as follows:
Example 1.In a calendar year, Employer N contributes $1,000 for the calendar year to the HSA of each current employee who is an eligible individual with coverage under any HDHP. Employer N does not contribute to the HSA of any former employee who is an eligible individual. Employer N's contributions satisfy the comparability rules.
Example 2.In a calendar year, Employer O contributes to the HSAs of current employees and former employees who are eligible individuals covered under any HDHP. Employer O contributes $750 to the HSA of each current employee with self-only HDHP coverage and $1,000 to the HSA of each current employee with family HDHP coverage. Employer O also contributes $300 to the HSA of each former employee with self-only HDHP coverage and $400 to the HSA of each former employee with family HDHP coverage. Employer O's contributions satisfy the comparability rules.
Q-11: Is an employer permitted to make comparable contributions only to the HSAs of comparable participating former employees who have coverage under the employer's HDHP?
A-11: If during a calendar year, an employer contributes to the HSA of any former employee who is an eligible individual covered under an HDHP provided by the employer, the employer is required to make comparable contributions to the HSAs of all former employees who are comparable participating former employees with coverage under any HDHP provided by the employer. An employer that contributes only to the HSAs of former employees who are eligible individuals with coverage under the employer's HDHP is not required to make comparable contributions to the HSAs of former employees who are eligible individuals and who are not covered under the employer's HDHP. However, an employer that contributes to the HSA of any former employee who is an eligible individual with coverage under an HDHP that is not an HDHP of the employer, must make comparable contributions to the HSAs of all former employees who are eligible individuals whether or not covered under an HDHP of the employer.
Q-12: If an employer contributes only to the HSAs of former employees who are eligible individuals with coverage under the employer's HDHP, must the employer make comparable contributions to the HSAs of former employees who are eligible individuals with coverage under the employer's HDHP because of an election under a COBRA continuation provision (as defined in section 9832(d)(1))?
A-12: No. An employer that contributes only to the HSAs of former employees who are eligible individuals with coverage under the employer's HDHP is not required to make comparable contributions to the HSAs of former employees who are eligible individuals with coverage under the employer's HDHP because of an election under a COBRA continuation provision (as defined in section 9832(d)(1)).
Q-13: How do the comparability rules apply if some employees have HSAs and other employees have Archer MSAs?
A-13: (a) HSAs and Archer MSAs. The comparability rules apply separately to employees who have HSAs and employees who have Archer MSAs. However, if an employee has both an HSA and an Archer MSA, the employer may contribute to either the HSA or the Archer MSA, but not to both.
(b) Example. The following example illustrates the rules in paragraph (a) of this Q & A-13:
Example.In a calendar year, Employer P contributes $600 to the Archer MSA of each employee who is an eligible individual and who has an Archer MSA. Employer P contributes $500 for the calendar year to the HSA of each employee who is an eligible individual and who has an HSA. If an employee has both an Archer MSA and an HSA, Employer P contributes to the employee's Archer MSA and not to the employee's HSA. Employee X has an Archer MSA and an HSA. Employer P contributes $600 for the calendar year to X's Archer MSA but does not contribute to X's HSA. Employer P's contributions satisfy the comparability rules.
[T.D. 9277, 71 FR 43058, July 31, 2006, as amended by T.D. 9457, 74 FR 45998, Sept. 8, 2009]
§ 54.4980G-4 Calculating comparable contributions.
Q-1: What are comparable contributions?
A-1: (a) Definition. Contributions are comparable if, for each month in a calendar year, the contributions are either the same amount or the same percentage of the deductible under the HDHP for employees who are eligible individuals with the same category of coverage on the first day of that month. Employees with self-only HDHP coverage are tested separately from employees with family HDHP coverage. Similarly, employees with different categories of family HDHP coverage may be tested separately. See Q & A-2 in § 54.4980G-1. An employer is not required to contribute the same amount or the same percentage of the deductible for employees who are eligible individuals with one category of HDHP coverage that it contributes for employees who are eligible individuals with a different category of HDHP coverage. For example, an employer that satisfies the comparability rules by contributing the same amount to the HSAs of all employees who are eligible individuals with family HDHP coverage is not required to contribute any amount to the HSAs of employees who are eligible individuals with self-only HDHP coverage, or to contribute the same percentage of the self-only HDHP deductible as the amount contributed with respect to family HDHP coverage. However, the contribution with respect to the self plus two category may not be less than the contribution with respect to the self plus one category and the contribution with respect to the self plus three or more category may not be less than the contribution with respect to the self plus two category. But see Q & A-1 of § 54.4980G-6 for a special rule for contributions made to the HSAs of nonhighly compensated employees.
(b) Examples. The following examples illustrate the rules in paragraph (a) of this Q & A-1. None of the employees in the following examples are covered by a collective bargaining agreement. The examples read as follows:
Example 1.In the 2007 calendar year, Employer A offers its full-time employees three health plans, including an HDHP with self-only coverage and a $2,000 deductible. Employer A contributes $1,000 for the calendar year to the HSA of each employee who is an eligible individual electing the self-only HDHP coverage. Employer A makes no HSA contributions for employees with family HDHP coverage or for employees who do not elect the employer's self-only HDHP. Employer A's HSA contributions satisfy the comparability rules.
Example 2.In the 2007 calendar year, Employer B offers its employees an HDHP with a $3,000 deductible for self-only coverage and a $4,000 deductible for family coverage. Employer B contributes $1,000 for the calendar year to the HSA of each employee who is an eligible individual electing the self-only HDHP coverage. Employer B contributes $2,000 for the calendar year to the HSA of each employee who is an eligible individual electing the family HDHP coverage. Employer B's HSA contributions satisfy the comparability rules.
Example 3.In the 2007 calendar year, Employer C offers its employees an HDHP with a $1,500 deductible for self-only coverage and a $3,000 deductible for family coverage. Employer C contributes $1,000 for the calendar year to the HSA of each employee who is an eligible individual electing the self-only HDHP coverage. Employer C contributes $1,000 for the calendar year to the HSA of each employee who is an eligible individual electing the family HDHP coverage. Employer C's HSA contributions satisfy the comparability rules.
Example 4.In the 2007 calendar year, Employer D offers its employees an HDHP with a $1,500 deductible for self-only coverage and a $3,000 deductible for family coverage. Employer D contributes $1,500 for the calendar year to the HSA of each employee who is an eligible individual electing the self-only HDHP coverage. Employer D contributes $1,000 for the calendar year to the HSA of each employee who is an eligible individual electing the family HDHP coverage. Employer D's HSA contributions satisfy the comparability rules.
Example 5. (i) In the 2007 calendar year, Employer E maintains two HDHPs. Plan A has a $2,000 deductible for self-only coverage and a $4,000 deductible for family coverage. Plan B has a $2,500 deductible for self-only coverage and a $4,500 deductible for family coverage. For the calendar year, Employer E makes contributions to the HSA of each full-time employee who is an eligible individual covered under Plan A of $600 for self-only coverage and $1,000 for family coverage. Employer E satisfies the comparability rules, if it makes either of the following contributions for the 2007 calendar year to the HSA of each full-time employee who is an eligible individual covered under Plan B—
(A) $600 for each full-time employee with self-only coverage and $1,000 for each full-time employee with family coverage; or
(B) $750 for each employee with self-only coverage and $1,125 for each employee with family coverage (the same percentage of the deductible Employer E contributes for full-time employees covered under Plan A, 30% of the deductible for self-only coverage and 25% of the deductible for family coverage).
(ii) Employer E also makes contributions to the HSA of each part-time employee who is an eligible individual covered under Plan A of $300 for self-only coverage and $500 for family coverage. Employer E satisfies the comparability rules, if it makes either of the following contributions for the 2007 calendar year to the HSA of each part-time employee who is an eligible individual covered under Plan B—
(A) $300 for each part-time employee with self-only coverage and $500 for each part-time employee with family coverage; or
(B) $375 for each part-time employee with self-only coverage and $563 for each part-time employee with family coverage (the same percentage of the deductible Employer E contributes for part-time employees covered under Plan A, 15% of the deductible for self-only coverage and 12.5% of the deductible for family coverage).
Example 6. (i) In the 2007 calendar year, Employer F maintains an HDHP. The HDHP has the following coverage options—
(A) A $2,500 deductible for self-only coverage;
(B) A $3,500 deductible for self plus one dependent (self plus one);
(C) A $3,500 deductible for self plus spouse (self plus one);
(D) A $3,500 deductible for self plus spouse and one dependent (self plus two); and
(E) A $3,500 deductible for self plus spouse and two or more dependents (self plus three or more).
(ii) Employer F makes the following contributions for the calendar year to the HSA of each full-time employee who is an eligible individual covered under the HDHP—
(A) $750 for self-only coverage;
(B) $1,000 for self plus one dependent;
(C) $1,000 for self plus spouse;
(D) $1,500 for self plus spouse and one dependent; and
(E) $2,000 for self plus spouse and two or more dependents.
(iii) Employer F's HSA contributions satisfy the comparability rules.
Example 7. (i) In a calendar year, Employer G offers its employees an HDHP and a health flexible spending arrangement (health FSA). The health FSA reimburses employees for medical expenses as defined in section 213(d). Some of Employer G's employees have coverage under the HDHP and the health FSA, some have coverage under the HDHP and their spouse's FSA, and some have coverage under the HDHP and are enrolled in Medicare. For the calendar year, Employer G contributes $500 to the HSA of each employee who is an eligible individual. No contributions are made to the HSAs of employees who have coverage under Employer G's health FSA or under a spouse's health FSA or who are enrolled in Medicare.
(ii) The employees who have coverage under a health FSA (whether Employer H's or their spouse's FSA) or who are covered under Medicare are not eligible individuals. Specifically, the employees who have coverage under the health FSA or under a spouse's health FSA are not comparable participating employees because they are not eligible individuals under section 223(c)(1). Similarly, the employees who are enrolled in Medicare are not comparable participating employees because they are not eligible individuals under section 223(b)(7) and (c)(1). Therefore, employees who have coverage under the health FSA or under a spouse's health FSA and employees who are enrolled in Medicare are excluded from comparability testing. See sections 4980G(b) and 4980E. Employer G's contributions satisfy the comparability rules.
Q-2: How does an employer comply with the comparability rules when some non-collectively bargained employees who are eligible individuals do not work for the employer during the entire calendar year?
A-2: (a) In general. In determining whether the comparability rules are satisfied, an employer must take into account all full-time and part-time employees who were employees and eligible individuals for any month during the calendar year. (Full-time and part-time employees are tested separately. See Q & A-5 in § 54.4980G-3.) There are two methods to comply with the comparability rules when some employees who are eligible individuals do not work for the employer during the entire calendar year; contributions may be made on a pay-as-you-go basis or on a look-back basis. See Q & A-9 through Q & A-11 in § 54.4980G-3 for the rules regarding comparable contributions to the HSAs of former employees.
(b) Contributions on a pay-as-you-go basis. An employer may comply with the comparability rules by contributing amounts at one or more dates during the calendar year to the HSAs of employees who are eligible individuals as of the first day of the month, if contributions are the same amount or the same percentage of the HDHP deductible for employees who are eligible individuals as of the first day of the month with the same category of coverage and are made at the same time. Contributions made at the employer's usual payroll interval for different groups of employees are considered to be made at the same time. For example, if salaried employees are paid monthly and hourly employees are paid bi-weekly, an employer may contribute to the HSAs of hourly employees on a bi-weekly basis and to the HSAs of salaried employees on a monthly basis. An employer may change the amount that it contributes to the HSAs of employees at any point. However, the changed contribution amounts must satisfy the comparability rules.
(c) Examples. The following examples illustrate the rules in paragraph (b) of this Q & A-2: The examples read as follows:
Example 1. (i) Beginning on January 1st, Employer H contributes $50 per month on the first day of each month to the HSA of each employee who is an eligible individual on that date. Employer H does not contribute to the HSAs of former employees. In mid-March of the same year, Employee X, an eligible individual, terminates employment after Employer H has contributed $150 to X's HSA. After X terminates employment, Employer H does not contribute additional amounts to X's HSA. In mid-April of the same year, Employer H hires Employee Y, an eligible individual, and contributes $50 to Y's HSA in May and $50 in June. Effective in July of the same year, Employer H stops contributing to the HSAs of all employees and makes no contributions to the HSA of any employee for the months of July through December. In August, Employer H hires Employee Z, an eligible individual. Employer H does not contribute to Z's HSA. After Z is hired, Employer H does not hire additional employees. As of the end of the calendar year, Employer H has made the following HSA contributions to its employees' HSAs—
(A) Employer H contributed $150 to X's HSA;
(B) Employer H contributed $100 to Y's HSA;
(C) Employer H did not contribute to Z's HSA; and
(D) Employer H contributed $300 to the HSA of each employee who was an eligible individual and employed by Employer J from January through June.
(ii) Employer H's contributions satisfy the comparability rules.
Example 2.In a calendar year, Employer J offers its employees an HDHP and contributes on a monthly pay-as-you-go basis to the HSAs of employees who are eligible individuals with coverage under Employer J's HDHP. In the calendar year, Employer J contributes $50 per month to the HSA of each employee with self-only HDHP coverage and $100 per month to the HSA of each employee with family HDHP coverage. From January 1st through March 31st of the calendar year, Employee X is an eligible individual with self-only HDHP coverage. From April 1st through December 31st of the calendar year, X is an eligible individual with family HDHP coverage. For the months of January, February and March of the calendar year, Employer J contributes $50 per month to X's HSA. For the remaining months of the calendar year, Employer J contributes $100 per month to X's HSA. Employer J's contributions to X's HSA satisfy the comparibility rules.
(d) Contributions on a look-back basis. An employer may also satisfy the comparability rules by determining comparable contributions for the calendar year at the end of the calendar year, taking into account all employees who were eligible individuals for any month during the calendar year and contributing the same percentage of the HDHP deductible or the same dollar amount to the HSAs of all employees with the same category of coverage for that month.
(e) Examples. The following examples illustrate the rules in paragraph (d) of this Q & A-2. The examples read as follows:
Example 1.In a calendar year, Employer K offers its employees an HDHP and contributes on a look-back basis to the HSAs of employees who are eligible individuals with coverage under Employer K's HDHP. Employer K contributes $600 ($50 per month) for the calendar year to the HSA of each employee with self-only HDHP coverage and $1,200 ($100 per month) for the calendar year to the HSA of each employee with family HDHP coverage. From January 1st through June 30th of the calendar year, Employee Y is an eligible individual with family HDHP coverage. From July 1st through December 31st, Y is an eligible individual with self-only HDHP coverage. Employer K contributes $900 on a look-back basis for the calendar year to Y's HSA ($100) per month for the months of January through June and $50 per month for the months of July through December. Employer K's contributions to Y's HSA satisfy the comparability rules.
Example 2.On December 31st, Employer L contributes $50 per month on a look-back basis to each employee's HSA for each month in the calendar year that the employee was an eligible individual. In mid-March of the same year, Employee T, an eligible individual, terminated employment. In mid-April of the same year, Employer L hired Employee U, who becomes an eligible individual as of May 1st and works for Employer L through December 31st. On December 31st, Employer L contributes $150 to Employee T's HSA and $400 to Employee U's HSA. Employer L's contributions satisfy the comparability rules.
(f) Periods and dates for making contributions. With both the pay-as-you-go method and the look-back method, an employer may establish, on a reasonable and consistent basis, periods for which contributions will be made (for example, a quarterly period covering three consecutive months in a calendar year) and the dates on which such contributions will be made for that designated period (for example, the first day of the quarter or the last day of the quarter in the case of an employer who has established a quarterly period for making contributions). An employer that makes contributions on a pay-as-you-go basis for a period covering more than one month will not fail to satisfy the comparability rules because an employee who terminates employment prior to the end of the period for which contributions were made has received more contributions on a monthly basis than employees who have worked the entire period. In addition, an employer that makes contributions on a pay-as-you-go basis for a period covering more than one month must make HSA contributions for any comparable participating employees hired after the date of initial funding for that period.
(g) Example. The following example illustrates the rules in paragraph (f) of this Q & A-2:
Example.Employer M has established, on a reasonable and consistent basis, a quarterly period for making contributions to the HSAs of eligible employees on a pay-as-you-go basis. Beginning on January 1st, Employer M contributes $150 for the first three months of the calendar year to the HSA of each employee who is an eligible individual on that date. On January 15th, Employee V, an eligible individual, terminated employment after Employer M has contributed $150 to V's HSA. On January 15th, Employer M hired Employee W, who becomes an eligible individual as of February 1st. On April 1st, Employer M has contributed $100 to W's HSA for the two months (February and March) in the quarter period that Employee W was an eligible employee. Employer M's contributions satisfy the comparability rules.
(h) Maximum contribution permitted for all employees who are eligible individuals during the last month of the taxable year. An employer may contribute up to the maximum annual contribution amount for the calendar year (based on the employees' HDHP coverage) to the HSAs of all employees who are eligible individuals on the first day of the last month of the employees' taxable year, including employees who worked for the employer for less than the entire calendar year and employees who became eligible individuals after January 1st of the calendar year. For example, such contribution may be made on behalf of an eligible individual who is hired after January 1st or an employee who becomes an eligible individual after January 1st. Employers are not required to provide more than a pro-rata contribution based on the number of months that an individual was an eligible individual and employed by the employer during the year. However, if an employer contributes more than a pro-rata amount for the calendar year to the HSA of any eligible individual who is hired after January 1st of the calendar year or any employee who becomes an eligible individual any time after January 1st of the calendar year, the employer must contribute that same amount on an equal and uniform basis to the HSAs of all comparable participating employees (as defined in Q & A-1 in § 54.4980G-1) who are hired or become eligible individuals after January 1st of the calendar year. Likewise, if an employer contributes the maximum annual contribution amount for the calendar year to the HSA of any eligible individual who is hired after January 1st of the calendar year or any employee who becomes an eligible individual any time after January 1st of the calendar year, the employer must contribute the maximum annual contribution amount on an equal and uniform basis to the HSAs of all comparable participating employees (as defined in Q & A-1 in § 54.4980G-1) who are hired or become eligible individuals after January 1st of the calendar year. An employer who makes the maximum calendar year contribution or more than a pro-rata contribution to the HSAs of employees who become eligible individuals after the first day of the calendar year or eligible individuals who are hired after the first day of the calendar year will not fail to satisfy comparability merely because some employees will have received more contributions on a monthly basis than employees who worked the entire calendar year.
(i) Examples. The following examples illustrate the rules in paragraph (h) in this Q & A-2. In the following examples, no contributions are made through a section 125 cafeteria plan and none of the employees are covered by a collective bargaining agreement.
Example 1.On January 1, 2010, Employer Q contributes $1,000 for the calendar year to the HSAs of employees who are eligible individuals with family HDHP coverage. In mid-March of the same year, Employer Q hires Employee A, an eligible individual with family HDHP coverage. On April 1, 2010, Employer Q contributes $1,000 to the HSA of Employee A. In September of the same year, Employee B becomes an eligible individual with family HDHP coverage. On October 1, 2010, Employer G contributes $1,000 to the HSA of Employee B. Employer Q does not make any other contributions for the 2010 calendar year. Employer Q's contributions satisfy the comparability rules.
Example 2.For the 2010 calendar year, Employer R only has two employees, Employee C and Employee D. Employee C, an eligible individual with family HDHP coverage, works for Employer R for the entire calendar year. Employee D, an eligible individual with family HDHP coverage works for Employer R from July 1st through December 31st. Employer R contributes $1,200 for the calendar year to the HSA of Employee C and $600 to the HSA of Employee D. Employer R does not make any other contributions for the 2010 calendar year. Employer R's contributions satisfy the comparability rules.
(j) Effective/applicability date. The rules in paragraphs (h) and (i) of Q & A-2 are effective for employer contributions made for calendar years beginning on or after January 1, 2010.
Q-3: How do the comparability rules apply to employer contributions to employees' HSAs if some non-collectively bargained employees work full-time during the entire calendar year, and other non-collectively bargained employees work full-time for less than the entire calendar year?
A-3: Employer contributions to the HSAs of employees who work full-time for less than twelve months satisfy the comparability rules if the contribution amount is comparable when determined on a month-to-month basis. For example, if the employer contributes $240 to the HSA of each full-time employee who works the entire calendar year, the employer must contribute $60 to the HSA of each full-time employee who works on the first day of each three months of the calendar year. The rules set forth in this Q & A-2 apply to employer contributions made on a pay-as-you-go basis or on a look-back basis as described in Q & A-3 of this section. See sections 4980G(b) and 4980E(d)(2)(B).
Q-4: May an employer make contributions for the entire year to the HSAs of its employees who are eligible individuals at the beginning of the calendar year (on a pre-funded basis) instead of contributing on a pay-as-you-go or on a look-back basis?
A-4: (a) Contributions on a pre-funded basis. Yes. An employer may make contributions for the entire year to the HSAs of its employees who are eligible individuals at the beginning of the calendar year. An employer that pre-funds the HSAs of its employees will not fail to satisfy the comparability rules because an employee who terminates employment prior to the end of the calendar year has received more contributions on a monthly basis than employees who work the entire calendar year. See Q & A-12 of this section. Under section 223(d)(1)(E), an account beneficiary's interest in an HSA is nonforfeitable. An employer must make comparable contributions for all employees who are comparable participating employees for any month during the calendar year, including employees who are eligible individuals hired after the date of initial funding. An employer that makes HSA contributions on a pre-funded basis may also contribute on a pre-funded basis to the HSAs of employees who are eligible individuals hired after the date of initial funding. Alternatively, an employer that has pre-funded the HSAs of comparable participating employees may contribute to the HSAs of employees who are eligible individuals hired after the date of initial funding on a pay-as-you-go basis or on a look-back basis. An employer that makes HSA contributions on a pre-funded basis must use the same contribution method for all employees who are eligible individuals hired after the date of initial funding.
(b) Example. The following example illustrates the rules in paragraph (a) of this Q & A-4:
Example. (i) On January 1, Employer N contributes $1,200 for the calendar year on a pre-funded basis to the HSA of each employee who is an eligible individual. In mid-May, Employer N hires Employee B, who becomes an eligible individual as of June 1st. Therefore, Employer N is required to make comparable contributions to B's HSA beginning in June. Employer N satisfies the comparability rules with respect to contributions to B's HSA if it makes HSA contributions in any one of the following ways—
(A) Pre-funding B's HSA by contributing $700 to B's HSA;
(B) Contributing $100 per month on a pay-as-you-go basis to B's HSA; or
(C) Contributing to B's HSA at the end of the calendar year taking into account each month that B was an eligible individual and employed by Employer M.
(ii) If Employer M hires additional employees who are eligible individuals after initial funding, it must use the same contribution method for these employees that it used to contribute to B's HSA.
Q-5: Must an employer use the same contribution method as described in Q & A-2 and Q & A-4 of this section for all employees who were comparable participating employees for any month during the calendar year?
A-5: Yes. If an employer makes comparable HSA contributions on a pay-as-you-go basis, it must do so for each employee who is a comparable participating employee as of the first day of the month. If an employer makes comparable contributions on a look-back basis, it must do so for each employee who was a comparable participating employee for any month during the calendar year. If an employer makes HSA contributions on a pre-funded basis, it must do so for all employees who are comparable participating employees at the beginning of the calendar year and must make comparable HSA contributions for all employees who are comparable participating employees for any month during the calendar year, including employees who are eligible individuals hired after the date of initial funding. See Q & A-4 of this section for rules regarding contributions for employees hired after initial funding.
Q-6: How does an employer comply with the comparability rules if an employee has not established an HSA at the time the employer contributes to its employees' HSAs?
A-6: (a) Employee has not established an HSA at the time the employer funds its employees' HSAs. If an employee has not established an HSA at the time the employer funds its employees' HSAs, the employer complies with the comparability rules by contributing comparable amounts plus reasonable interest to the employee's HSA when the employee establishes the HSA, taking into account each month that the employee was a comparable participating employee. See Q & A-13 of this section for rules regarding reasonable interest.
(b) Example. The following example illustrates the rules in paragraph (a) of this Q & A-6:
Example.Beginning on January 1st, Employer O contributes $500 per calendar year on a pay-as-you-go basis to the HSA of each employee who is an eligible individual. Employee C is an eligible individual during the entire calendar year but does not establish an HSA until March. Notwithstanding C's delay in establishing an HSA, Employer O must make up the missed HSA contributions plus reasonable interest for January and February by April 15th of the following calendar year.
Q-7: If an employer bases its contributions on a percentage of the HDHP deductible, how is the correct percentage or dollar amount computed?
A-7: (a) Computing HSA contributions. The correct percentage is determined by rounding to the nearest 1/100th of a percentage point and the dollar amount is determined by rounding to the nearest whole dollar.
(b) Example. The following example illustrates the rules in paragraph (a) of this Q & A-7:
Example. In this Example, assume that each HDHP provided by Employer P satisfies the definition of an HDHP for the 2007 calendar year. In the 2007 calendar year, Employer P maintains two HDHPs. Plan A has a deductible of $3,000 for self-only coverage. Employer P contributes $1,000 for the calendar year to the HSA of each employee covered under Plan A. Plan B has a deductible of $3,500 for self-only coverage. Employer P satisfies the comparability rules if it makes either of the following contributions for the 2007 calendar year to the HSA of each employee who is an eligible individual with self-only coverage under Plan B—
(i) $1,000; or
(ii) $1,167 (33.33% of the deductible rounded to the nearest whole dollar amount).
Q-8: Does an employer that contributes to the HSA of each comparable participating employee in an amount equal to the employee's HSA contribution or a percentage of the employee's HSA contribution (matching contributions) satisfy the rule that all comparable participating employees receive comparable contributions?
A-8: No. If all comparable participating employees do not contribute the same amount to their HSAs and, consequently, do not receive comparable contributions to their HSAs, the comparability rules are not satisfied, notwithstanding that the employer offers to make available the same contribution amount to each comparable participating employee. But see Q & A-1 in § 54.4980G-5 on contributions to HSAs made through a cafeteria plan.
Q-9: If an employer conditions contributions by the employer to an employee's HSA on an employee's participation in health assessments, disease management programs or wellness programs and makes the same contributions available to all employees who participate in the programs, do the contributions satisfy the comparability rules?
A-9: No. If all comparable participating employees do not elect to participate in all the programs and consequently, all comparable participating employees do not receive comparable contributions to their HSAs, the employer contributions fail to satisfy the comparability rules. But see Q & A-1 in § 54.4980G-5 on contributions made to HSAs through a cafeteria plan.
Q-10: If an employer makes additional contributions to the HSAs of all comparable participating employees who have attained a specified age or who have worked for the employer for a specified number of years, do the contributions satisfy the comparability rules?
A-10: No. If all comparable participating employees do not meet the age or length of service requirement, all comparable participating employees do not receive comparable contributions to their HSAs and the employer contributions fail to satisfy the comparability rules.
Q-11: If an employer makes additional contributions to the HSAs of all comparable participating employees who are eligible to make the additional contributions (HSA catch-up contributions) under section 223(b)(3), do the contributions satisfy the comparability rules?
A-11: No. If all comparable participating employees are not eligible to make the additional HSA contributions under section 223(b)(3), all comparable participating employees do not receive comparable contributions to their HSAs, and the employer contributions fail to satisfy the comparability rules.
Q-12: If an employer's contributions to an employee's HSA result in non-comparable contributions, may the employer recoup the excess amount from the employee's HSA?
A-12: No. An employer may not recoup from an employee's HSA any portion of the employer's contribution to the employee's HSA. Under section 223(d)(1)(E), an account beneficiary's interest in an HSA is nonforfeitable. However, an employer may make additional HSA contributions to satisfy the comparability rules. An employer may contribute up until April 15th following the calendar year in which the non-comparable contributions were made. An employer that makes additional HSA contributions to correct non-comparable contributions must also contribute reasonable interest. However, an employer is not required to contribute amounts in excess of the annual contribution limits in section 223(b). See Q & A-13 of this section for rules regarding reasonable interest.
Q-13: What constitutes a reasonable interest rate for purposes of making comparable contributions?
A-13: The determination of whether a rate of interest used by an employer is reasonable will be based on all of the facts and circumstances. If an employer calculates interest using the Federal short-term rate as determined by the Secretary in accordance with section 1274(d), the employer is deemed to use a reasonable interest rate.
Q-14: Does an employer fail to satisfy the comparability rules for a calendar year if the employer fails to make contributions with respect to eligible employees because the employee has not established an HSA or because the employer does not know that the employee has established an HSA?
A-14: (a) In general. An employer will not fail to satisfy the comparability rules for a calendar year (Year 1) merely because the employer fails to make contributions with respect to an eligible employee because the employee has not established an HSA or because the employer does not know that the employee has established an HSA, if—
(1) The employer provides timely written notice to all such eligible employees that it will make comparable contributions for Year 1 for eligible employees who, by the last day of February of the following calendar year (Year 2), both establish an HSA and notify the employer (in accordance with a procedure specified in the notice) that they have established an HSA; and
(2) For each such eligible employee who establishes an HSA and so notifies the employer on or before the last day of February of Year 2, the employer contributes to the HSA for Year 1 comparable amounts (taking into account each month that the employee was a comparable participating employee) plus reasonable interest by April 15th of Year 2.
(b) Notice. The notice described in paragraph (a) of this Q & A-14 must be provided to each eligible employee who has not established an HSA by December 31 of Year 1 or if the employer does not know if the employee established an HSA. The employer may provide the notice to other employees as well. However, if an employee has earlier notified the employer that he or she has established an HSA, or if the employer has previously made contributions to that employee's HSA, the employer may not condition making comparable contributions on receipt of any additional notice from that employee. For each calendar year, a notice is deemed to be timely if the employer provides the notice no earlier than 90 days before the first HSA employer contribution for that calendar year and no later than January 15 of the following calendar year.
(c) Model notice. Employers may use the following sample language as a basis in preparing their own notices.
Notice to Employees Regarding Employer Contributions to HSAs:
This notice explains how you may be eligible to receive contributions from [employer] if you are covered by a High Deductible Health Plan (HDHP). [Employer] provides contributions to the Health Savings Account (HSA) of each employee who is [insert employer's eligibility requirements for HSA contributions] (“eligible employee”). If you are an eligible employee, you must do the following in order to receive an employer contribution:
(1) Establish an HSA on or before the last day in February of [insert year after the year for which the contribution is being made] and;
(2) Notify [insert name and contact information for appropriate person to be contacted] of your HSA account information on or before the last day in February of [insert year after year for which the contribution is being made]. [Specify the HSA account information that the employee must provide (e.g., account number, name and address of trustee or custodian, etc.) and the method by which the employee must provide this account information (e.g., in writing, by e-mail, on a certain form, etc.)].
If you establish your HSA on or before the last day of February in [insert year after year for which the contribution is being made] and notify [employer] of your HSA account information, you will receive your HSA contributions, plus reasonable interest, for [insert year for which contribution is being made] by April 15 of [insert year after year for which contribution is being made]. If, however, you do not establish your HSA or you do not notify us of your HSA account information by the deadline, then we are not required to make any contributions to your HSA for [insert applicable year]. You may notify us that you have established an HSA by sending an [e-mail or] a written notice to [insert name, title and, if applicable, e-mail address]. If you have any questions about this notice, you can contact [insert name and title] at [insert telephone number or other contact information].
(d) [Reserved]
(e) Electronic delivery. An employer may furnish the notice required under this section electronically in accordance with § 1.401(a)-21 of this chapter.
(f) Examples. The following examples illustrate the rules in this Q & A-14:
Example 1.In a calendar year, Employer Q contributes to the HSAs of current employees who are eligible individuals covered under any HDHP. For the 2009 calendar year, Employer Q contributes $50 per month on the first day of each month, beginning January 1st, to the HSA of each employee who is an eligible employee on that date. For the 2009 calendar year, Employer Q provides written notice satisfying the content requirements of this Q & A-14 on October 16, 2008 to all employees regarding the availability of HSA contributions for eligible employees. For eligible employees who are hired after October 16, 2008, Employer Q provides such a notice no later than January 15, 2010. Employer Q's notice satisfies the notice timing requirements in paragraph (a)(1) of this Q & A-14.
Example 2.Employer R's written cafeteria plan permits employees to elect to make pre-tax salary reduction contributions to their HSAs. Employees making this election have the right to receive cash or other taxable benefits in lieu of their HSA pre-tax contribution. Employer R automatically contributes a non-elective matching contribution to the HSA of each employee who makes a pre-tax HSA contribution. Because Employer R's HSA contributions are made through the cafeteria plan, the comparability requirements do not apply to the HSA contributions made by Employer R. Consequently, Employer R is not required to provide written notice to its employees regarding the availability of this matching HSA contribution. See Q & A-1 in § 54.4980G-5 for treatment of HSA contributions made through a cafeteria plan.
Example 3.In a calendar year, Employer S maintains an HDHP and only contributes to the HSAs of eligible employees who elect coverage under its HDHP. For the 2009 calendar year, Employer S employs ten eligible employees and all ten employees have elected coverage under Employer S's HDHP and have established HSAs. For the 2009 calendar year, Employer S makes comparable contributions to the HSAs of all ten employees. Employer S satisfies the comparability rules. Thus, Employer S is not required to provide written notice to its employees regarding the availability of HSA contributions for eligible employees.
Example 4.In a calendar year, Employer T contributes to the HSAs of current full-time employees with family coverage under any HDHP. For the 2009 calendar year, Employer T provides timely written notice satisfying the content requirements of this section to all employees regardless of HDHP coverage. Employer T makes identical monthly contributions to all eligible employees (meaning full time employees with family HDHP coverage) that establish HSAs. Employer T contributes comparable amounts (taking into account each month that the employee was a comparable participating employee) plus reasonable interest to the HSAs of the eligible employees that establish HSAs and provide the necessary information after the end of the year but on or before the last day of February, 2010. Employer T makes no contribution to the HSAs of employees that do not establish an HSA or that do not provide the necessary information on or before the last day of February, 2010. Employer T satisfies the comparability requirements.
Example 5.For the 2009 calendar year, Employer V contributes to the HSAs of current full time employees with family coverage under any HDHP. Employer V has 500 current full time employees. As of the date for Employer V's first HSA contribution for the 2009 calendar year, 450 eligible employees have established HSAs. Employer V provides timely written notice satisfying the content requirements of this section only to those 50 eligible employees who have not established HSAs. Employer V makes identical quarterly contributions to the 450 eligible employees who established HSAs. By April 15, 2010, Employer V contributes comparable amounts to the other eligible employees who establish HSAs and provide the necessary information on or before the last day of February, 2010. Employer V makes no contribution to the HSAs of eligible employees that do not establish an HSA or that do not provide the necessary information on or before the last day of February, 2010. Employer V satisfies the comparability rules.
Q-15: For any calendar year, may an employer accelerate part or all of its contributions for the entire year to the HSAs of employees who have incurred, during the calendar year, qualified medical expenses (as defined in section 223(d)(2)) exceeding the employer's cumulative HSA contributions at that time?
A-15: (a) In general. Yes. For any calendar year, an employer may accelerate part or all of its contributions for the entire year to the HSAs of employees who have incurred, during the calendar year, qualified medical expenses exceeding the employer's cumulative HSA contributions at that time. If an employer accelerates contributions to the HSA of any such eligible employee, all accelerated contributions must be available throughout the calendar year on an equal and uniform basis to all such eligible employees. Employers must establish reasonable uniform methods and requirements for accelerated contributions and the determination of medical expenses.
(b) Satisfying comparability. An employer that accelerates contributions to the HSAs of its employees will not fail to satisfy the comparability rules because employees who incur qualifying medical expenses exceeding the employer's cumulative HSA contributions at that time have received more contributions in a given period than comparable employees who do not incur such expenses, provided that all comparable employees receive the same amount or the same percentage for the calendar year. Also, an employer that accelerates contributions to the HSAs of its employees will not fail to satisfy the comparability rules because an employee who terminates employment prior to the end of the calendar year has received more contributions on a monthly basis than employees who work the entire calendar year. An employer is not required to contribute reasonable interest on either accelerated or non-accelerated HSA contributions. But see Q & A-6 and Q & A-12 of this section for when reasonable interest must be paid.
Q-16: What is the effective date for the rules in Q & A-14 and Q & A-15 of this section?
A-16: These regulations apply to employer contributions made for calendar years beginning on or after January 1, 2009.
[T.D. 9277, 71 FR 43058, July 31, 2006; 71 FR 53967, Sept. 13, 2006, as amended by T.D. 9393, 73 FR 20795, Apr. 17, 2008; T.D. 9457, 74 FR 45998, Sept. 8, 2009]
§ 54.4980G-5 HSA comparability rules and cafeteria plans and waiver of excise tax.
Q-1: If an employer makes contributions through a section 125 cafeteria plan to the HSA of each employee who is an eligible individual, are the contributions subject to the comparability rules?
A-1: (a) In general. No. The comparability rules do not apply to HSA contributions that an employer makes through a section 125 cafeteria plan. However, contributions to an HSA made through a cafeteria plan are subject to the section 125 nondiscrimination rules (eligibility rules, contributions and benefits tests and key employee concentration tests). See section 125(b), (c) and (g) and the regulations thereunder.
(b) Contributions made through a section 125 cafeteria plan. Employer contributions to employees' HSAs are made through a section 125 cafeteria plan and are subject to the section 125 cafeteria plan nondiscrimination rules and not the comparability rules if under the written cafeteria plan, the employees have the right to elect to receive cash or other taxable benefits in lieu of all or a portion of an HSA contribution (meaning that all or a portion of the HSA contributions are available as pre-tax salary reduction amounts), regardless of whether an employee actually elects to contribute any amount to the HSA by salary reduction.
Q-2: If an employer makes contributions through a cafeteria plan to the HSA of each employee who is an eligible individual in an amount equal to the amount of the employee's HSA contribution or a percentage of the amount of the employee's HSA contribution (matching contributions), are the contributions subject to the section 4980G comparability rules?
A-2: No. The comparability rules do not apply to HSA contributions that an employer makes through a section 125 cafeteria plan. Thus, where matching contributions are made by an employer through a cafeteria plan, the contributions are not subject to the comparability rules of section 4980G. However, contributions, including matching contributions, to an HSA made under a cafeteria plan are subject to the section 125 nondiscrimination rules (eligibility rules, contributions and benefits tests and key employee concentration tests). See Q & A-1 of this section.
Q-3: If under the employer's cafeteria plan, employees who are eligible individuals and who participate in health assessments, disease management programs or wellness programs receive an employer contribution to an HSA and the employees have the right to elect to make pre-tax salary reduction contributions to their HSAs, are the contributions subject to the comparability rules?
A-3: (a) In general. No. The comparability rules do not apply to employer contributions to an HSA made through a cafeteria plan. See Q & A-1 of this section.
(b) Examples. The following examples illustrate the rules in this § 54.4980G-5. The examples read as follows:
Example 1.Employer A's written cafeteria plan permits employees to elect to make pre-tax salary reduction contributions to their HSAs. Employees making this election have the right to receive cash or other taxable benefits in lieu of their HSA pre-tax contribution. The section 125 cafeteria plan nondiscrimination rules and not the comparability rules apply because the HSA contributions are made through the cafeteria plan.
Example 2.Employer B's written cafeteria plan permits employees to elect to make pre-tax salary reduction contributions to their HSAs. Employees making this election have the right to receive cash or other taxable benefits in lieu of their HSA pre-tax contribution. Employer B automatically contributes a non-elective matching contribution or seed money to the HSA of each employee who makes a pre-tax HSA contribution. The section 125 cafeteria plan nondiscrimination rules and not the comparability rules apply to Employer B's HSA contributions because the HSA contributions are made through the cafeteria plan.
Example 3.Employer C's written cafeteria plan permits employees to elect to make pre-tax salary reduction contributions to their HSAs. Employees making this election have the right to receive cash or other taxable benefits in lieu of their HSA pre-tax contribution. Employer C makes a non-elective contribution to the HSAs of all employees who complete a health risk assessment and participate in Employer C's wellness program. Employees do not have the right to receive cash or other taxable benefits in lieu of Employer C's non-elective contribution. The section 125 cafeteria plan nondiscrimination rules and not the comparability rules apply to Employer C's HSA contributions because the HSA contributions are made through the cafeteria plan.
Example 4.Employer D's written cafeteria plan permits employees to elect to make pre-tax salary reduction contributions to their HSAs. Employees making this election have the right to receive cash or other taxable benefits in lieu of their HSA pre-tax contribution. Employees participating in the plan who are eligible individuals receive automatic employer contributions to their HSAs. Employees make no election with respect to Employer D's contribution and do not have the right to receive cash or other taxable benefits in lieu of Employer D's contribution but are permitted to make their own pre-tax salary reduction contributions to fund their HSAs. The section 125 cafeteria plan nondiscrimination rules and not the comparability rules apply to Employer D's HSA contributions because the HSA contributions are made through the cafeteria plan.
Q-4: May all or part of the excise tax imposed under section 4980G be waived?
A-4: In the case of a failure which is due to reasonable cause and not to willful neglect, all or a portion of the excise tax imposed under section 4980G may be waived to the extent that the payment of the tax would be excessive relative to the failure involved. See sections 4980G(b) and 4980E(c).
[T.D. 9277, 71 FR 43058, July 31, 2006]
§ 54.4980G-6 Special rule for contributions made to the HSAs of nonhighly compensated employees.
Q-1: May an employer make larger contributions to the HSAs of nonhighly compensated employees than to the HSAs of highly compensated employees?
A-1: Yes. Employers may make larger HSA contributions for nonhighly compensated employees who are comparable participating employees than for highly compensated employees who are comparable participating employees. See Q & A-1 in § 54.4980G-1 for the definition of comparable participating employee. For purposes of this section, highly compensated employee is defined under section 414(q). Nonhighly compensated employees are employees that are not highly compensated employees. The comparability rules continue to apply with respect to contributions to the HSAs of all nonhighly compensated employees. Employers must make comparable contributions for the calendar year to the HSA of each nonhighly compensated employee who is a comparable participating employee.
Q-2: May an employer make larger contributions to the HSAs of highly compensated employees than to the HSAs of nonhighly compensated employees?
A-2: (a) In general. No. Employer contributions to HSAs for highly compensated employees who are comparable participating employees may not be larger than employer HSA contributions for nonhighly compensated employees who are comparable participating employees. The comparability rules continue to apply with respect to contributions to the HSAs of all highly compensated employees. Employers must make comparable contributions for the calendar year to the HSA of each highly compensated comparable participating employee. See Q & A-1 in § 54.4980G-1 for the definition of comparable participating employee.
(b) Examples. The following examples illustrate the rules in Q & A-1 and Q & A-2 of this section. No contributions are made through a section 125 cafeteria plan and none of the employees in the following examples are covered by a collective bargaining agreement. All of the employees in the following examples have the same HDHP deductible for the same category of coverage.
Example 1.In 2010, Employer A contributes $1,000 for the calendar year to the HSA of each full-time nonhighly compensated employee who is an eligible individual with self-only HDHP coverage. Employer A makes no contribution to the HSA of any full-time highly compensated employee who is an eligible individual with self-only HDHP coverage. Employer A's HSA contributions for calendar year 2010 satisfy the comparability rules.
Example 2.In 2010, Employer B contributes $2,000 for the calendar year to the HSA of each full-time nonhighly compensated employee who is an eligible individual with self-only HDHP coverage. Employer B also contributes $1,000 for the calendar year to the HSA of each full-time highly compensated employee who is an eligible individual with self-only HDHP coverage. Employer B's HSA contributions for calendar year 2010 satisfy the comparability rules.
Example 3.In 2010, Employer C contributes $1,000 for the calendar year to the HSA of each full-time nonhighly compensated employee who is an eligible individual with self-only HDHP coverage. Employer C contributes $2,000 for the calendar year to the HSA of each full-time highly compensated employee who is an eligible individual with self-only HDHP coverage. Employer C's HSA contributions for calendar year 2010 do not satisfy the comparability rules.
Example 4.In 2010, Employer D contributes $1,000 for the calendar year to the HSA of each full-time nonhighly compensated employee who is an eligible individual with self-only HDHP coverage. Employer D also contributes $1,000 to the HSA of each full-time highly compensated employee who is an eligible individual with self-only HDHP coverage. In addition, the employer contributes an additional $500 to the HSA of each nonhighly compensated employee who participates in a wellness program. The nonhighly compensated employees did not receive comparable contributions, and, therefore, Employer D's HSA contributions for calendar year 2010 do not satisfy the comparability rules.
Example 5.In 2010, Employer E contributes $1,000 for the calendar year to the HSA of each full-time non-management nonhighly compensated employee who is an eligible individual with family HDHP coverage. Employer E also contributes $500 for the calendar year to the HSA of each full-time management nonhighly compensated employee who is an eligible individual with family HDHP coverage. The nonhighly compensated employees did not receive comparable contributions, and, therefore, Employer E's HSA contributions for calendar year 2010 do not satisfy the comparability rules.
Q-3: May an employer make larger HSA contributions for employees with self plus two HDHP coverage than employees with self plus one HDHP coverage even if the employees with self plus two are all highly compensated employees and the employees with self plus one are all nonhighly compensated employees?
A-3: (a) Yes. Q & A-1 in § 54.4980G-4 provides that an employer's contribution with respect to the self plus two category of HDHP coverage may not be less than the contribution with respect to the self plus one category and the contribution with respect to the self plus three or more category may not be less than the contribution with respect to the self plus two category. Therefore, the comparability rules are not violated if an employer makes a larger HSA contribution for the self plus two category of HDHP coverage than to self plus one coverage, even if the employees with self plus two coverage are all highly compensated employees and the employees with self plus one coverage are all nonhighly compensated employees. Likewise, the comparability rules are not violated if an employer makes a larger HSA contribution for the self plus three category of HDHP coverage than to self plus two coverage, even if the employees with self plus three coverage are all highly compensated employees and the employees with self plus two coverage are all nonhighly compensated employees.
(b) Example. The following example illustrates the rules in paragraph (a) of this Q & A-3. In the following example, no contributions are made through a section 125 cafeteria plan and none of the employees are covered by a collective bargaining agreement.
Example.In 2010, Employer F contributes $1,000 for the calendar year to the HSA of each full-time employee who is an eligible individual with self plus one HDHP coverage. Employer F contributes $1,500 for the calendar year to the HSA of each employee who is an eligible individual with self plus two HDHP coverage. The deductible for both the self plus one HDHP and the self plus two HDHP is $2,000. Employee A, an eligible individual, is a nonhighly compensated employee with self plus one coverage. Employee B, an eligible individual, is a highly compensated employee with self plus two coverage. For the 2010 calendar year, Employer F contributes $1,000 to Employee A's HSA and $1,500 to Employee B's HSA. Employer F's HSA contributions satisfy the comparability rules.
Q-4:What is the effective date for the rules in this section?
A-4: The rules in this section are effective for employer contributions made for calendar years beginning on or after January 1, 2010.
[T.D. 9457, 74 FR 45998, Sept. 8, 2009]
§ 54.4980G-7 Special comparability rules for qualified HSA distributions contributed to HSAs on or after December 20, 2006 and before January 1, 2012.
Q-1 How do the comparability rules of section 4980G apply to qualified HSA distributions under section 106(e)(2)?
A-1:The comparability rules of section 4980G do not apply to amounts contributed to employee HSAs through qualified HSA distributions. However, in order to satisfy the comparability rules, if an employer offers qualified HSA distributions, as defined in section 106(e)(2), to any employee who is an eligible individual covered under any HDHP, the employer must offer qualified HSA distributions to all employees who are eligible individuals covered under any HDHP. However, if an employer offers qualified HSA distributions only to employees who are eligible individuals covered under the employer's HDHP, the employer is not required to offer qualified HSA distributions to employees who are eligible individuals but are not covered under the employer's HDHP.
Q-2: What is the effective date for the rules in this section?
A-2: The rules in this section are effective for are effective for employer contributions made for calendar years beginning on or after January 1, 2010.
[T.D. 9457, 74 FR 45999, Sept. 8, 2009]
§ 54.4980H-0 Table of contents.
This section lists the table of contents for §§ 54.4980H-1 through 54.4980H-6.
§ 54.4980H-1 Definitions.
(a) Definitions.
(1) Administrative period.
(2) Advance credit payment.
(3) Affordable Care Act.
(4) Applicable large employer.
(5) Applicable large employer member.
(6) Applicable premium tax credit.
(7) Bona fide volunteer.
(8) Calendar month.
(9) Church, or a convention or association of churches.
(10) Collective bargaining agreement.
(11) Cost-sharing reduction.
(12) Dependent.
(13) Educational organization.
(14) Eligible employer-sponsored plan.
(15) Employee.
(16) Employer.
(17) Employment break period.
(18) Exchange.
(19) Federal poverty line.
(20) Form W-2 wages.
(21) Full-time employee.
(22) Full-time equivalent employee (FTE).
(23) Government entity.
(24) Hour of service.
(25) Initial measurement period.
(26) Limited non-assessment period for certain employees.
(27) Minimum essential coverage.
(28) Minimum value.
(29) Month.
(30) New employee.
(31) Ongoing employee.
(32) Part-time employee.
(33) Period of employment.
(34) Person.
(35) Plan year.
(36) Predecessor employer.
(37) Qualified health plan.
(38) Seasonal employee.
(39) Seasonal worker.
(40) Section 1411 certification.
(41) Section 4980H(a) applicable payment amount.
(42) Section 4980H(b) applicable payment amount.
(43) Self-only coverage.
(44) Special unpaid leave.
(45) Stability period.
(46) Standard measurement period.
(47) Start date.
(48) United States.
(49) Variable hour employee.
(50) Week.
(b) Effective/applicability date.
§ 54.4980H-2 Applicable large employer and applicable large employer member.
(a) In general.
(b) Determining applicable large employer status.
(1) In general.
(2) Seasonal worker exception.
(3) Employers not in existence in preceding calendar year.
(4) Special rules for government entities, churches, and conventions and associations of churches.
(5) Transition rule for an employer's first year as an applicable large employer.
(c) Full-time equivalent employees (FTEs).
(1) In general.
(2) Calculating the number of FTEs.
(d) Examples.
(e) Additional guidance.
(f) Effective/applicability date.
§ 54.4980H-3 Determining full-time employees.
(a) In general.
(b) Hours of service.
(1) In general.
(2) Hourly employees calculation.
(3) Non-hourly employees calculation.
(c) Monthly measurement method.
(1) In general.
(2) Employee first otherwise eligible for an offer of coverage.
(3) Use of weekly periods.
(4) Employees rehired after termination of employment or resuming service after other absence.
(5) Examples.
(d) Look-back measurement method.
(1) Ongoing employees.
(2) New non-variable hour, new non-seasonal and new non-part-time employees.
(3) New variable hour employees, new seasonal employees, and new part-time employees.
(4) Transition from new variable hour employee, new seasonal employee, or new part-time employee to ongoing employee.
(5) Examples.
(6) Employees rehired after termination of employment or resuming service after other absence.
(e) Use of the look-back measurement method and the monthly measurement method for different categories of employees.
(f) Changes in employment status resulting in a change in full-time employee determination method.
(1) Change in employment status from a position to which a look-back measurement method applies to a position to which the monthly measurement method applies, or vice versa.
(2) Special rule for certain employees to whom minimum value coverage has been continuously offered.
(g) Nonpayment or late payment of premiums.
(h) Additional guidance.
(i) Effective/applicability date.
§ 54.4980H-4 Assessable payments under section 4980H(a).
(a) In general.
(b) Offer of coverage.
(1) In general.
(2) Offer of coverage on behalf of another entity.
(c) Partial calendar month.
(d) Application to applicable large employer member.
(e) Allocated reduction of 30 full-time employees.
(f) Example.
(g) Additional guidance.
(h) Effective/applicability date.
§ 54.4980H-5 Assessable payments under section 4980H(b).
(a) In general.
(b) Offer of coverage.
(c) Partial calendar month.
(d) Applicability to applicable large employer member.
(e) Affordability.
(1) In general.
(2) Affordability safe harbors for section 4980H(b) purposes.
(f) Additional guidance.
(g) Effective/applicability date.
§ 54.4980H-6 Administration and procedure.
(a) In general.
(b) Effective/applicability date.
[T.D. 9655, 79 FR 8577, Feb. 12, 2014]
§ 54.4980H-1 Definitions.
(a) Definitions. The definitions in this section apply only for purposes of this section and §§ 54.4980H-2 through 54.4980H-6.
(1) Administrative period. The term administrative period means an optional period, selected by an applicable large employer member, of no longer than 90 days beginning immediately following the end of a measurement period and ending immediately before the start of the associated stability period. The administrative period also includes the period between a new employee's start date and the beginning of the initial measurement period, if the initial measurement period does not begin on the employee's start date.
(2) Advance credit payment. The term advance credit payment means an advance payment of the premium tax credit as provided in Affordable Care Act section 1412 (42 U.S.C. 18082).
(3) Affordable Care Act. The term Affordable Care Act means the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), as amended by the Medicare and Medicaid Extenders Act of 2010, Public Law 111-309 (124 Stat. 3285 (2010)), the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, Public Law 112-9 (125 Stat. 36 (2011)), the Department of Defense and Full-Year Continuing Appropriations Act, 2011, Public Law 112-10 (125 Stat. 38 (2011)), and the 3% Withholding Repeal and Job Creation Act, Public Law 112-56 (125 Stat. 711 (2011)).
(4) Applicable large employer. The term applicable large employer means, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year. For rules relating to the determination of applicable large employer status, see § 54.4980H-2.
(5) Applicable large employer member. The term applicable large employer member means a person that, together with one or more other persons, is treated as a single employer that is an applicable large employer. For this purpose, if a person, together with one or more other persons, is treated as a single employer that is an applicable large employer on any day of a calendar month, that person is an applicable large employer member for that calendar month. If the applicable large employer comprises one person, that one person is the applicable large employer member. An applicable large employer member does not include a person that is not an employer or only an employer of employees with no hours of service for the calendar year. For rules for government entities, and churches, or conventions or associations of churches, see § 54.4980H-2(b)(4).
(6) Applicable premium tax credit. The term applicable premium tax credit means any premium tax credit that is allowed or paid under section 36B and any advance payment of such credit.
(7) Bona fide volunteer. The term bona fide volunteer means an employee of a government entity or an organization described in section 501(c) that is exempt from taxation under section 501(a) whose only compensation from that entity or organization is in the form of—
(i) Reimbursement for (or reasonable allowance for) reasonable expenses incurred in the performance of services by volunteers, or
(ii) Reasonable benefits (including length of service awards), and nominal fees, customarily paid by similar entities in connection with the performance of services by volunteers.
(8) Calendar month. The term calendar month means one of the 12 full months named in the calendar, such as January, February, or March.
(9) Church or a convention or association of churches. The term church or a convention or association of churches has the same meaning as provided in § 1.170A-9(b).
(10) Collective bargaining agreement. The term collective bargaining agreement means an agreement that the Secretary of Labor determines to be a collective bargaining agreement, provided that the health benefits provided under the collective bargaining agreement are the subject of good faith bargaining between employee representatives and one or more employers, and the agreement between employee representatives and one or more employers satisfies section 7701(a)(46).
(11) Cost-sharing reduction. The term cost-sharing reduction means a cost-sharing reduction and any advance payment of the reduction as defined under section 1402 of the Affordable Care Act and 45 CFR 155.20.
(12) Dependent. The term dependent means a child (as defined in section 152(f)(1) but excluding a stepson, stepdaughter or an eligible foster child (and excluding any individual who is excluded from the definition of dependent under section 152 by operation of section 152(b)(3))) of an employee who has not attained age 26. A child attains age 26 on the 26th anniversary of the date the child was born. A child is a dependent for purposes of section 4980H for the entire calendar month during which he or she attains age 26. Absent knowledge to the contrary, applicable large employer members may rely on an employee's representation about that employee's children and the ages of those children. The term dependent does not include the spouse of an employee.
(13) Educational organization. The term educational organization means an entity described in § 1.170A-9(c)(1), whether or not described in section 501(c)(3) and tax-exempt under section 501(a). Thus, the term educational organization includes taxable entities, tax-exempt entities and government entities.
(14) Eligible employer-sponsored plan. The term eligible employer-sponsored plan has the same meaning as provided under section 5000A(f)(2) and the regulations thereunder and any other applicable guidance.
(15) Employee. The term employee means an individual who is an employee under the common-law standard. See § 31.3401(c)-1(b). For purposes of this paragraph (a)(15), a leased employee (as defined in section 414(n)(2)), a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder, or a worker described in section 3508 is not an employee.
(16) Employer. The term employer means the person that is the employer of an employee under the common-law standard. See § 31.3121(d)-1(c). For purposes of determining whether an employer is an applicable large employer, all persons treated as a single employer under section 414(b), (c), (m), or (o) are treated as a single employer. Thus, all employees of a controlled group of entities under section 414(b) or (c), an affiliated service group under section 414(m), or an entity in an arrangement described under section 414(o), are taken into account in determining whether the members of the controlled group or affiliated service group together are an applicable large employer. For purposes of determining applicable large employer status, the term employer also includes a predecessor employer (see paragraph (a)(36) of this section) and a successor employer.
(17) Employment break period. The term employment break period means a period of at least four consecutive weeks (disregarding special unpaid leave), measured in weeks, during which an employee of an educational organization is not credited with hours of service for an applicable large employer.
(18) Exchange. The term Exchange means an Exchange as defined in 45 CFR 155.20.
(19) Federal poverty line. The term federal poverty line means for a plan year any of the poverty guidelines (updated periodically in the Federal Register by the Secretary of Health and Human Services under the authority of 42 U.S.C. 9902(2)) in effect within six months before the first day of the plan year of the applicable large employer member's health plan, as selected by the applicable large employer member.
(20) Form W-2 wages. The term Form W-2 wages with respect to an employee refers to the amount of wages as defined under section 3401(a) for the applicable calendar year (required to be reported in Box 1 of the Form W-2 (Wage and Tax Statement)) received from an applicable large employer.
(21) Full-time employee—(i) In general. The term full-time employee means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer. For rules on the determination of whether an employee is a full-time employee, including a description of the look-back measurement method and the monthly measurement method, see § 54.4980H-3. The look-back measurement method for identifying full-time employees is available only for purposes of determining and computing liability under section 4980H and not for the purpose of determining status as an applicable large employer under § 54.4980H-2.
(ii) Monthly equivalency. Except as otherwise provided in paragraph (a)(21)(iii) of this section, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week, and this 130 hours of service monthly equivalency applies for both the look-back measurement method and the monthly measurement method for determining full-time employee status.
(iii) Determination of full-time employee status using weekly rule under the monthly measurement method. Under the optional weekly rule set forth in § 54.4980H-3(c)(3), full-time employee status for certain calendar months is based on hours of service over four weekly periods and for certain other calendar months is based on hours of service over five weekly periods. With respect to a month with four weekly periods, an employee with at least 120 hours of service is a full-time employee, and with respect to a month with five weekly periods, an employee with at least 150 hours of service is a full-time employee. For purposes of this rule, the seven continuous calendar days that constitute a week (for example Sunday through Saturday) must be consistently applied for all calendar months of the calendar year.
(22) Full-time equivalent employee (FTE). The term full-time equivalent employee, or FTE, means a combination of employees, each of whom individually is not treated as a full-time employee because he or she is not employed on average at least 30 hours of service per week with an employer, who, in combination, are counted as the equivalent of a full-time employee solely for purposes of determining whether the employer is an applicable large employer. For rules on the method for determining the number of an employer's full-time equivalent employees, or FTEs, see § 54.4980H-2(c).
(23) Government entity. The term government entity means the government of the United States, any State or political subdivision thereof, any Indian tribal government (as defined in section 7701(a)(40)) or subdivision of an Indian tribal government (determined in accordance with section 7871(d)), or any agency or instrumentality of any of the foregoing.
(24) Hour of service—(i) In general. The term hour of service means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and each hour for which an employee is paid, or entitled to payment by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence (as defined in 29 CFR 2530.200b-2(a)). For the rules for determining an employee's hours of service, see § 54.4980H-3.
(ii) Excluded hours—(A) Bona fide volunteers. The term hour of service does not include any hour for services performed as a bona fide volunteer.
(B) Work-study program. The term hour of service does not include any hour for services to the extent those services are performed as part of a Federal Work-Study Program as defined under 34 CFR 675 or a substantially similar program of a State or political subdivision thereof.
(C) Services outside the United States. The term hour of service does not include any hour for services to the extent the compensation for those services constitutes income from sources without the United States (within the meaning of sections 861 through 863 and the regulations thereunder).
(iii) Service for other applicable large employer members. In determining hours of service and status as a full-time employee for all purposes under section 4980H, an hour of service for one applicable large employer member is treated as an hour of service for all other applicable large employer members for all periods during which the applicable large employer members are part of the same group of employers forming an applicable large employer.
(25) Initial measurement period. The term initial measurement period means a period selected by an applicable large employer member of at least three consecutive months but not more than 12 consecutive months used by the applicable large employer as part of the look-back measurement method in § 54.4980H-3(d).
(26) Limited non-assessment period for certain employees. References to the limited non-assessment period for certain employees refers to the limited period during which an employer will not be subject to an assessable payment under section 4980H(a), and in certain cases section 4980H(b), with respect to an employee as set forth in—
(i) Section 54.4980H-2(b)(5) (regarding the transition rule for an employer's first year as an applicable large employer),
(ii) Section 54.4980H-3(c)(2) (regarding the application of section 4980H for the three full calendar month period beginning with the first full calendar month in which an employee is first otherwise eligible for an offer of coverage under the monthly measurement method),
(iii) Section 54.4980H-3(d)(2)(iii) (regarding the application of section 4980H during the initial three full calendar months of employment for an employee reasonably expected to be a full-time employee at the start date, under the look-back measurement method),
(iv) Section 54.4980H-3(d)(3)(iii) (regarding the application of section 4980H during the initial measurement period to a new variable hour employee, seasonal employee or part-time employee determined to be employed on average at least 30 hours of service per week, under the look-back measurement method),
(v) Section 54.4980H-3(d)(3)(vii) (regarding the application of section 4980H following an employee's change in employment status to a full-time employee during the initial measurement period, under the look-back measurement method), and
(vi) Section 54.4980H-4(c) and § 54.4980H-5(c) (regarding the application of section 4980H to the calendar month in which an employee's start date occurs on a day other than the first day of the calendar month).
(27) Minimum essential coverage. The term minimum essential coverage, or MEC, has the same meaning as provided in section 5000A(f) and any regulations or other guidance thereunder.
(28) Minimum value. The term minimum value has the same meaning as provided in section 36B(c)(2)(C)(ii) and any regulations or other guidance thereunder.
(29) Month. The term month means—
(i) A calendar month as defined in paragraph (a)(8) of this section, or
(ii) The period that begins on any date following the first day of a calendar month and that ends on the immediately preceding date in the immediately following calendar month (for example, from February 2 to March 1 or from December 15 to January 14).
(30) New employee. Under the look-back measurement method, the term new employee means an employee who has been employed by an applicable large employer for less than one complete standard measurement period; for treatment of the employee as a new employee or continuing employee under the look-back measurement method following a period for which no hours of service are earned, see the rehire and continuing employee rules at § 54.4980H-3(d)(6). Under the monthly measurement method, the term new employee means an employee who either has not previously been employed by the applicable large employer or has previously been employed by the applicable large employer but is treated as a new employee under the rehire and continuing employee rules at § 54.4980H-3(c)(4).
(31) Ongoing employee. The term ongoing employee means an employee who has been employed by an applicable large employer member for at least one complete standard measurement period. For the treatment of an ongoing employee as a new employee or continuing employee following a period for which no hours of service are earned, see the rehire and continuing employee rules at § 54.4980H-3(d)(6).
(32) Part-time employee. The term part-time employee means a new employee who the applicable large employer member reasonably expects to be employed on average less than 30 hours of service per week during the initial measurement period, based on the facts and circumstances at the employee's start date. Whether an employer's determination that a new employee is a part-time employee is reasonable is based on the facts and circumstances at the employee's start date. Factors to consider in determining a new employee's full-time employee status are set forth in § 54.4980H-3(d)(2)(ii).
(33) Period of employment. The term period of employment means the period of time beginning on the first date for which an employee is credited with an hour of service for an applicable large employer (including any member of that applicable large employer) and ending on the last date on which the employee is credited with an hour of service for that applicable large employer, both dates inclusive. An employee may have one or more periods of employment with the same applicable large employer.
(34) Person. The term person has the same meaning as provided in section 7701(a)(1) and the regulations thereunder.
(35) Plan year. A plan year must be twelve consecutive months, unless a short plan year of less than twelve consecutive months is permitted for a valid business purpose. A plan year is permitted to begin on any day of a year and must end on the preceding day in the immediately following year (for example, a plan year that begins on October 15, 2015, must end on October 14, 2016). A calendar year plan year is a period of twelve consecutive months beginning on January 1 and ending on December 31 of the same calendar year. Once established, a plan year is effective for the first plan year and for all subsequent plan years, unless changed, provided that such change will only be recognized if made for a valid business purpose. A change in the plan year is not permitted if a principal purpose of the change in plan year is to circumvent the rules of section 4980H or these regulations.
(36) Predecessor employer. [Reserved]
(37) Qualified health plan. The term qualified health plan means a qualified health plan as defined in Affordable Care Act section 1301(a) (42 U.S.C. 18021(a)), but does not include a catastrophic plan described in Affordable Care Act section 1302(e) (42 U.S.C. 18022(e)).
(38) Seasonal employee. The term seasonal employee means an employee who is hired into a position for which the customary annual employment is six months or less.
(39) Seasonal worker. The term seasonal worker means a worker who performs labor or services on a seasonal basis as defined by the Secretary of Labor, including (but not limited to) workers covered by 29 CFR 500.20(s)(1), and retail workers employed exclusively during holiday seasons. Employers may apply a reasonable, good faith interpretation of the term seasonal worker and a reasonable good faith interpretation of 29 CFR 500.20(s)(1) (including as applied by analogy to workers and employment positions not otherwise covered under 29 CFR 500.20(s)(1)).
(40) Section 1411 Certification. The term Section 1411 Certification means the certification received as part of the process established by the Secretary of Health and Human Services under which an employee is certified to the employer under section 1411 of the Affordable Care Act as having enrolled for a calendar month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.
(41) Section 4980H(a) applicable payment amount. The term section 4980H(a) applicable payment amount means, with respect to any calendar month, 1/12 of $2,000, adjusted for inflation in accordance with section 4980H(c)(5) and any applicable guidance thereunder.
(42) Section 4980H(b) applicable payment amount. The term section 4980H(b) applicable payment amount means, with respect to any calendar month, 1/12 of $3,000, adjusted for inflation in accordance with section 4980H(c)(5) and any applicable guidance thereunder.
(43) Self-only coverage. The term self-only coverage means health insurance coverage provided to only one individual, generally the employee.
(44) Special unpaid leave. The term special unpaid leave means—
(i) Unpaid leave that is subject to the Family and Medical Leave Act of 1993 (FMLA), Public Law 103-3, 29 U.S.C. 2601 et seq.;
(ii) Unpaid leave that is subject to the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), Public Law 103-353, 38 U.S.C. 4301 et seq.; or
(iii) Unpaid leave on account of jury duty.
(45) Stability period. The term stability period means a period selected by an applicable large employer member that immediately follows, and is associated with, a standard measurement period or an initial measurement period (and, if elected by the employer, the administrative period associated with that standard measurement period or initial measurement period), and is used by the applicable large employer member as part of the look-back measurement method in § 54.4980H-3(d).
(46) Standard measurement period. The term standard measurement period means a period of at least three but not more than 12 consecutive months that is used by an applicable large employer member as part of the look-back measurement method in § 54.4980H-3(d). See § 54.4980H-3(d)(1)(ii) for rules on the use of payroll periods that include the beginning and end dates of the measurement period.
(47) Start date. The term start date means the first date on which an employee is required to be credited with an hour of service with an employer. For rules relating to when, following a period for which an employee does not earn an hour of service, that employee may be treated as a new employee with a new start date rather than a continuing employee, see the rehire and continuing employee rules at § 54.4980H-3(c)(4) and § 54.4980H-3(d)(6).
(48) United States. The term United States means United States as defined in section 7701(a)(9).
(49) Variable hour employee—(i) In general. The term variable hour employee means an employee if, based on the facts and circumstances at the employee's start date, the applicable large employer member cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee's hours are variable or otherwise uncertain.
(ii) Factors—(A) In general. Factors to consider in determining whether it can be determined that the employee is reasonably expected to be (or reasonably expected not to be) employed on average at least 30 hours of service per week during the initial measurement period include, but are not limited to, whether the employee is replacing an employee who was a full-time employee or a variable hour employee, the extent to which the hours of service of employees in the same or comparable positions have actually varied above and below an average of 30 hours of service per week during recent measurement periods, and whether the job was advertised, or otherwise communicated to the new employee or otherwise documented (for example, through a contract or job description) as requiring hours of service that would average at least 30 hours of service per week, less than 30 hours of service per week, or may vary above and below an average of 30 hours of service per week. These factors are only relevant for a particular new employee if the employer has no reason to anticipate that the facts and circumstances related to that new employee will be different. In all cases, no single factor is determinative. For purposes of determining whether an employee is a variable hour employee, the applicable large employer member may not take into account the likelihood that the employee may terminate employment with the applicable large employer (including any member of the applicable large employer) before the end of the initial measurement period.
(B) Additional factors for an employee hired by an employer for temporary placement at an unrelated entity. In the case of an individual who, under all the facts and circumstances, is the employee of an entity (referred to solely for purposes of this paragraph (a)(49) as a “temporary staffing firm”) that hired such individual for temporary placement at an unrelated entity that is not the common law employer, additional factors to consider to determine whether the employee is reasonably expected to be (or reasonably expected not to be) employed by the temporary staffing firm on average at least 30 hours of service per week during the initial measurement period include, but are not limited to, whether other employees in the same position of employment with the temporary staffing firm, as part of their continuing employment, retain the right to reject temporary placements that the temporary staffing firm offers the employee; typically have periods during which no offer of temporary placement is made; typically are offered temporary placements for differing periods of time; and typically are offered temporary placements that do not extend beyond 13 weeks.
(C) Educational organizations. An employer that is an educational organization cannot take into account the potential for, or likelihood of, an employment break period in determining its expectation of future hours of service.
(iii) Application only for look-back measurement method. The term variable hour employee is used as a category of employees under the look-back measurement method and is not relevant to the monthly measurement method.
(50) Week. The term week means any period of seven consecutive calendar days applied consistently by the applicable large employer member.
(b) Effective/applicability date. This section is applicable for periods after December 31, 2014.
[T.D. 9655, 79 FR 8577, Feb. 12, 2014]
§ 54.4980H-2 Applicable large employer and applicable large employer member.
(a) In general. Section 4980H applies to an applicable large employer and to all of the applicable large employer members that comprise that applicable large employer.
(b) Determining applicable large employer status—(1) In general. An employer's status as an applicable large employer for a calendar year is determined by taking the sum of the total number of full-time employees (including any seasonal workers) for each calendar month in the preceding calendar year and the total number of FTEs (including any seasonal workers) for each calendar month in the preceding calendar year, and dividing by 12. The result, if not a whole number, is then rounded to the next lowest whole number. If the result of this calculation is less than 50, the employer is not an applicable large employer for the current calendar year. If the result of this calculation is 50 or more, the employer is an applicable large employer for the current calendar year, unless the seasonal worker exception in paragraph (b)(2) of this section applies.
(2) Seasonal worker exception. If the sum of an employer's full-time employees and FTEs exceeds 50 for 120 days or less during the preceding calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days are seasonal workers, the employer is not considered to employ more than 50 full-time employees (including FTEs) and the employer is not an applicable large employer for the current calendar year. In the case of an employer that was not in existence on any business day during the preceding calendar year, if the employer reasonably expects that the sum of its full-time employees and FTEs for the current calendar year will exceed 50 for 120 days or less during the calendar year, and that the employees in excess of 50 who will be employed during that period of no more than 120 days will be seasonal workers, the employer is not an applicable large employer for the current calendar year. For purposes of this paragraph (b)(2) only, four calendar months may be treated as the equivalent of 120 days. The four calendar months and the 120 days are not required to be consecutive.
(3) Employers not in existence in preceding calendar year. An employer not in existence throughout the preceding calendar year is an applicable large employer for the current calendar year if the employer is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) on business days during the current calendar year and it actually employs an average of at least 50 full-time employees (taking into account FTEs) on business days during the calendar year. An employer is treated as not having been in existence throughout the prior calendar year only if the employer was not in existence on any business day in the prior calendar year. See paragraph (b)(2) of this section for the application of the seasonal worker exception to employers not in existence in the preceding calendar year.
(4) Special rules for government entities, churches, and conventions and associations of churches. [Reserved]
(5) Transition rule for an employer's first year as an applicable large employer. With respect to an employee who was not offered coverage by the employer at any point during the prior calendar year, if the applicable large employer offers coverage to the employee on or before April 1 of the first calendar year for which the employer is an applicable large employer, the employer will not be subject to an assessable payment under section 4980H by reason of its failure to offer coverage to the employee for January through March of that year, provided that this relief applies only with respect to potential liability under section 4980H(b) (for January through March of the first calendar year for which the employer is an applicable large employer) if the coverage offered by April 1 provides minimum value. If the employer does not offer coverage to the employee by April 1, the employer may be subject to a section 4980H(a) assessable payment with respect January through March of the first calendar year for which the employer is an applicable large employer in addition to any later calendar months for which coverage was not offered. If the employer offers coverage to the employee by April 1 that does not provided minimum value, the employer may be subject to a section 4980H(b) assessable payment with respect to the employee for January through March of the first calendar year for which the employer is an applicable large employer in addition to any later calendar months for which coverage does not provide minimum value or is not affordable. This rule applies only during the first year that an employer is an applicable large employer (and would not apply if, for example, the employer falls below the 50 full-time employee (plus FTE) threshold for a subsequent calendar year and then increases employment and becomes an applicable large employer again).
(c) Full-time equivalent employees (FTEs)—(1) In general. In determining whether an employer is an applicable large employer, the number of FTEs it employed during the preceding calendar year is taken into account. All employees (including seasonal workers) who were not employed on average at least 30 hours of service per week for a calendar month in the preceding calendar year are included in calculating the employer's FTEs for that calendar month.
(2) Calculating the number of FTEs. The number of FTEs for each calendar month in the preceding calendar year is determined by calculating the aggregate number of hours of service for that calendar month for employees who were not full-time employees (but not more than 120 hours of service for any employee) and dividing that number by 120. In determining the number of FTEs for each calendar month, fractions are taken into account; an employer may round the number of FTEs for each calendar month to the nearest one hundredth.
(d) Examples. The following examples illustrate the rules of paragraphs (a) through (c) of this section. In these examples, hours of service are computed following the rules set forth in § 54.4980H-3, and references to years refer to calendar years unless otherwise specified. The employers in Example 2 through Example 6 are each the sole applicable large employer member of the applicable large employer, as determined under section 414(b), (c), (m), and (o).
Example 1 (Applicable large employer/controlled group). (i) Facts. For all of 2015 and 2016, Corporation Z owns 100 percent of all classes of stock of Corporation Y and Corporation X. Corporation Z has no employees at any time in 2015. For every calendar month in 2015, Corporation Y has 40 full-time employees and Corporation X has 60 full-time employees. Corporations Z, Y, and X are a controlled group of corporations under section 414(b).
(ii) Conclusion. Because Corporations Z, Y and X have a combined total of 100 full-time employees during 2015, Corporations Z, Y, and X together are an applicable large employer for 2016. Each of Corporations Z, Y and X is an applicable large employer member for 2016.
Example 2 (Applicable large employer with FTEs). (i) Facts. During each calendar month of 2015, Employer W has 20 full-time employees each of whom averages 35 hours of service per week, 40 employees each of whom averages 90 hours of service per calendar month, and no seasonal workers.
(ii) Conclusion. Each of the 20 employees who average 35 hours of service per week count as one full-time employee for each calendar month. To determine the number of FTEs for each calendar month, the total hours of service of the employees who are not full-time employees (but not more than 120 hours of service per employee) are aggregated and divided by 120. The result is that the employer has 30 FTEs for each calendar month (40 × 90 = 3,600, and 3,600 ÷ 120 = 30). Because Employer W has 50 full-time employees (the sum of 20 full-time employees and 30 FTEs) during each calendar month in 2015, and because the seasonal worker exception is not applicable, Employer W is an applicable large employer for 2016.
Example 3 (Seasonal worker exception). (i) Facts. During 2015, Employer V has 40 full-time employees for the entire calendar year, none of whom are seasonal workers. In addition, Employer V also has 80 seasonal workers who are full-time employees and who work for Employer V from September through December 2015. Employer V has no FTEs during 2015.
(ii) Conclusion. Before applying the seasonal worker exception, Employer V has 40 full-time employees during each of eight calendar months of 2015, and 120 full-time employees during each of four calendar months of 2015, resulting in an average of 66.67 full-time employees for the year. However, Employer V's workforce exceeded 50 full-time employees (counting seasonal workers) for no more than four calendar months (treated as the equivalent of 120 days) in calendar year 2015, and the number of full-time employees would be less than 50 during those months if seasonal workers were disregarded. Accordingly, because after application of the seasonal worker exception described in paragraph (b)(2) of this section Employer V is not considered to employ more than 50 full-time employees, Employer V is not an applicable large employer for 2016.
Example 4 (Seasonal workers and other FTEs). (i) Facts. Same facts as Example 3, except that Employer V has 20 FTEs in August, some of whom are seasonal workers.
(ii) Conclusion. The seasonal worker exception described in paragraph (b)(2) of this section does not apply if the number of an employer's full-time employees (including seasonal workers) and FTEs exceeds 50 for more than 120 days during the calendar year. Because Employer V has at least 50 full-time employees for a period greater than four calendar months (treated as the equivalent of 120 days) during 2015, the exception described in paragraph (b)(2) of this section does not apply. Employer V averaged 68 full-time employees in 2015: [(40 × 7) + (60 × 1) + (120 × 4)] ÷ 12 = 68.33, and accordingly, Employer V is an applicable large employer for calendar year 2016.
Example 5 (New employer). (i) Facts. Corporation S is incorporated on January 1, 2016. On January 1, 2016, Corporation S has three employees. However, prior to incorporation, Corporation S's owners purchased a factory intended to open within two calendar months of incorporation and to employ approximately 100 full-time employees. By March 15, 2016, Corporation S has more than 75 full-time employees.
(ii) Conclusion. Because Corporation S can reasonably be expected to employ on average at least 50 full-time employees on business days during 2016, and actually employs an average of at least 50 full-time employees on business days during 2016, Corporation S is an applicable large employer (and an applicable large employer member) for calendar year 2016.
Example 6 (First year as applicable large employer). (i) Facts. As of January 1, 2015, Employer R has been in existence for several years and did not average 50 or more full-time employees (including FTEs) on business days during 2014. Employer R averages 50 or more full-time employees on business days during 2015, so that for 2016 Employer R is an applicable large employer, for the first time. For all the calendar months of 2016, Employer R has the same 60 full-time employees. Employer R offered 20 of those full-time employees healthcare coverage during 2015, and offered those same employees coverage providing minimum value for 2016. With respect to the 40 full-time employees who were not offered coverage during 2015, Employer R offers coverage providing minimum value for calendar months April 2016 through December 2016.
(ii) Conclusion. For the 40 full-time employees not offered coverage during 2015 and offered coverage providing minimum value for the calendar months April 2016 through December 2016, the failure to offer coverage during the calendar months January 2016 through March 2016 will not result in an assessable payment under section 4980H with respect to those employees for those three calendar months. For those same 40 full-time employees, the offer of coverage during the calendar months April 2016 through December 2016 may result in an assessable payment under section 4980H(b) with respect to any employee for any calendar month for which the offer is not affordable and for which Employer R has received a Section 1411 Certification. For the other 20 full-time employees, the offer of coverage during 2016 may result in an assessable payment under section 4980H(b) for any calendar month if the offer is not affordable and Employer R has received a Section 1411 Certification with respect to the employee who received the offer of coverage. For all calendar months of 2016, Employer R will not be subject to an assessable payment under section 4980H(a).
(e) Additional guidance. With respect to an employer's status as an applicable large employer, the Commissioner may prescribe additional guidance of general applicability, published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter).
(f) Effective/applicability date. This section is applicable for periods after December 31, 2014.
[T.D. 9655, 79 FR 8577, Feb. 12, 2014]
§ 54.4980H-3 Determining full-time employees.
(a) In general. This section sets forth the rules for determining hours of service and status as a full-time employee for purposes of section 4980H. These regulations provide two methods for determining full-time employee status—the monthly measurement method, set forth in paragraph (c) of this section, and the look-back measurement method, set forth in paragraph (d) of this section. The monthly measurement method applies for purposes of determining and calculating liability under section 4980H(a) and (b), as well as, with respect to paragraph (c)(1) of this section, determination of applicable large employer status (except with respect to the weekly rule under the monthly measurement method). The look-back measurement method applies solely for purposes of determining and calculating liability under section 4980H(a) and (b) (and not for purposes of determining status as an applicable large employer). See § 54.4980H-1(a)(21) for the definition of full-time employee. The rules set forth in this section prescribe the minimum standards for determining status as a full-time employee for purposes of section 4980H; treatment of additional employees as full-time employees for other purposes does not affect section 4980H liability if those employees are not full-time employees under the look-back measurement method or the monthly measurement method.
(b) Hours of service—(1) In general. The following rules on the calculation of hours of service apply for purposes of applying both the look-back measurement method and the monthly measurement method.
(2) Hourly employees calculation. Under the look-back measurement method and the monthly measurement method, for employees paid on an hourly basis, an employer must calculate actual hours of service from records of hours worked and hours for which payment is made or due.
(3) Non-hourly employees calculation—(i) In general. Except as otherwise provided, under the look-back measurement method and the monthly measurement method, for employees paid on a non-hourly basis, an employer must calculate hours of service by using one of the following methods:
(A) Using actual hours of service from records of hours worked and hours for which payment is made or due;
(B) Using a days-worked equivalency whereby the employee is credited with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service in accordance with paragraph (b)(2) of this section; or
(C) Using a weeks-worked equivalency whereby the employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service in accordance with paragraph (b)(2) of this section.
(ii) Change in method. An employer must use one of the three methods in paragraph (b)(3)(i) of this section for calculating the hours of service for non-hourly employees. An employer is not required to use the same method for all non-hourly employees, and may apply different methods for different categories of non-hourly employees, provided the categories are reasonable and consistently applied. Similarly, an applicable large employer member is not required to apply the same methods as other applicable large employer members of the same applicable large employer for the same or different categories of non-hourly employees, provided that in each case the categories are reasonable and consistently applied by the applicable large employer member. An employer may change the method of calculating the hours of service of non-hourly employees (or of one or more categories of non-hourly employees) for each calendar year.
(iii) Prohibited use of equivalencies. The number of hours of service calculated using the days-worked or weeks-worked equivalency must reflect generally the hours actually worked and the hours for which payment is made or due. An employer is not permitted to use the days-worked equivalency or the weeks-worked equivalency if the result is to substantially understate an employee's hours of service in a manner that would cause that employee not to be treated as a full-time employee, or if the result is to understate the hours of service of a substantial number of employees (even if no particular employee's hours of service are understated substantially and even if the understatement would not cause the employee to not be treated as a full-time employee). For example, as to the former, an employer may not use a days-worked equivalency in the case of an employee who generally works three 10-hour days per week, because the equivalency would substantially understate the employee's hours of service as 24 hours of service per week, which would result in the employee being treated as not a full-time employee.
(c) Monthly measurement method—(1) In general. Under the monthly measurement method, an applicable large employer member determines each employee's status as a full-time employee by counting the employee's hours of service for each calendar month. See § 54.4980H-1(a)(21) for the definition of full-time employee. This paragraph (c)(1) (except with respect to the weekly rule) applies for purposes of the determination of status as an applicable large employer; paragraphs (c)(2) through (4) of this section do not apply for purposes of the determination of status as an applicable large employer. For rules regarding the use of the look-back measurement method and the monthly measurement method for different categories of employees, see paragraph (e) of this section.
(2) Employee first otherwise eligible for an offer of coverage. The rule in this paragraph (c)(2) applies with respect to an employee who, in a calendar month, first becomes otherwise eligible to be offered coverage under a group health plan of an employer using the monthly measurement method with respect to that employee. For purposes of this paragraph (c)(2), an employee is otherwise eligible to be offered coverage under a group health plan for a calendar month if, pursuant to the terms of the plan as in effect for that calendar month, the employee meets all conditions to be offered coverage under the plan for that calendar month, other than the completion of a waiting period, within the meaning of § 54.9801-2, and an employee is first otherwise eligible if the employee has not previously been eligible or otherwise eligible for an offer of coverage under a group health plan of the employer during the employee's period of employment. An employer is not subject to an assessable payment under section 4980H(a) with respect to an employee for each calendar month during the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible for an offer of coverage under a group health plan of the employer, provided that the employee is offered coverage no later than the first day of the first calendar month immediately following the three-month period if the employee is still employed on that day. If the coverage for which the employee is otherwise eligible during the three-month period, and which the employee actually is offered on the day following that three-month period if still employed, provides minimum value, the employer also will not be subject to an assessable payment under section 4980H(b) with respect to that employee for the three-month period. This rule cannot apply more than once per period of employment of an employee. If an employee terminates employment and returns under circumstances that would constitute a rehire as set forth in paragraph (c)(4) of this section, the rule in this paragraph (c)(2) may apply again.
(3) Use of weekly periods. With respect to a category of employees for whom an employer uses the monthly measurement method, an employer may determine full-time employee status for a calendar month based on hours of service over a period that:
(i) Begins on the first day of the week that includes the first day of the calendar month, provided that the period over which hours of service are measured does not include the week in which falls the last day of the calendar month (unless that week ends with the last day of the calendar month, in which case it is included); or
(ii) begins on the first day of the week immediately subsequent to the week that includes the first day of the calendar month (unless the week begins on the first day of the calendar month, in which case it is included), provided the period over which hours of service are measured includes the week in which falls the last day of the calendar month.
(4) Employees rehired after termination of employment or resuming service after other absence—(i) Treatment as a new employee after a period of absence for employees of employers other than educational organizations. Except as provided in paragraph (c)(4)(ii) of this section (related to rules for employers that are educational organizations), an employee who resumes providing services to (or is otherwise credited with an hour of service for) an applicable large employer after a period during which the individual was not credited with any hours of service may be treated as having terminated employment and having been rehired, and therefore may be treated as a new employee upon the resumption of services only if the employee did not have an hour of service for the applicable large employer for a period of at least 13 consecutive weeks immediately preceding the resumption of services. The rule set forth in this paragraph (c)(4)(i) applies solely for the purpose of determining whether the employee, upon the resumption of services, is treated as a new employee or as a continuing employee, and does not determine whether the employee is treated as a continuing full-time employee (for example, an employee on leave) or a terminated employee for some or all of the period during which no hours of service are credited.
(ii) Treatment as a new employee after a period of absence for employees of educational organizations. With respect to an employer that is an educational organization, an employee who resumes providing services to (or is otherwise credited with an hour of service for) an applicable large employer after a period during which the individual was not credited with any hours of service may be treated as having terminated employment and having been rehired, and therefore may be treated as a new employee upon the resumption of services, only if the employee did not have an hour of service for the applicable large employer for a period of at least 26 consecutive weeks immediately preceding the resumption of services. The rule set forth in this paragraph (c)(4)(ii) applies solely for the purpose of determining whether the employee, upon the resumption of services, is treated as a new employee or as a continuing employee, and does not determine whether the employee is treated as a continuing full-time employee (for example, an employee on leave) or a terminated employee for some or all of the period during which no hours of service are credited.
(iii) Averaging method for special unpaid leave and employment break periods. The averaging method for periods of special unpaid leave and employment break periods does not apply under the monthly measurement method, regardless of whether the employer is (or is not) an educational organization.
(iv) Treatment of continuing employee. The rule set forth in paragraph (c)(2) of this section applies to an employee treated as a continuing employee in the same way that it applies to an employee who has not experienced a period with no hours of service. A continuing employee treated as a full-time employee is treated as offered coverage upon resumption of services if the employee is offered coverage as of the first day that employee is credited with an hour of service, or, if later, as soon as administratively practicable. For this purpose, offering coverage by no later than the first day of the calendar month following resumption of services is deemed to be as soon as administratively practicable.
(v) Rule of parity. For purposes of determining the period after which an employee may be treated as having terminated employment and having been rehired, an applicable large employer may choose a period, measured in weeks, of at least four consecutive weeks during which the employee was not credited with any hours of service that exceeds the number of weeks of that employee's period of employment with the applicable large employer immediately preceding the period that is shorter than 13 weeks (for an employee of an educational organization employer, a period that is shorter than 26 weeks).
(vi) International transfers. An employer may treat an employee as having terminated employment if the employee transfers to a position at the same applicable large employer (including a different applicable large employer member that is part of the same applicable large employer) if the position is anticipated to continue indefinitely or for at least 12 months and if substantially all of the compensation will constitute income from sources without the United States (within the meaning of sections 861 through 863 and the regulations thereunder). With respect to an employee transferring from a position that was anticipated to continue indefinitely or for at least 12 months and in which substantially all of the compensation for the hours of service constitutes income from sources without the United States (within the meaning of sections 861 through 863 and the regulations thereunder) to a position at the same applicable large employer (including a different applicable large employer member that is part of the same applicable large employer) with respect to which substantially all of the compensation will constitute U.S. source income, the employer may treat that employee as a new hire to the extent consistent with the rules related to rehired employees as set forth in paragraph (c)(4) of this section.
(5) Examples. The following examples illustrate the rules of paragraphs (c)(1) through (4) of this section. In each example, the employer is an applicable large employer with 200 full-time employees (including FTEs) that uses the monthly measurement method to identify full-time employees and offers coverage only to employees who are full-time employees (and their dependents).
Example 1 (Monthly measurement method—employee first otherwise eligible for an offer of coverage). (i) Facts. Employer Z uses the monthly measurement method. Employer Z hires Employee A on January 1, 2016. For each calendar month in 2016, Employee A averages 20 hours of service per week and is not eligible (or otherwise eligible) for an offer of coverage under the group health plan of Employer Z. Effective January 1, 2017, Employee A is promoted to a position that is eligible for an offer of coverage under a group health plan of Employer Z, following completion of a 90-day waiting period. For January 2017 through March 2017, Employee A meets all of the conditions for eligibility under the group health plan, other than completion of the waiting period. The coverage that would have been offered to Employee A under the terms of the plan, but for the waiting period, during those three months would have provided minimum value. Effective April 1, 2017, Employer Z offers Employee A coverage that provides minimum value. Employee A averages 40 hours of service per week for each calendar month in 2017.
(ii) Conclusion. Because Employer Z offers minimum value coverage to Employee A no later than the first day following the period of three full calendar months beginning with the first full calendar month in which Employee A is otherwise eligible for an offer of coverage under a group health plan of Employer Z, Employer Z is not subject to an assessable payment for January 2017 through March 2017 under section 4980H by reason of its failure to offer coverage to Employee A during those months. For calendar months after March 2017, an offer of minimum value coverage may result in an assessable payment under section 4980H(b) with respect to Employee A for any month for which the offer is not affordable and for which Employer Z has received a Section 1411 Certification. Employer Z is not subject to an assessable payment under section 4980H by reason of its failure to offer coverage to Employee A during each month of 2016 because for each month of 2016, Employee A was not a full-time employee.
Example 2 (Rehire rules under monthly measurement method for employers that are not educational organizations). (i) Facts. Same as Example 1, except that Employee A has zero hours of service during a nine week period of unpaid leave (that constitutes special unpaid leave) beginning on June 25, 2017, and ending on August 26, 2017. As a result of the nine week period during which Employee A has zero hours of service, Employee A averages less than 30 hours of service per week for July 2017 and August 2017. Employee A averages more than 30 hours of service per week for each month between and including September 2017 through December 2017. Employer Z does not use the rule of parity, set forth in paragraph (c)(4)(v) of this section, and Employer Z is not an educational organization.
(ii) Conclusion. Because Employee A resumes providing services for Employer Z after a period during which the employee was not credited with any hours of service of less than 13 consecutive weeks, Employer Z may not treat Employee A as having terminated employment and having been rehired. Therefore, Employer Z may not treat Employee A as a new employee upon the resumption of services, and, accordingly, Employer Z may not again apply the rule set forth in paragraph (c)(2) of this section. Although the nine consecutive weeks of zero hours of service constitute special unpaid leave, the averaging method for periods of special unpaid leave does not apply under the monthly measurement method. Therefore, Employer Z may treat Employee A as a non-full-time employee for July 2017 and August 2017.
Example 3 (Use of weekly rule). (i) Facts. Employer Y uses the monthly measurement method in combination with the weekly rule for purposes of determining whether an employee is a full-time employee for a particular calendar month. For purposes of applying the weekly rule, Employer Y uses the period of Sunday through Saturday as a week and includes the week that includes the first day of a calendar month and excludes the week that includes the last day of a calendar month (except in any case in which the last day of the calendar month occurs on a Saturday). Employer Y measures hours of service for the five weeks from Sunday, December 27, 2015, through Saturday, January 30, 2016, to determine an employee's full-time employee status for January 2016, for the four weeks from Sunday, January 31, 2016, through Saturday, February 27, 2016, to determine an employee's status for February 2016, and the four weeks from Sunday, February 28, 2016, through Saturday, March 26, 2016, to determine an employee's status for March 2016. For January 2016, Employer Y treats an employee as a full-time employee if the employee has at least 150 hours of service (30 hours per week × 5 weeks). For February 2016 and March 2016, Employer Y treats an employee as a full-time employee if the employee has at least 120 hours of service (30 hours per week × 4 weeks).
(ii) Conclusion. Employer Y has correctly applied the weekly rule as part of the monthly measurement method for determining each employee's status as a full-time employee for the months January, February, and March 2016.
(d) Look-back measurement method—(1) Ongoing employees—(i) In general. Under the look-back measurement method for ongoing employees, an applicable large employer determines each ongoing employee's full-time employee status by looking back at the standard measurement period. The applicable large employer member determines the months in which the standard measurement period starts and ends, provided that the determination must be made on a uniform and consistent basis for all employees in the same category (see paragraph (d)(1)(v) of this section for a list of permissible categories). For example, if an applicable large employer member chooses a standard measurement period of 12 months, the applicable large employer member could choose to make it the calendar year, a non-calendar plan year, or a different 12-month period, such as one that ends shortly before the start of the plan's annual open enrollment period. If the applicable large employer member determines that an employee was employed on average at least 30 hours of service per week during the standard measurement period, then the applicable large employer member must treat the employee as a full-time employee during a subsequent stability period, regardless of the employee's number of hours of service during the stability period, so long as he or she remains an employee.
(ii) Use of payroll periods. For payroll periods that are one week, two weeks, or semi-monthly in duration, an employer is permitted to treat as a measurement period a period that ends on the last day of the payroll period preceding the payroll period that includes the date that would otherwise be the last day of the measurement period, provided that the measurement period begins on the first day of the payroll period that includes the date that would otherwise be the first day of the measurement period. An employer may also treat as a measurement period a period that begins on the first day of the payroll period that follows the payroll period that includes the date that would otherwise be the first day of the measurement period, provided that the measurement period ends on the last day of the payroll period that includes the date that would otherwise be the last day of the measurement period. For example, an employer using the calendar year as a measurement period could exclude the entire payroll period that included January 1 (the beginning of the year) if it included the entire payroll period that included December 31 (the end of that same year), or, alternatively, could exclude the entire payroll period that included December 31 of a calendar year if it included the entire payroll period that included January 1 of that calendar year.
(iii) Employee determined to be employed an average of at least 30 hours of service per week. An employee who was employed on average at least 30 hours of service per week during the standard measurement period must be treated as a full-time employee for a stability period that begins immediately after the standard measurement period and any applicable administrative period. The stability period must be at least six consecutive calendar months but no shorter in duration than the standard measurement period.
(iv) Employee determined not to be employed on average at least 30 hours of service per week. If an employee was not employed an average of at least 30 hours of service per week during the standard measurement period, the applicable large employer member may treat the employee as not a full-time employee during the stability period that follows, but is not longer than, the standard measurement period. The stability period must begin immediately after the end of the measurement period and any applicable administrative period.
(v) Permissible employee categories. Different applicable large employer members of the same applicable large employer may use measurement periods and stability periods that differ either in length or in their starting or ending dates. In addition, subject to the rules governing the relationship between the length of the measurement period and the stability period, applicable large employer members may use measurement periods and stability periods that differ either in length or in their starting and ending dates for—
(A) Collectively bargained employees and non-collectively bargained employees,
(B) Each group of collectively bargained employees covered by a separate collective bargaining agreement,
(C) Salaried employees and hourly employees, and
(D) Employees whose primary places of employment are in different States.
(vi) Optional administrative period. An applicable large employer member may provide for an administrative period that begins immediately after the end of a standard measurement period and that ends immediately before the associated stability period; however, any administrative period between the standard measurement period and the stability period for ongoing employees may neither reduce nor lengthen the measurement period or the stability period. The administrative period following the standard measurement period may last up to 90 days. To prevent this administrative period from creating a period during which coverage is not available, the administrative period must overlap with the prior stability period, so that, during any such administrative period applicable to ongoing employees following a standard measurement period, ongoing employees who are enrolled in coverage because of their status as full-time employees based on a prior measurement period must continue to be covered through the administrative period. Applicable large employer members may use administrative periods that differ in length for the categories of employees identified in paragraph (d)(1)(v) of this section.
(vii) Change in employment status. Except as provided in paragraph (f)(2) of this section, if an ongoing employee experiences a change in employment status before the end of a stability period, the change will not affect the application of the classification of the employee as a full-time employee (or not a full-time employee) for the remaining portion of the stability period. For example, if an ongoing employee in a certain position of employment is not treated as a full-time employee during a stability period because the employee's hours of service during the prior measurement period were insufficient for full-time-employee treatment, and the employee experiences a change in employment status that involves an increased level of hours of service, the treatment of the employee as a non-full-time employee during the remainder of the stability period is unaffected. Similarly, if an ongoing employee in a certain position of employment is treated as a full-time employee during a stability period because the employee's hours of service during the prior measurement period were sufficient for full-time-employee treatment, and the employee experiences a change in employment status that involves a lower level of hours of service, the treatment of the employee as a full-time employee during the remainder of the stability period is unaffected.
(viii) Example. The following example illustrates the application of paragraph (d)(1) of this section:
(A) Facts. Employer Z is an applicable large employer member and computes hours of service following the rules in this paragraph (d)(1). Employer Z chooses to use a 12-month stability period that begins January 1 and a 12-month standard measurement period that begins October 15. Consistent with the terms of Employer Z's group health plan, only employees classified as full-time employees using the look-back measurement method are eligible for coverage. Employer Z chooses to use an administrative period between the end of the standard measurement period (October 14) and the beginning of the stability period (January 1) to determine which employees were employed on average 30 hours of service per week during the measurement period, notify them of their eligibility for the plan for the calendar year beginning on January 1 and of the coverage available under the plan, answer questions and collect materials from employees, and enroll those employees who elect coverage in the plan. Previously-determined full-time employees already enrolled in coverage continue to be offered coverage through the administrative period. Employee A and Employee B have been employed by Employer Z for several years, continuously from their start date. Employee A was employed on average 30 hours of service per week during the standard measurement period that begins October 15, 2015, and ends October 14, 2016, and for all prior standard measurement periods. Employee B also was employed on average 30 hours of service per week for all prior standard measurement periods, but averaged less than 30 hours of service per week during the standard measurement period that begins October 15, 2015, and ends October 14, 2016.
(B) Conclusions. Because Employee A was employed for the entire standard measurement period that begins October 15, 2015, and ends October 14, 2016, Employee A is an ongoing employee with respect to the stability period running from January 1, 2017, through December 31, 2017. Because Employee A was employed on average 30 hours of service per week during that standard measurement period, Employee A is offered coverage for the entire 2017 stability period (including the administrative period from October 15, 2017, through December 31, 2017). Because Employee A was employed on average 30 hours of service per week during the prior standard measurement period, Employee A is offered coverage for the entire 2016 stability period and, if enrolled, would continue such coverage during the administrative period from October 15, 2016, through December 31, 2016. Because Employee B was employed for the entire standard measurement period that begins October 15, 2015, and ends October 14, 2016, Employee B is also an ongoing employee with respect to the stability period in 2017. Because Employee B was not a full-time employee based on hours of service during this standard measurement period, Employee B is not offered coverage for the stability period in 2017 (including the administrative period from October 15, 2017, through December 31, 2017). However, because Employee B was employed on average 30 hours of service per week during the prior standard measurement period, Employee B is offered coverage through the end of the 2016 stability period and, if enrolled, would continue such coverage during the administrative period from October 15, 2016, through December 31, 2016. Employer Z complies with the standards of paragraph (d)(1) of this section because the standard measurement period is no longer than 12 months, the stability period for ongoing employees who are full-time employees based on hours of service during the standard measurement period is not shorter than the standard measurement period, the stability period for ongoing employees who are not full-time employees based on hours of service during the standard measurement period is no longer than the standard measurement period, and the administrative period is no longer than 90 days.
(2) New non-variable hour, new non-seasonal and new non-part-time employees—(i) In general. For a new employee who is reasonably expected at the employee's start date to be a full-time employee (and is not a seasonal employee), an applicable large employer member determines such employee's status as a full-time employee based on the employee's hours of service for each calendar month. If the employee's hours of service for the calendar month equal or exceed an average of 30 hours of service per week, the employee is a full-time employee for that calendar month. Once a new employee who is reasonably expected at the employee's start date to be a full-time employee (and is not a seasonal employee) becomes an ongoing employee, the rules set forth in paragraph (d)(1) of this section apply for determining full-time employee status.
(ii) Factors for determining full-time employee status. Whether an employer's determination that a new employee (who is not a seasonal employee) is a full-time employee or is not a full-time employee is reasonable is based on the facts and circumstances at the employee's start date. Factors to consider in determining whether a new employee who is not a seasonal employee is reasonably expected at the employee's start date to be a full-time employee include, but are not limited to, whether the employee is replacing an employee who was (or was not) a full-time employee, the extent to which hours of service of ongoing employees in the same or comparable positions have varied above and below an average of 30 hours of service per week during recent measurement periods, and whether the job was advertised, or otherwise communicated to the new hire or otherwise documented (for example, through a contract or job description), as requiring hours of service that would average 30 (or more) hours of service per week or less than 30 hours of service per week. In all cases, no single factor is determinative. An educational organization employer cannot take into account the potential for, or likelihood of, an employment break period in determining its expectation of future hours of service.
(iii) Application of section 4980H to initial full three calendar months of employment. Notwithstanding paragraph (d)(2)(i) of this section, with respect to an employee who is reasonably expected at his or her start date to be a full-time employee (and is not a seasonal employee), the employer will not be subject to an assessable payment under section 4980H(a) for any calendar month of the three-month period beginning with the first day of the first full calendar month of employment if, for the calendar month, the employee is otherwise eligible for an offer of coverage under a group health plan of the employer, provided that the employee is offered coverage by the employer no later than the first day of the fourth full calendar month of employment if the employee is still employed on that day. If the offer of coverage for which the employee is otherwise eligible during the first three full calendar months of employment, and which the employee actually is offered by the first day of the fourth month if still employed, provides minimum value, the employer also will not be subject to an assessable payment under section 4980H(b) with respect to that employee for the first three full calendar months of employment. For purposes of this paragraph (d)(2)(iii), an employee is otherwise eligible to be offered coverage under a group health plan for a calendar month if, pursuant to the terms of the plan as in effect for that calendar month, the employee meets all conditions to be offered coverage under the plan for that calendar month, other than the completion of a waiting period, within the meaning of § 54.9801-2.
(3) New variable hour employees, new seasonal employees, and new part-time employees—(i) In general. For new variable hour employees, new seasonal employees, and new part-time employees, applicable large employer members are permitted to determine whether the new employee is a full-time employee using an initial measurement period of no less than three consecutive months and no more than 12 consecutive months (as selected by the applicable large employer member) that begins on the employee's start date or on any date up to and including the first day of the first calendar month following the employee's start date (or on the first day of the first payroll period starting on or after the employee's start date, if later, as set forth in paragraph (d)(3)(ii) of this section). The applicable large employer member measures the new employee's hours of service during the initial measurement period and determines whether the employee was employed on average at least 30 hours of service per week during this period. The stability period for such employees must be the same length as the stability period for ongoing employees.
(ii) Use of payroll periods. An applicable large employer member may apply the payroll period rule set forth in paragraph (d)(1)(ii) of this section for purposes of determining an initial measurement period, provided that the initial measurement period must begin on the start date or any date during the period beginning with the employee's start date and ending with the later of the first day of the first calendar month following the employee's start date and the first day of the first payroll period that starts after the employee's start date. As set forth in paragraph (d)(1)(ii) of this section, the use of payroll periods for purposes of determining the initial measurement period applies for payroll periods that are one week, two weeks, or semi-monthly in duration.
(iii) Employees determined to be employed on average at least 30 hours of service per week. If a new variable hour employee, new seasonal employee, or new part-time employee has on average at least 30 hours of service per week during the initial measurement period, the applicable large employer member must treat the employee as a full-time employee during the stability period that begins after the initial measurement period (and any associated administrative period). The stability period must be a period of at least six consecutive calendar months that is no shorter in duration than the initial measurement period. The stability period must begin immediately after the end of the measurement period and any applicable administrative period. With respect to an employee who has on average at least 30 hours of service per week during the initial measurement period, the employer will not be subject to an assessable payment under section 4980H(a) for any calendar month during the initial measurement period and any associated administrative period if, for the calendar month, the employee is otherwise eligible for an offer of coverage under a group health plan of the employer, provided that the employee is offered coverage by the employer no later than the first day of the associated stability period if the employee is still employed on that day. If the offer of coverage for which the employee is otherwise eligible during the initial measurement period, and which the employee actually is offered by the first day of the stability period if still employed, provides minimum value, the employer also will not be subject to an assessable payment under section 4980H(b) with respect to that employee during the initial measurement period and any associated administrative period. For purposes of this paragraph (d)(3)(iii), an employee is otherwise eligible to be offered coverage under a group health plan for a month if, pursuant to the terms of the plan as in effect for that calendar month, the employee meets all conditions to be offered coverage under the plan for that month, other than the completion of a waiting period, within the meaning of § 54.9801-2.
(iv) Employees determined not to be employed on average at least 30 hours of service per week. If a new variable hour employee, new seasonal employee, or new part-time employee does not have on average at least 30 hours of service per week during the initial measurement period, the applicable large employer member may treat the employee as not a full-time employee during the stability period that follows the initial measurement period. Except as provided in paragraph (d)(4)(iv) of this section, the stability period for such employees must not be more than one month longer than the initial measurement period and must not exceed the remainder of the first entire standard measurement period (plus any associated administrative period) for which a variable hour employee, seasonal employee, or part-time employee has been employed. The stability period must begin immediately after the end of the measurement period and any applicable administrative period.
(v) Permissible differences in measurement or stability periods for different categories of employees. Subject to the rules governing the relationship between the length of the measurement period and the stability period, with respect to a new variable hour employee, new seasonal employee, or new part-time employee, applicable large employer members may use measurement periods and stability periods that differ either in length or in their starting and ending dates for the categories of employees identified in paragraph (d)(1)(v) of this section.
(vi) Optional administrative period—(A) In general. Subject to the limits in paragraph (d)(3)(vi)(B) of this section, an applicable large employer member may apply an administrative period in connection with an initial measurement period and before the start of the stability period. This administrative period must not exceed 90 days in total. For this purpose, the administrative period includes all periods between the start date of a new variable hour employee, new seasonal employee, or new part-time employee and the date the employee is first offered coverage under the applicable large employer member's group health plan, other than the initial measurement period. Thus, for example, if the applicable large employer member begins the initial measurement period on the first day of the first month following a new employee's start date, the period between the employee's start date and the first day of the next month must be taken into account in applying the 90-day limit on the administrative period. Similarly, if there is a period between the end of the initial measurement period and the date the employee is first offered coverage under the plan, that period must be taken into account in applying the 90-day limit on the administrative period. Applicable large employer members may use administrative periods that differ in length for the categories of employees identified in paragraph (d)(1)(v) of this section.
(B) Limit on combined length of initial measurement period and administrative period. In addition to the specific limits on the initial measurement period (which must not exceed 12 months) and the administrative period (which must not exceed 90 days), there is a limit on the combined length of the initial measurement period and the administrative period applicable to a new variable hour employee, new seasonal employee, or new part-time employee. Specifically, the initial measurement period and administrative period together cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee's start date. For example, if an applicable large employer member uses a 12-month initial measurement period for a new variable hour employee, and begins that initial measurement period on the first day of the first calendar month following the employee's start date, the period between the end of the initial measurement period and the offer of coverage to a new variable hour employee who is a full-time employee based on hours of service during the initial measurement period must not exceed one month.
(vii) Change in employment status during the initial measurement period—(A) In general. If a new variable hour employee, new seasonal employee, or new part-time employee experiences a change in employment status before the end of the initial measurement period such that, if the employee had begun employment in the new position or status, the employee would have reasonably been expected to be employed on average at least 30 hours of service per week (or, if applicable, would not have been a seasonal employee and would have been expected to be employed on average at least 30 hours of service per week), the rules set forth in the remainder of this paragraph (d)(3)(vii) apply. With respect to an employee described in this paragraph (d)(3)(vii) and subject to the rules in the next sentence, the employer will not be subject to an assessable payment under section 4980H for the period before the first day of the fourth full calendar month following the change in employment status (or, if earlier and the employee averages 30 or more hours of service per week during the initial measurement period, the first day of the first month following the end of the initial measurement period (including any optional administrative period associated with the initial measurement period)). An employer will not be subject to an assessable payment under section 4980H(a) with respect to an employee described in this paragraph (d)(3)(vii) for any calendar month during the period described in the prior sentence if, for the calendar month, the employee is otherwise eligible for an offer of coverage under a group health plan of the employer, provided that the employee is offered coverage by the employer no later than the end of the period described in the prior sentence if the employee is still employed on that date; if the offer of coverage for which the employee is otherwise eligible during the period described in the prior sentence, and which the employee is actually offered by the first day after the end of that period if still employed, provides minimum value, the employer also will not be subject to an assessable payment under section 4980H(b) with respect to that employee during that period. For purposes of this paragraph (d)(3)(vii), an employee is otherwise eligible to be offered coverage under a group health plan for a calendar month if, pursuant to the terms of the plan as in effect for that calendar month, the employee meets all conditions to be offered coverage under the plan for that calendar month, other than the completion of a waiting period, within the meaning of § 54.9801-2.
(B) Example. The following example illustrates the provisions of paragraph (d)(3)(vii) of this section. In the following example, the applicable large employer member has 200 full-time employees and offers all of its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan. The coverage is affordable within the meaning of section 36B(c)(2)(C)(i) (or is treated as affordable under one of the affordability safe harbors described in § 54.4980H-5) and provides minimum value.
Example (Change in employment status from variable hour employee to full-time employee). (i) Facts. For new variable hour employees, Employer Z uses a 12-month initial measurement period that begins on the start date and applies an administrative period from the end of the initial measurement period through the end of the first calendar month beginning on or after the end of the initial measurement period. For new variable hour employees, Employer Z offers coverage no later than the first day of the fourteenth month after the start date if an employee averages 30 or more hours of service per week during the initial measurement period. Employer Z hires Employee A on May 10, 2015. Employee A's initial measurement period runs from May 10, 2015, through May 9, 2016, with the optional administrative period ending June 30, 2016. At Employee A's May 10, 2015, start date, Employee A is a variable hour employee. On September 15, 2015, Employer Z promotes Employee A to a position that can reasonably be expected to average at least 30 hours of service per week. For October 2015 through December 2015, Employee A is otherwise eligible for an offer of coverage that provides minimum value, and, on January 1, 2016, Employee A is offered coverage by the employer that provides minimum value.
(ii) Conclusion. Employer Z will not be subject to an assessable payment under section 4980H(a) with respect to Employee A for October 2015, November 2015, or December 2015, because for each of those months Employee A is otherwise eligible for an offer of coverage and because Employee A is offered coverage by January 1, 2016 (the date that is the earlier of the first day of the fourth calendar month following the change in employment status (January 1, 2016) or the first day of the calendar month after the end of the initial measurement period plus the optional administrative period (July 1, 2016)). Because the coverage offered on January 1, 2016, provides minimum value, Employer Z also will not be subject to an assessable payment under section 4980H(b) with respect to Employee A for October 2015, November 2015, or December 2015.
(4) Transition from new variable hour employee, new seasonal employee, or new part-time employee to ongoing employee—(i) In general. Once a new variable hour employee, new seasonal employee, or new part-time employee has been employed for an entire standard measurement period, the applicable large employer member must test the employee for full-time employee status, beginning with that standard measurement period, at the same time and under the same conditions as apply to other ongoing employees. Accordingly, for example, an applicable large employer member with a calendar year standard measurement period that also uses a one-year initial measurement period beginning on the employee's start date would test a new employee whose start date is April 12 for full-time employee status first based on the initial measurement period (April 12 of the year including the start date through April 11 of the following year) and again based on the calendar year standard measurement period (if the employee continues in employment for that entire standard measurement period) beginning on January 1 of the year after the start date.
(ii) Employee determined to be employed an average of at least 30 hours of service per week. An employee who was employed an average of at least 30 hours of service per week during an initial measurement period or standard measurement period must be treated as a full-time employee for the entire associated stability period. This is the case even if the employee was employed an average of at least 30 hours of service per week during the initial measurement period but was not employed an average of at least 30 hours of service per week during the overlapping or immediately following standard measurement period. In that case, the applicable large employer member may treat the employee as not a full-time employee only after the end of the stability period associated with the initial measurement period. Thereafter, the applicable large employer member must determine the employee's status as a full-time employee in the same manner as it determines such status in the case of its other ongoing employees as described in paragraph (d)(1) of this section.
(iii) Employee determined not to be employed an average of at least 30 hours of service per week. If the employee was not employed an average of at least 30 hours of service per week during the initial measurement period, but was employed at least 30 hours of service per week during the overlapping or immediately following standard measurement period, the employee must be treated as a full-time employee for the entire stability period that corresponds to that standard measurement period (even if that stability period begins before the end of the stability period associated with the initial measurement period). Thereafter, the applicable large employer member must determine the employee's status as a full-time employee in the same manner as it determines such status in the case of its other ongoing employees as described in paragraph (d)(1) of this section.
(iv) Treatment during periods between stability periods. If there is a period between the end of the stability period associated with the initial measurement period and the beginning of the stability period associated with the first full standard measurement period during which an employee is employed, the treatment as a full-time employee or not a full-time employee that applies during the stability period associated with the initial measurement period continues to apply until the beginning of the stability period associated with the first full standard measurement period during which the employee is employed.
(5) Examples. The following examples illustrate the look-back measurement methods described in paragraphs (d)(1), (d)(3) and (d)(4) of this section. In all of the following examples, the applicable large employer member has 200 full-time employees and offers all of its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan. The coverage is affordable within the meaning of section 36B(c)(2)(C)(i) (or is treated as affordable coverage under one of the affordability safe harbors described in § 54.4980H-5) and provides minimum value. In Example 1 through Example 8, the new employee is a new variable hour employee, and the employer has chosen to use a 12-month standard measurement period for ongoing employees starting October 15 and a 12-month stability period associated with that standard measurement period starting January 1. (Thus, during the administrative period from October 15 through December 31 of each calendar year, the employer continues to offer coverage to employees who qualified for coverage for that entire calendar year based upon having an average of at least 30 hours of service per week during the prior standard measurement period.) In Example 9 and Example 10, the new employee is a new variable hour employee, and the employer uses a six-month standard measurement period, starting each May 1 and November 1, with six-month stability periods associated with those standard measurement periods starting January 1 and July 1. In Example 12, Example 13, and Example 14, the employer is in the trade or business of providing temporary workers to numerous clients that are unrelated to the employer and to one another; the employer is the common law employer of the temporary workers based on all of the facts and circumstances; the employer offers health plan coverage only to full-time employees (including temporary workers who are full-time employees) and their dependents; and the employer uses a 12-month initial measurement period for new variable hour employees that begins on the start date and applies an administrative period from the end of the initial measurement period through the end of the first calendar month beginning after the end of the initial measurement period.
Example 1 (12-Month initial measurement period followed by 1 + partial month administrative period). (i) Facts. For new variable hour employees, Employer Z uses a 12-month initial measurement period that begins on the start date and applies an administrative period from the end of the initial measurement period through the end of the first calendar month beginning on or after the end of the initial measurement period. Employer Z hires Employee A on May 10, 2015. Employee A's initial measurement period runs from May 10, 2015, through May 9, 2016. Employee A has an average of 30 hours of service per week during this initial measurement period. Employer Z offers coverage that provides minimum value to Employee A for a stability period that runs from July 1, 2016, through June 30, 2017. For each calendar month during the period beginning with June 2015 and ending with June 2016, Employee A is otherwise eligible for an offer of coverage with respect to the coverage that is offered to Employee A on July 1, 2016.
(ii) Conclusion. Employer Z uses an initial measurement period that does not exceed 12 months; an administrative period totaling not more than 90 days; and a combined initial measurement period and administrative period that does not last beyond the final day of the first calendar month beginning on or after the one-year anniversary of Employee A's start date. Accordingly, Employer Z complies with the standards for the initial measurement period and stability periods for a new variable hour employee. Employer Z will not be subject to an assessable payment under section 4980H(a) with respect to Employee A for any calendar month from June 2015 through June 2016 because, for each month during that period, Employee A is otherwise eligible for an offer of coverage and because coverage is offered no later than the end of the initial measurement period plus the associated administrative period (July 1, 2016). Employer Z will not be subject to an assessable payment under section 4980H(b) with respect to Employee A for any calendar month from June 2015 through June 2016 because the coverage Employer Z offers to Employee A provides minimum value. Employer Z will not be subject to an assessable payment under section 4980H(a) or (b) with respect to Employee A for May 2015 because an applicable large employer member is not subject to an assessable payment under section 4980H with respect to an employee for the calendar month in which falls the employee's start date if the start date is on a date other than the first day of the calendar month. Employer Z must test Employee A again based on the period from October 15, 2015, through October 14, 2016 (Employer Z's first standard measurement period that begins after Employee A's start date).
Example 2 (11-Month initial measurement period followed by 2 + partial month administrative period). (i) Facts. Same as Example 1, except that Employer Z uses an 11-month initial measurement period that begins on the start date and applies an administrative period from the end of the initial measurement period until the end of the second calendar month beginning after the end of the initial measurement period. Employee A's initial measurement period runs from May 10, 2015, through April 9, 2016. The administrative period associated with Employee A's initial measurement period ends on June 30, 2016. Employee A has an average of 30 hours of service per week during this initial measurement period.
(ii) Conclusion. Same as Example 1.
Example 3 (11-Month initial measurement period preceded by partial month administrative period and followed by 2-month administrative period). (i) Facts. Same as Example 1, except that Employer Z uses an 11-month initial measurement period that begins on the first day of the first calendar month beginning after the start date and applies an administrative period that runs from the end of the initial measurement period through the end of the second calendar month beginning on or after the end of the initial measurement period. Employee A's initial measurement period runs from June 1, 2015, through April 30, 2016. The administrative period associated with Employee A's initial measurement period ends on June 30, 2016. Employee A has an average of 30 hours of service per week during this initial measurement period.
(ii) Conclusion. Same as Example 1.
Example 4 (12-Month initial measurement period preceded by partial month administrative period and followed by 2-month administrative period). (i) Facts. For new variable hour employees, Employer Z uses a 12-month initial measurement period that begins on the first day of the first month following the start date and applies an administrative period that runs from the end of the initial measurement period through the end of the second calendar month beginning on or after the end of the initial measurement period. Employer Z hires Employee A on May 10, 2015. Employee A's initial measurement period runs from June 1, 2015, through May 31, 2016. Employee A has an average of 30 hours of service per week during this initial measurement period. Employer Z offers coverage to Employee A for a stability period that runs from August 1, 2016, through July 31, 2017.
(ii) Conclusion. Employer Z does not satisfy the standards for the look-back measurement method in paragraph (d)(3)(vi)(B) of this section because the combination of the initial partial month delay, the 12-month initial measurement period, and the two month administrative period means that the coverage offered to Employee A does not become effective until after the first day of the second calendar month following the first anniversary of Employee A's start date. Accordingly, Employer Z is potentially subject to an assessable payment under section 4980H for each full calendar month during the initial measurement period and associated administrative period.
Example 5 (Continuous full-time employee). (i) Facts. Same as Example 1; in addition, Employer Z tests Employee A again based on Employee A's hours of service from October 15, 2015, through October 14, 2016 (Employer Z's first standard measurement period that begins after Employee A's start date), determines that Employee A has an average of 30 hours of service per week during that period, and offers Employee A coverage for July 1, 2017, through December 31, 2017. (Employee A already has an offer of coverage for the period of January 1, 2017, through June 30, 2017, because that period is covered by the initial stability period following the initial measurement period, during which Employee A was determined to be a full-time employee.)
(ii) Conclusion. Employer Z is not subject to any payment under section 4980H for any calendar month during 2017 with respect to Employee A.
Example 6 (Initially full-time employee, becomes non-full-time employee). (i) Facts. Same as Example 1; in addition, Employer Z tests Employee A again based on Employee A's hours of service from October 15, 2015, through October 14, 2016 (Employer Z's first standard measurement period that begins after Employee A's start date), and determines that Employee A has an average of 28 hours of service per week during that period. Employer Z continues to offer coverage to Employee A through June 30, 2017 (the end of the stability period based on the initial measurement period during which Employee A was determined to be a full-time employee), but does not offer coverage to Employee A for the period of July 1, 2017, through December 31, 2017.
(ii) Conclusion. Employer Z is not subject to any payment under section 4980H for any calendar month during 2017 with respect to Employee A.
Example 7 (Initially non-full-time employee). (i) Facts. Same as Example 1, except that Employee A has an average of 28 hours of service per week during the initial measurement period (May 10, 2015, through May 9, 2016), and Employer Z does not offer coverage to Employee A for any calendar month in 2016.
(ii) Conclusion. From Employee A's start date through the end of 2016, Employer Z is not subject to any payment under section 4980H with respect to Employee A, because Employer Z complies with the standards for the measurement and stability periods for a new variable hour employee with respect to Employee A and because under those standards, Employee A is not a full-time employee for any month during 2016.
Example 8 (Initially non-full-time employee, becomes full-time employee). (i) Facts. Same as Example 7; in addition, Employer Z tests Employee A again based on Employee A's hours of service from October 15, 2015, through October 14, 2016 (Employer Z's first standard measurement period that begins after Employee A's start date), determines that Employee A has an average of 30 hours of service per week during this standard measurement period, and offers coverage to Employee A for 2017.
(ii) Conclusion. Employer Z is not subject to any payment under section 4980H for any calendar month during 2017 with respect to Employee A.
Example 9 (Initially full-time employee). (i) Facts. For new variable hour employees, Employer Y uses a six-month initial measurement period that begins on the start date and applies an administrative period that runs from the end of the initial measurement period through the end of the first full calendar month beginning after the end of the initial measurement period. Employer Y hires Employee B on May 10, 2015. Employee B's initial measurement period runs from May 10, 2015, through November 9, 2015, during which Employee B has an average of 30 hours of service per week. Employer Y offers coverage that provides minimum value to Employee B for a stability period that runs from January 1, 2016, through June 30, 2016. For each calendar month during the period from June 2015 through December 2015, Employee B is otherwise eligible for an offer of coverage with respect to the coverage that is offered to Employee B on January 1, 2016.
(ii) Conclusion. Employer Y uses an initial measurement period that does not exceed 12 months; an administrative period totaling not more than 90 days; and a combined initial measurement period and administrative period that does not extend beyond the final day of the first calendar month beginning on or after the one-year anniversary of Employee B's start date. Employer Y complies with the standards for the measurement and stability periods for a new variable hour employee with respect to Employee B. Employer Y is not subject to an assessable payment under section 4980H(a) with respect to Employee B for any calendar month from June 2015 through December 2015 because, for each month during that period, Employee B is otherwise eligible for an offer of coverage and because Employee B is offered coverage no later than the end of the initial measurement period plus the associated administrative period (January 1, 2016). Employer Y is not subject to an assessable payment under section 4980H(b) with respect to Employee B for any calendar month from June 2015 through December 2015 because the coverage Employer Y offers to Employee B no later than January 1, 2016, provides minimum value. Employer Y is not subject to an assessable payment under section 4980H(a) or (b) with respect to Employee B for May 2015 because an applicable large employer member is not subject to an assessable payment under section 4980H with respect to an employee for the calendar month in which falls the employee's start date if the start date is on a date other than the first day of the calendar month. Employer Y must test Employee B again based on Employee B's hours of service during the period from November 1, 2015, through April 30, 2016 (Employer Y's first standard measurement period that begins after Employee B's start date).
Example 10 (Initially full-time employee, becomes non-full-time employee). (i) Facts. Same as Example 9; in addition, Employer Y tests Employee B again based on Employee B's hours of service during the period from November 1, 2015, through April 30, 2016 (Employer Y's first standard measurement period that begins after Employee B's start date), during which period Employee B has an average of 28 hours of service per week. Employer Y continues to offer coverage to Employee B through June 30, 2016 (the end of the initial stability period based on the initial measurement period during which Employee B has an average of 30 hours of service per week), but does not offer coverage to Employee B from July 1, 2016, through December 31, 2016.
(ii) Conclusion. Employer Y is not subject to any payment under section 4980H with respect to Employee B for any calendar month during 2016.
Example 11 (Seasonal employee, 12-month initial measurement period; 1 + partial month administrative period). (i) Facts. Employer X offers health plan coverage only to full-time employees (and their dependents). Employer X uses a 12-month initial measurement period for new seasonal employees that begins on the start date and applies an administrative period from the end of the initial measurement period through the end of the first calendar month beginning after the end of the initial measurement period. Employer X hires Employee C, a ski instructor, on November 15, 2015, with an anticipated season during which Employee C will work running through March 15, 2016. Employee C's initial measurement period runs from November 15, 2015, through November 14, 2016.
(ii) Conclusion. Employer X determines that Employee C is a seasonal employee because Employee C is hired into a position for which the customary annual employment is six months or less. Accordingly, Employer X may treat Employee C as a seasonal employee during the initial measurement period.
Example 12 (Variable hour employee; temporary staffing firm). (i) Facts. Employer W hires Employee D on January 1, 2015, in a position under which Employer W will offer assignments to Employee D to provide services in temporary placements at clients of Employer W, and employees of Employer W in the same position as Employee D, as part of their continuing employment, retain the right to reject an offer of placement. Employees of Employer W in the same position of employment as Employee D typically perform services for a particular client for 40 hours of service per week for a period of less than 13 weeks, and for each employee there are typically periods in a calendar year during which Employer W does not have an assignment to offer the employee. At the time Employee D is hired by Employer W, Employer W has no reason to anticipate that Employee D's position of employment will differ from the typical employee in the same position.
(ii) Conclusion. Employer W cannot determine whether Employee D is reasonably expected to average at least 30 hours of service per week for the 12-month initial measurement period. Accordingly, Employer W may treat Employee D as a variable hour employee during the initial measurement period.
Example 13 (Variable hour employee; temporary staffing firm). (i) Facts. Employer V hires Employee E on January 1, 2015, in a position under which Employer V will offer assignments to Employee E to provide services in temporary placements at clients of Employer V. Employees of Employer V in the same position of employment as Employee E typically are offered assignments of varying hours of service per week (so that some weeks of the assignment typically result in more than 30 hours of service per week and other weeks of the assignment typically result in less than 30 hours of service per week). Although a typical employee in the same position of employment as Employee E rarely fails to have an offer of an assignment for any period during the calendar year, employees of Employer V in the same position of employment, as part of their continuing employment, retain the right to reject an offer of placement, and typically refuse one or more offers of placement and do not perform services for periods ranging from four to twelve weeks during a calendar year. At the time Employee E is hired by Employer V, Employer V has no reason to anticipate that Employee E's position of employment will differ from the typical employee in the same position.
(ii) Conclusion. Employer V cannot determine whether Employee E is reasonably expected to average at least 30 hours of service per week for the 12-month initial measurement period. Accordingly, Employer V may treat Employee E as a variable hour employee during the initial measurement period.
Example 14 (Variable hour employee; temporary staffing firm). (i) Facts. Employer T hires Employee F on January 1, 2015, in a position under which Employer T will offer assignments to Employee F to provide services in temporary placements at clients of Employer T. Employees of Employer T in the same position typically are offered assignments of 40 or more hours of service per week for periods expected to last for periods of three months to 12 months, subject to a request for renewal by the client. Employees of Employer T in similar positions to Employee F are typically offered and take new positions immediately upon cessation of a placement. At the time Employee F is hired by Employer T, Employer T has no reason to anticipate that Employee F's position of employment will differ from the typical employee in the same position.
(ii) Conclusion. Employer T must assume that Employee F will be employed by Employer T and available for an offer of temporary placement for the entire initial measurement period. Under that assumption, Employer T would reasonably determine that Employee F is reasonably expected to average at least 30 hours of service per week for the 12-month initial measurement period. Accordingly, Employer T may not treat Employee F as a variable hour employee during the initial measurement period.
Example 15 (Variable hour employee). (i) Facts. Employee G is hired on an hourly basis by Employer S to fill in for employees who are absent and to provide additional staffing at peak times. Employer S expects that Employee G will average 30 hours of service per week or more for Employee G's first few months of employment, while assigned to a specific project, but also reasonably expects that the assignments will be of unpredictable duration, that there will be periods of unpredictable duration between assignments, that the hours per week required by subsequent assignments will vary, and that Employee G will not necessarily be available for all assignments.
(ii) Conclusion. Employer S cannot determine whether Employee G is reasonably expected to average at least 30 hours of service per week for the initial measurement period. Accordingly, Employer S may treat Employee G as a variable hour employee during the initial measurement period.
Example 16 (Period between initial stability period and standard stability period). (i) Facts. Employer R uses an 11-month initial measurement period for new variable hour, new seasonal, and new part-time employees with an administrative period that lasts from the end of the initial measurement period through the last day of the first calendar month beginning on or after the first anniversary of the employee's start date. Employer R uses a standard measurement period of October 15 through October 14, and an administrative period of October 15 through December 31. Employee H is hired as a variable hour employee on October 20, 2015, with an initial measurement period of October 20, 2015, through September 19, 2016, and an administrative period lasting through November 30, 2016. Employee H is a full-time employee based on the hours of service in the initial measurement period, and Employee H's stability period for the initial measurement period is December 1, 2016, through November 30, 2017. Employee H's first full standard measurement period begins on October 15, 2016, with an associated stability period beginning on January 1, 2018. The standard measurement period beginning on October 15, 2015, does not apply to Employee H because Employee H is not hired until October 20, 2015.
(ii) Conclusion. For the period after the stability period associated with the initial measurement period and before the stability period associated with Employee H's first full standard measurement period (that is December 1, 2017, through December 31, 2017), Employer R must treat Employee H as a full-time employee because the treatment as a full-time employee (or not a full-time employee) that applies during the stability period associated with the initial measurement period continues to apply until the beginning of the stability period associated with the first full standard measurement period during which the employee is employed.
(6) Employees rehired after termination of employment or resuming service after other absence—(i) Treatment as a new employee after a period of absence for employees of employers other than educational organizations—(A) In general. The rules in this paragraph (d)(6)(i) apply to employers that are not educational organizations. For rules relating to employers that are educational organizations, see paragraph (d)(6)(ii) of this section. An employee who resumes providing services to (or is otherwise credited with an hour of service for) an applicable large employer that is not an educational organization after a period during which the employee was not credited with any hours of service may be treated as having terminated employment and having been rehired, and therefore may be treated as a new employee upon the resumption of services, only if the employee did not have an hour of service for the applicable large employer for a period of at least 13 consecutive weeks immediately preceding the resumption of services. The rule set forth in this paragraph (d)(6)(i) applies solely for the purpose of determining whether the employee, upon the resumption of services, is treated as a new employee or as a continuing employee, and does not determine whether the employee is treated as a continuing full-time employee or a terminated employee during the period during which no hours of service are credited.
(B) Averaging method for special unpaid leave. For purposes of applying the look-back measurement method described in paragraph (d) of this section to an employee who is not treated as a new employee under paragraph (d)(6)(i) of this section, the employer determines the employee's average hours of service for a measurement period by computing the average after excluding any special unpaid leave during that measurement period and by using that average as the average for the entire measurement period. Alternatively, for purposes of determining the employee's average hours of service for the measurement period, the employer may choose to treat the employee as credited with hours of service for any periods of special unpaid leave during that measurement period at a rate equal to the average weekly rate at which the employee was credited with hours of service during the weeks in the measurement period that are not part of a period of special unpaid leave. There is no limit on the number of hours of service required to be excluded or credited (as the case may be) with respect to special unpaid leave. For purposes of this paragraph (d)(6)(i)(B), in computing the average weekly rate, employers are permitted to use any reasonable method if applied on a consistent basis. In addition, if an employee's average weekly rate under this paragraph (d)(6)(i)(B) is computed for a measurement period and that measurement period is shorter than six months, the six-month period ending with the close of the measurement period is used to compute the average hours of service.
(C) Averaging rules for employment break periods for employers other than educational organizations. The averaging rule for employment break periods described in paragraph (d)(6)(ii)(B) of this section applies only to educational organizations and does not apply to other employers.
(ii) Treatment as a new employee after a period of absence for employees of employers that are educational organizations—(A) In general. The rules of this paragraph (d)(6)(ii) apply only to employers that are educational institutions. An employee who resumes providing services to (or is otherwise credited with an hour of service for) an applicable large employer that is an educational organization after a period during which the employee was not credited with any hours of service may be treated as having terminated employment and having been rehired, and therefore may be treated as a new employee upon the resumption of services, only if the employee did not have an hour of service for the applicable large employer for a period of at least 26 consecutive weeks immediately preceding the resumption of services. The rule set forth in this paragraph (d)(6)(ii)(A) applies solely for the purpose of determining whether the employee, upon the resumption of services, is treated as a new employee or as a continuing employee, and does not determine whether the employee is treated as a continuing full-time employee or a terminated employee during the period during which no hours of service are credited.
(B) Averaging method for special unpaid leave and employment break periods. For purposes of applying the look-back measurement method described in paragraph (d) of this section to an employee who is not treated as a new employee under paragraph (d)(6)(ii)(A) of this section, an educational organization employer determines the employee's average hours of service for a measurement period by computing the average after excluding any special unpaid leave and any employment break period during that measurement period and by using that average as the average for the entire measurement period. Alternatively, for purposes of determining the employee's average hours of service for the measurement period, the employer may choose to treat the employee as credited with hours of service for any periods of special unpaid leave and any employment break period during that measurement period at a rate equal to the average weekly rate at which the employee was credited with hours of service during the weeks in the measurement period that are not part of a period of special unpaid leave or an employment break period. Notwithstanding the preceding two sentences, no more than 501 hours of service during employment break periods in a calendar year are required to be excluded (under the first sentence) or credited (under the second sentence) by an educational organization, provided that this 501-hour limit does not apply to hours of service required to be excluded or credited in respect of special unpaid leave. In applying the preceding sentence, an employer that uses the method described in the first sentence of this paragraph (d)(6)(ii)(B) determines the number of hours excluded by multiplying the average weekly rate for the measurement period (determined as in the second sentence of this paragraph (d)(6)(ii)(B)) by the number of weeks in the employment break period. For purposes of this paragraph (d)(6)(ii)(B), in computing the average weekly rate, employers are permitted to use any reasonable method if applied on a consistent basis. In addition, if an employee's average weekly rate under this paragraph (d)(6)(ii)(B) is being computed for a measurement period and that measurement period is shorter than six months, the six-month period ending with the close of the measurement period is used to compute the average hours of service.
(iii) Treatment of continuing employee. Under the look-back measurement method, an employee treated as a continuing employee retains, upon resumption of services, the status that employee had with respect to the application of any stability period (for example, if the continuing employee returns during a stability period in which the employee is treated as a full-time employee, the employee is treated as a full-time employee upon return and through the end of that stability period). For purposes of the preceding sentence, a continuing employee treated as a full-time employee is treated as offered coverage upon resumption of services if the employee is offered coverage as of the first day that employee is credited with an hour of service, or, if later, as soon as administratively practicable. For this purpose, offering coverage by no later than the first day of the calendar month following resumption of services is deemed to be as soon as administratively practicable. If a continuing employee returns during a stability period in which the employee is treated as a full-time employee and the employer previously made the employee an offer of coverage with respect to the entire stability period and the employee declined the offer, the employer will continue to be treated as having offered coverage for that stability period and the employer need not make a new offer of coverage for the remainder of the ongoing stability period due to the employee's resumption of services.
(iv) Rule of parity. For purposes of determining the period after which an employee may be treated as having terminated employment and having been rehired, an applicable large employer may choose a period, measured in weeks, of at least four consecutive weeks during which the employee was not credited with any hours of service that exceeds the number of weeks of that employee's period of employment with the applicable large employer immediately preceding the period and that is shorter than 13 weeks (for an employee of an educational organization employer, a period that is shorter than 26 weeks). For purposes of the preceding sentence, the duration of the immediately preceding period of employment is determined after application to that period of employment of the averaging methods described in paragraphs (d)(6)(i)(B) and (d)(6)(ii)(B) of this section (relating to employment break periods and special unpaid leave), if applicable.
(v) International transfers. An employer may treat an employee as having terminated employment if the employee transfers to a position at the same applicable large employer (including a different applicable large employer member that is part of the same applicable large employer) if the position is anticipated to continue indefinitely or for at least 12 months and if substantially all of the compensation will constitute income from sources without the United States (within the meaning of sections 861 through 863 and the regulations thereunder). With respect to an employee transferring from a position that was anticipated to continue indefinitely or for at least 12 months and in which substantially all of the compensation for the hours of service constitutes income from sources without the United States (within the meaning of sections 861 through 863 and the regulations thereunder) to a position at the same applicable large employer (including a different applicable large employer member that is part of the same applicable large employer) with respect to which substantially all of the compensation will constitute U.S. source income, the employer may treat that employee as a new hire to the extent consistent with the rules related to rehired employees in paragraph (d)(6) of this section.
(vi) Anti-abuse rule. For purposes of this paragraph (d)(6), any hour of service is disregarded if the hour of service is credited, or the services giving rise to the crediting of the hour of service are requested or required of the employee, for a purpose of avoiding or undermining the application of the employee rehire rules under paragraph (d)(6) of this section, or the application of the averaging method for employment break periods under paragraph (d)(6)(ii)(B) of this section. For example, if an employee of an educational organization would otherwise have a period with no hours of service to which the rules under paragraph (d)(6)(ii)(B) of this section would apply, but for the employer's request or requirement that the employee perform one or more hours of service for a purpose of avoiding the application of those rules, any such hours of service for the week are disregarded, and the rules under paragraph (d)(6)(ii)(B) of this section will apply.
(vii) Examples. The following examples illustrate the provisions of paragraph (d)(6) of this section. All employers in these examples are applicable large employer members with 200 full-time employees (including full-time equivalent employees), each is in a different applicable large employer group, and each determines full-time employee status under the look-back measurement method. None of the periods during which an employee is not credited with an hour of service for an employer involve special unpaid leave or the employee being credited with hours of service for any applicable large employer member in the same applicable large employer as the employer.
Example 1. (i) Facts. As of April 1, 2015, Employee A has been an employee of Employer Z (which is not an educational organization) for 10 years. On April 1, 2015, Employee A terminates employment and is not credited with an hour of service until June 1, 2015, when Employer Z rehires Employee A and Employee A continues as an employee through December 31, 2015, which is the close of the measurement period as applied by Employer Z.
(ii) Conclusion. Because the period for which Employee A is not credited with any hours of service is not longer than Employee A's prior period of employment and is less than 13 weeks, Employee A is not treated as having terminated employment and been rehired for purposes of determining whether Employee A is treated as a new employee upon resumption of services. Therefore, Employee A's hours of service prior to termination are required to be taken into account for purposes of the measurement period, and Employee A's period with no hours of service is taken into account as a period of zero hours of service during the measurement period.
Example 2. (i) Facts. Same facts as Example 1, except that Employee A is rehired on December 1, 2015.
(ii) Conclusion. Because the period during which Employee A is not credited with an hour of service for Employer Z exceeds 13 weeks, Employee A is treated as having terminated employment on April 1, 2015, and having been rehired as a new employee on December 1, 2015, for purposes of determining Employee A's full-time employee status. Because Employee A is treated as a new employee, Employee A's hours of service prior to termination are not taken into account for purposes of the measurement period, and the period between termination and rehire with no hours of service is not taken into account in the new measurement period that begins after the employee is rehired.
Example 3. (i) Facts. Employee B is employed by Employer Y, an educational organization. Employee B is employed for 38 hours of service per week on average from September 7, 2014, through May 23, 2015, and then does not provide services (and is not otherwise credited with an hour of service) during the summer break when the school is generally not in session. Employee B resumes providing services for Employer Y on September 7, 2015, when the new school year begins.
(ii) Conclusion. Because the period from May 24, 2015 through September 5, 2015 (a total of 15 weeks), during which Employee B is not credited with an hour of service does not exceed 26 weeks, and also does not exceed the number of weeks of Employee B's immediately preceding period of employment, Employee B is not treated as having terminated employment on May 24, 2015, and having been rehired on September 6, 2015. Also, for purposes of determining Employee B's average hours of service per week for the measurement period, Employee B is credited, under the averaging method for employment break periods applicable to educational organizations, as having an average of 38 hours of service per week for the 15 weeks between May 24, 2015 and September 5, 2015, during which Employee B otherwise was credited with no hours of service. However, Employer Y is not required to credit more than 501 hours of service for the employment break period (15 weeks × 38 hours = 570 hours).
Example 4. (i) Facts. Same facts as Example 3, except that Employee B does not resume providing services for Employer Y until December 5, 2015.
(ii) Conclusion. Because the period from May 24, 2015 through December 5, 2015, exceeds 26 weeks, Employee B may be treated as having terminated employment on May 24, 2015, and having been rehired on December 5, 2015. Because Employee B is treated as a new employee on December 5, 2015, Employee B's hours of service prior to termination are not taken into account for purposes of the measurement period, and the period between termination and rehire with no hours of service is not taken into account in the new measurement period that begins after Employee B is rehired. The averaging method for employment break periods applicable to educational organizations does not apply because Employee B is treated as a new employee rather than a continuing employee as of the date of resumption of services.
(e) Use of the look-back measurement method and the monthly measurement method for different categories of employees. Different applicable large employer members of the same applicable large employer may use different methods of determining full-time employee status (that is, either the monthly measurement method or the look-back measurement method). In addition, an applicable large employer member may use either the monthly measurement method or the look-back measurement method for each of the categories of employees set forth in paragraphs (d)(1)(v) and (d)(3)(v) of this section, and is not required to use the same method for all categories.
(f) Changes in employment status resulting in a change in full-time employee determination method—(1) Change in employment status from a position to which a look-back measurement method applies to a position to which the monthly measurement method applies, or vice versa—(i) Change from look-back measurement method to monthly measurement method. For an employee transferring from a position under which the look-back measurement method is used to determine the employee's status as a full-time employee, to a position under which the monthly measurement method is used to determine the employee's status as a full-time employee, the following rules apply:
(A) For an employee who at the time of the change of position is in a stability period under which the employee is treated as a full-time employee, the employer must continue to treat the employee as a full-time employee through the end of the stability period;
(B) For an employee who at the time of the change of position is in a stability period under which the employee is not treated as a full-time employee, the employer may continue to treat the employee as not a full-time employee through the end of the stability period, or may apply the monthly measurement method set forth in paragraph (c) of this section through the end of the stability period beginning with any calendar month including the calendar month in which the change in employment status occurs or any subsequent calendar month;
(C) For the stability period associated with the measurement period during which the change in employment status occurs, the employer must treat the employee as a full-time employee for any calendar month during which the employee either would be treated as a full-time employee under the stability period that would have applied based on the measurement period in which the change in employment status occurred or would be treated as a full-time employee under the monthly measurement method; and
(D) For any calendar month subsequent to the stability period identified in paragraph (f)(1)(i)(C) of this section, the monthly measurement method applies for determination of the employee's status as a full-time employee.
(ii) Change from monthly measurement method to look-back measurement method. For an employee who is transferring from a position under which the monthly measurement method is used to determine the employee's status as a full-time employee, to a position under which a look-back measurement method is used to determine the employee's status as a full-time employee, the following rules apply:
(A) For the remainder of the applicable stability period during which the change in employment status occurs, the employer must continue to use the monthly measurement method to determine the employee's status as a full-time employee unless the employee's hours of service prior to the change in employment status would have resulted in the employee being treated as a full-time employee during the stability period in which the change in employment status occurs, in which case the employer must treat the employee as a full-time employee for that stability period;
(B) For the applicable stability period following the measurement period during which the change in employment status occurs, the employer must treat the employee as a full-time employee for any calendar month during which the employee either would be treated as a full-time employee based on the measurement period during which the change in employment status occurs or would be treated as a full-time employee under the monthly measurement method; and
(C) For any calendar month subsequent to the stability period identified in paragraph (f)(1)(ii)(B) of this section, the look-back measurement method applies for determination of the employee's status as a full-time employee.
(iii) Examples. The following examples illustrate the rules of this paragraph (f). In each example, the employer is an applicable large employer with 200 full-time employees (including FTEs). For each example, the employer uses the monthly measurement method for determining whether a salaried employee is a full-time employee, and the look-back measurement method for determining whether an hourly employee is a full-time employee with a measurement period from October 15 through October 14 of the following calendar year, and a stability period from January 1 through December 31. In each case, the relevant employee has been employed continuously for several years.
Example 1 (Look-back measurement method to monthly measurement method).Employee A is an hourly employee. Based on Employee A's hours of service from October 15, 2015, through October 14, 2016, Employee A is treated as a full-time employee from January 1, 2017, through December 31, 2017. On July 1, 2017, Employee A transfers from a position as an hourly employee to a position as a salaried employee. For the months July 2017 through December 2017, Employee A must be treated as a full-time employee. Employee A is employed for hours of service from October 15, 2016, through October 14, 2017, such that under the applicable look-back measurement method Employee A would be treated as a full-time employee for the period of January 1, 2018, through December 31, 2018. Accordingly, Employee A must be treated as a full-time employee for the calendar year 2018. For calendar year 2019, the determination of whether Employee A is a full-time employee is made under the monthly measurement method.
Example 2 (Look-back measurement method to monthly measurement method).Same facts as Example 1, except that based on Employee A's hours of service from October 15, 2015, through October 14, 2016, Employee A is not treated as a full-time employee from January 1, 2017, through December 31, 2017. For the months July 2017 through December 2017, Employer Z may either treat Employee A as not a full-time employee or apply the monthly measurement method to determine Employee A's status as a full-time employee. Employee A is employed for hours of service from October 15, 2016, through October 14, 2017, such that under the applicable look-back measurement method Employee A would be treated as a full-time employee for the period of January 1, 2018, through December 31, 2018. Employee A must be treated as a full-time employee for the calendar year 2018. For calendar year 2019, the determination of whether Employee A is a full-time employee is made under the monthly measurement method.
Example 3 (Look-back measurement method to monthly measurement method).Same facts as Example 1, except that Employee A is employed for hours of service from October 15, 2016, through October 14, 2017, such that under the applicable look-back measurement method Employee A would not be treated as a full-time employee for the period of January 1, 2018, through December 31, 2018. For the calendar year 2018, Employer Z must treat Employee A as a full-time employee only for calendar months during which Employee A would be a full-time employee under the monthly measurement method. For calendar year 2019, the determination of whether Employee A is a full-time employee is made under the monthly measurement method.
Example 4 (Monthly measurement method to look-back measurement method).Employee B is a salaried employee of Employer Y. On July 1, 2017, Employee B transfers to an hourly employee position. Based on Employee B's hours of service from October 15, 2015, through October 14, 2016, Employee B would have been treated as a full-time employee for the stability period from January 1, 2017, through December 31, 2017, had the look-back measurement method applicable to hourly employees applied to Employee B for the entire stability period. For the calendar months January 2017 through June 2017 (prior to Employee B's change to hourly employee status), Employee B's status as a full-time employee is determined using the monthly measurement method. For the calendar months July 2017 through December 2017, Employer Y must treat Employee B as a full-time employee because Employee B would have been treated as a full-time employee during that portion of the stability period had the look-back measurement method applied to Employee B for that entire stability period. Employee B is employed for hours of service from October 15, 2016, through October 14, 2017, such that under the applicable look-back measurement method Employee B would be treated as a full-time employee for the period January 1, 2018, through December 31, 2018. Accordingly, Employee B must be treated as a full-time employee for the calendar year 2018. For calendar year 2019, the determination of whether Employee B is a full-time employee is made under the applicable look-back measurement method.
Example 5 (Monthly measurement method to look-back measurement method).Same facts as Example 4, except that based on Employee B's hours of service from October 15, 2015, through October 14, 2016, Employee B would not have been treated as a full-time employee from January 1, 2017, through December 31, 2017. For the calendar months of 2017, Employer Y applies the monthly measurement method to determine Employee B's status as a full-time employee. Employee B is employed for hours of service from October 15, 2016, through October 14, 2017, such that under the applicable look-back measurement method Employee B would be treated as a full-time employee for the period January 1, 2018, through December 31, 2018. Accordingly, Employee B must be treated as a full-time employee for the calendar year 2018. For calendar year 2019, the determination of whether Employee B is a full-time employee is made under the applicable look-back measurement method.
Example 6 (Monthly measurement method to look-back measurement method).Same facts as Example 4, except that Employee B is employed for hours of service from October 15, 2016, through October 14, 2017, such that under the applicable look-back measurement method Employee B would not be treated as a full-time employee for the period of January 1, 2018, through December 31, 2018. For the calendar year 2018, Employer Y must treat Employee B as a full-time employee only for calendar months during which Employee B would be a full-time employee under the monthly measurement method.
(2) Special rule for certain employees to whom minimum value coverage has been continuously offered—(i) In general. Notwithstanding the rules in paragraphs (e) and (f) of this section, an employer using the look-back measurement method to determine the full-time employee status of an employee may apply the monthly measurement method to that employee beginning on the first day of the fourth full calendar month following the calendar month in which the employee experiences a change in employment status such that, if the employee had begun employment in the new position or status, the employee would have reasonably been expected not to be employed on average at least 30 hours of service per week (for example, the employee has changed to a part-time position of only 20 hours of service per week). This rule only applies with respect to an employee to whom the applicable large employer member offered minimum value coverage by the first day of the calendar month following the employee's initial three full calendar months of employment through the calendar month in which the change in employment status described in this paragraph (f)(2) occurs, and only if the employee actually averages less than 30 hours of service per week for each of the three full calendar months following the change in employment status. For the three full calendar months between the employee's change in employment status and the application of the monthly measurement method, the employee's full-time employee status is determined based on the employee's status during the applicable stability period(s). Under this rule, an employer may apply the monthly measurement method to an employee even if the employer does not apply the monthly measurement method to the other employees in the same category of employees under paragraph (d)(1)(v) or (d)(3)(v) of this section (for example, under this method an employer could apply the monthly measurement method to an hourly employee, even if the employer uses the look-back measurement method to determine full-time employee status of all other hourly employees). The employer may continue to apply the monthly measurement method through the end of the first full measurement period (and any associated administrative period) that would have applied had the employee remained under the applicable look-back measurement method.
(ii) Examples. The following examples illustrate the rule of paragraphs (f)(2) of this section. In each example, the employer is an applicable large employer with 200 full-time employees (including FTEs).
Example 1 (New variable hour employee, no delay in coverage, becomes non-full-time employee). (i) Facts. Employer Z, an applicable large employer, uses the look-back measurement method to determine the full-time employee status for all of its employees. On May 10, 2015, Employer Z hired Employee A who is a variable hour employee. Although Employee A is a new variable hour employee, so that Employer Z could wait until the end of an initial measurement period to offer coverage to Employee A without an assessable payment under section 4980H with respect to Employee A, Employer Z offers coverage that provides minimum value to Employee A on September 1, 2015. For its ongoing employees, Employer Z has chosen to use a 12-month standard measurement period starting October 15 and a 12-month stability period associated with that standard measurement period starting January 1. Employee A continues in employment with Employer Z for over five years and averages more than 30 hours of service per week for all measurement periods through the measurement period ending October 14, 2020. On February 12, 2021, Employee A experiences a change in position of employment with Employer Z to a position under which Employer Z reasonably expects Employee A to average less than 30 hours of service per week. For the calendar months after February 2021, Employee A averages less than 30 hours of service per week. Employer Z offered Employee A coverage that provided minimum value continuously from September 1, 2015, through May 31, 2021. Effective June 1, 2021, Employer Z elects to apply the monthly measurement method to determine Employee A's status as a full-time employee for the remainder of the stability period ending December 31, 2021, and the calendar year 2022 (which is through the end of the first full measurement period following the change in employment status plus the associated administrative period). Applying the stability period beginning January 1, 2021, Employer Z treats Employee A as a full-time employee for each calendar month from January 2021 through May 2021. Applying the monthly measurement method, for each calendar month from June 2021 through December 2022, Employer Z treats Employee A as not a full-time employee.
(ii) Conclusion. Because Employer Z offered coverage that provided minimum value to Employee A from no later than the first day of the fourth full calendar month following Employee A's start date through the calendar month in which the change in employment status occurred, and because Employee A did not average 30 hours of service per week for any of the three calendar months immediately following Employee A's change in employment status to an employee not reasonably expected to average 30 hours of service per week, Employer Z may use the monthly measurement method to determine the full-time employee status of Employee A beginning on the first day of the fourth month following the change in employment status (June 1, 2021) through the end of the first full measurement period (plus any associated administrative period) immediately following the change in employment status (December 31, 2022). Because Employee A did not average at least 30 hours of service per week for any calendar month from June 2021 through December 2022, Employer Z has properly treated Employee A as not a full-time employee for those calendar months.
Example 2 (New full-time employee, no delay in coverage, becomes non-full-time employee). (i) Facts. Same facts as Example 1, except that at Employee A's start date, Employer Z reasonably expects that Employee A will average at least 30 hours of service per week. Accordingly, Employer Z offers coverage to Employee A beginning on September 1, 2015, and offers coverage continuously to Employee A for all calendar months through May 2021.
(ii) Conclusion. Same as Example 1.
(g) Nonpayment or late payment of premiums. An applicable large employer member will not be treated as failing to offer to a full-time employee (and his or her dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for an employee whose coverage under the plan is terminated during the coverage period solely due to the employee failing to make a timely payment of the employee portion of the premium. This treatment continues only through the end of the coverage period (typically the plan year). For this purpose, the rules in § 54.4980B-8, Q&A-5(a), (c), (d) and (e) apply under this section to the payment for coverage with respect to a full-time employee in the same manner that they apply to payment for COBRA continuation coverage under § 54.4980B-8.
(h) Additional guidance. With respect to the determination of full-time employee status, including determination of hours of service, the Commissioner may prescribe additional guidance of general applicability, published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter).
(i) Effective/applicability date. This section is applicable for periods after December 31, 2014.
[T.D. 9655, 79 FR 8577, Feb. 12, 2014]
§ 54.4980H-4 Assessable payments under section 4980H(a).
(a) In general. If an applicable large employer member fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for any calendar month, and the applicable large employer member has received a Section 1411 Certification with respect to at least one full-time employee, an assessable payment is imposed. For the calendar month, the applicable large employer member will owe an assessable payment equal to the product of the section 4980H(a) applicable payment amount and the number of full-time employees of the applicable large employer member (other than employees in a limited non-assessment period for certain employees and as adjusted in accordance with paragraph (e) of this section). For purposes of this paragraph (a), an applicable large employer member is treated as offering such coverage to its full-time employees (and their dependents) for a calendar month if, for that month, it offers such coverage to all but five percent (or, if greater, five) of its full-time employees (provided that an employee is treated as having been offered coverage only if the employer also offers coverage to that employee's dependents). For purposes of the preceding sentence, an employee in a limited non-assessment period for certain employees is not included in the calculation.
(b) Offer of coverage—(1) In general. An applicable large employer member will not be treated as having made an offer of coverage to a full-time employee for a plan year if the employee does not have an effective opportunity to elect to enroll in the coverage at least once with respect to the plan year, or does not have an effective opportunity to decline to enroll if the coverage offered does not provide minimum value or requires an employee contribution for any calendar month of more than 9.5 percent of a monthly amount determined as the federal poverty line for a single individual for the applicable calendar year, divided by 12. For this purpose, the applicable federal poverty line is the federal poverty line for the 48 contiguous states and the District of Columbia. Whether an employee has an effective opportunity to enroll or to decline to enroll is determined based on all the relevant facts and circumstances, including adequacy of notice of the availability of the offer of coverage, the period of time during which acceptance of the offer of coverage may be made, and any other conditions on the offer. An employee's election of coverage from a prior year that continues for the next plan year unless the employee affirmatively elects to opt out of the plan constitutes an offer of coverage for purposes of section 4980H.
(2) Offer of coverage on behalf of another entity. For purposes of section 4980H, an offer of coverage by one applicable large employer member to an employee for a calendar month is treated as an offer of coverage by all applicable large employer members for that calendar month. In addition, an offer of coverage made to an employee on behalf of a contributing employer under a multiemployer or single employer Taft-Hartley plan or multiple employer welfare arrangement (MEWA) is treated as made by the employer. For an offer of coverage to an employee performing services for an employer that is a client of a staffing firm, in cases in which the staffing firm is not the common law employer of the individual and the staffing firm makes an offer of coverage to the employee on behalf of the client employer under a plan established or maintained by the staffing firm, the offer is treated as made by the client employer for purposes of section 4980H only if the fee the client employer would pay to the staffing firm for an employee enrolled in health coverage under the plan is higher than the fee the client employer would pay the staffing firm for the same employee if that employee did not enroll in health coverage under the plan.
(c) Partial calendar month. If an applicable large employer member fails to offer coverage to a full-time employee for any day of a calendar month, that employee is treated as not offered coverage during that entire month, regardless of whether the employer uses the payroll period rule set forth in § 54.4980H-3(d)(1)(ii) or the weekly rule set forth in § 54.4980H-3(c)(3) to determine full-time employee status for the calendar month. However, in a calendar month in which the employment of a full-time employee terminates, if the employee would have been offered coverage for the entire calendar month had the employee been employed for the entire calendar month, the employee is treated as having been offered coverage for that entire calendar month. In addition, an applicable large employer member is not subject to an assessable payment under section 4980H with respect to an employee for the calendar month in which the employee's start date occurs if the start date is on a date other than the first day of the calendar month, and, in addition, with respect to the calendar month in which the start date occurs, such an employee is not included for purposes of the calculation of any potential liability under section 4980H(a).
(d) Application to applicable large employer member. The liability for an assessable payment under section 4980H(a) for a calendar month with respect to a full-time employee applies solely to the applicable large employer member that was the employer of that employee for that calendar month. For an employee who was an employee of more than one applicable large employer member of the same applicable large employer during a calendar month, the liability for the assessable payment under section 4980H(a) for a calendar month applies to the applicable large employer member for whom the employee has the greatest number of hours of service for that calendar month (if the employee has an equal number of hours of service for two or more applicable large employer members of the same applicable large employer for the calendar month, those applicable large employer members can treat one of those members as the employer of that employee for that calendar month for purposes of this section, and if the members do not select one member, or select in an inconsistent manner, the IRS will select a member to be treated as the employer of that employee for purposes of the assessable payment determination). For a calendar month, an applicable large employer member may be liable for an assessable payment under section 4980H(a) or under section 4980H(b), but will not be liable for an assessable payment under both section 4980H(a) and section 4980H(b).
(e) Allocated reduction of 30 full-time employees. For purposes of the liability calculation under paragraph (a) of this section, with respect to each calendar month, an applicable large employer member's number of full-time employees is reduced by that member's allocable share of 30. The applicable large employer member's allocation is equal to 30 allocated ratably among all members of the applicable large employer on the basis of the number of full-time employees employed by each applicable large employer member during the calendar month (after application of the rules of paragraph (d) of this section addressing employees who work for more than one applicable large employer member during a calendar month). If an applicable large employer member's total allocation is not a whole number, the allocation is rounded to the next highest whole number. This rounding rule may result in the aggregate reduction for the entire group of applicable large employer members exceeding 30.
(f) Example. The following example illustrates the provisions of paragraphs (a) and (e) of this section.
Example. (i) Facts. Applicable large employer member Z and applicable large employer member Y are the two members of an applicable large employer. Applicable large employer member Z employs 40 full-time employees in each calendar month of 2017. Applicable large employer member Y employs 35 full-time employees in each calendar month of 2017. Assume that for 2017, the applicable payment amount for a calendar month is $2,000 divided by 12. Applicable large employer member Z does not sponsor an eligible employer-sponsored plan for any calendar month of 2017, and receives a Section 1411 Certification for 2017 with respect to at least one of its full-time employees. Applicable large employer member Y sponsors an eligible employer-sponsored plan under which all of its full-time employees are eligible for minimum essential coverage.
(ii) Conclusion. Pursuant to section 4980H(a) and this section, applicable large employer member Z is subject to an assessable payment under section 4980H(a) for 2017 of $48,000, which is equal to 24 × $2,000 (40 full-time employees reduced by 16 (its allocable share of the 30-employee offset ((40/75) × 30 = 16)) and then multiplied by $2,000). Applicable large employer member Y is not subject to an assessable payment under section 4980H(a) for 2017.
(g) Additional guidance. With respect to assessable payments under section 4980H(a), the Commissioner may prescribe additional guidance of general applicability, published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter).
(h) Effective/applicability date. This section is applicable for periods after December 31, 2014.
[T.D. 9655, 79 FR 8577, Feb. 12, 2014]
§ 54.4980H-5 Assessable payments under section 4980H(b).
(a) In general. If an applicable large employer member offers to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for any calendar month (including an offer of coverage to all but five percent or less (or, if greater, five or less) of its full-time employees (provided that an employee is treated as having been offered coverage only if the employer also offers coverage to that employee's dependents)) and the applicable large employer member has received a Section 1411 Certification with respect to one or more full-time employees of the applicable large employer member, then there is imposed on the applicable large employer member an assessable payment equal to the product of the number of full-time employees of the applicable large employer member for which it has received a Section 1411 Certification (minus the number of those employees in a limited non-assessment period for certain employees and the number of other employees who were offered the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that satisfied minimum value and met one or more of the affordability safe harbors described in paragraph (e) of this section) and the section 4980H(b) applicable payment amount. Notwithstanding the foregoing, the aggregate amount of assessable payment determined under this paragraph (a) with respect to all employees of an applicable large employer member for any calendar month may not exceed the product of the section 4980H(a) applicable payment amount and the number of full-time employees of the applicable large employer member during that calendar month (reduced by the applicable large employer member's ratable allocation of the 30 employee reduction under § 54.4980H-4(e)).
(b) Offer of coverage. For purposes of this section, the same rules with respect to an offer of coverage for purposes of section 4980H(a) apply. See § 54.4980H-4.
(c) Partial calendar month. If an applicable large employer member fails to offer coverage to a full-time employee for any day of a calendar month, that employee is treated as not offered coverage during that entire month, regardless of whether the employer uses the payroll period rule set forth in § 54.4980H-3(d)(1)(ii) or the weekly rule set forth in § 54.4980H-3(c)(3) to determine full-time employee status for the calendar month. However, in a calendar month in which a full-time employee's employment terminates, if the employee would have been offered coverage if the employee had been employed for the entire month, the employee is treated as having been offered coverage during that month. Also, an applicable large employer member is not subject to an assessable payment under section 4980H with respect to an employee for the calendar month in which the employee's start date occurs if the start date is on a date other than the first day of the calendar month.
(d) Applicability to applicable large employer member. The liability for an assessable payment under section 4980H(b) for a calendar month with respect to a full-time employee applies solely to the applicable large employer member that was the employer of that employee for that calendar month. For an employee who was a full-time employee of more than one applicable large employer member during that calendar month, the liability for the assessable payment under section 4980H(b) for a calendar month applies to the applicable large employer member for whom the employee has the greatest number of hours of service for that calendar month (if the employee has an equal number of hours of service for two or more applicable large employer members for the calendar month, those applicable large employer members can treat one of those members as the employer of that employee for that calendar month for purposes of this paragraph (d), and if the members do not select one member, or select in an inconsistent manner, the IRS will select a member to be treated as the employer of that employee for purposes of the assessable payment determination). For a calendar month, an applicable large employer member may be liable for an assessable payment under section 4980H(a) or under section 4980H(b), but will not be liable for an assessable payment under both section 4980H(a) and section 4980H(b).
(e) Affordability—(1) In general. An employee who is offered coverage by an applicable large employer member may be eligible for an applicable premium tax credit or cost-sharing reduction if that offer of coverage is not affordable within the meaning of section 36B(c)(2)(C)(i) and the regulations thereunder.
(2) Affordability safe harbors for section 4980H(b) purposes. The affordability safe harbors set forth in paragraph (e)(2)(ii) through (iv) of this section apply solely for purposes of section 4980H(b), so that an applicable large employer member that offers minimum essential coverage providing minimum value will not be subject to an assessable payment under section 4980H(b) with respect to any employee receiving the applicable premium tax credit or cost-sharing reduction for a period for which the coverage is determined to be affordable under the requirements of an affordability safe harbor. This rule applies even if the applicable large employer member's offer of coverage that meets the requirements of an affordability safe harbor is not affordable for a particular employee under section 36B(c)(2)(C)(i) and an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to that employee.
(i) Conditions of using an affordability safe harbor. An applicable large employer member may use one or more of the affordability safe harbors described in this paragraph (e)(2) only if the employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that provides minimum value with respect to the self-only coverage offered to the employee. Use of any of the safe harbors is optional for an applicable large employer member, and an applicable large employer member may choose to apply the safe harbors for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category. Reasonable categories generally include specified job categories, nature of compensation (hourly or salary), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable category.
(ii) Form W-2 safe harbor—(A) Full-year offer of coverage. An employer will not be subject to an assessable payment under section 4980H(b) with respect to a full-time employee if that employee's required contribution for the calendar year for the employer's lowest cost self-only coverage that provides minimum value during the entire calendar year (excluding COBRA or other continuation coverage except with respect to an active employee eligible for continuation coverage) does not exceed 9.5 percent of that employee's Form W-2 wages from the employer (and any other member of the same applicable large employer that also pays wages to that employee) for the calendar year. Application of this safe harbor is determined after the end of the calendar year and on an employee-by-employee basis, taking into account the Form W-2 wages and the required employee contribution for that year. In addition, to qualify for this safe harbor, the employee's required contribution must remain a consistent amount or percentage of all Form W-2 wages during the calendar year (or during the plan year for plans with non-calendar year plan years) so that an applicable large employer member is not permitted to make discretionary adjustments to the required employee contribution for a pay period. A periodic contribution that is based on a consistent percentage of all Form W-2 wages may be subject to a dollar limit specified by the employer.
(B) Adjustment for partial-year offer of coverage. For an employee not offered coverage for an entire calendar year, the Form W-2 safe harbor is applied by adjusting the Form W-2 wages to reflect the period for which coverage was offered, then determining whether the employee's required contribution for the employer's lowest cost self-only coverage that provides minimum value, totaled for the periods during which coverage was offered, does not exceed 9.5 percent of the adjusted amount of Form W-2 wages. To adjust Form W-2 wages for this purpose, the Form W-2 wages are multiplied by a fraction equal to the number of calendar months for which coverage was offered over the number of calendar months in the employee's period of employment with the employer during the calendar year. For this purpose, if coverage is offered during at least one day during the calendar month, or the employee is employed for at least one day during the calendar month, the entire calendar month is counted in determining the applicable fraction.
(iii) Rate of pay safe harbor. An applicable large employer member satisfies the rate of pay safe harbor with respect to an hourly employee for a calendar month if the employee's required contribution for the calendar month for the applicable large employer member's lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of an amount equal to 130 hours multiplied by the lower of the employee's hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year) or the employee's lowest hourly rate of pay during the calendar month. An applicable large employer member satisfies the rate of pay safe harbor with respect to a non-hourly employee for a calendar month if the employee's required contribution for the calendar month for the applicable large employer member's lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of the employee's monthly salary, as of the first day of the coverage period (instead of 130 multiplied by the hourly rate of pay); provided that if the monthly salary is reduced, including due to a reduction in work hours, the safe harbor is not available, and, solely for purposes of this paragraph (e)(2)(iii), an applicable large employer member may use any reasonable method for converting payroll periods to monthly salary. For this purpose, if coverage is offered during at least one day during the calendar month, the entire calendar month is counted both for purposes of determining the assumed income for the calendar month and for determining the employee's share of the premium for the calendar month.
(iv) Federal poverty line safe harbor. An applicable large employer member satisfies the federal poverty line safe harbor with respect to an employee for a calendar month if the employee's required contribution for the calendar month for the applicable large employer member's lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of a monthly amount determined as the federal poverty line for a single individual for the applicable calendar year, divided by 12. For this purpose, if coverage is offered during at least one day during the calendar month, the entire calendar month is counted both for purposes of determining the monthly amount for the calendar month and for determining the employee's share of the premium for the calendar month. For this purpose, the applicable federal poverty line is the federal poverty line for the State in which the employee is employed.
(v) Examples. The following examples illustrate the application of the affordability safe harbors described in this paragraph (e)(2). In each example, each employer is an applicable large employer member with 200 full-time employees (including full-time equivalent employees).
Example 1 (Form W-2 wages safe harbor). (i) Facts. Employee A is employed by Employer Z consistently from January 1, 2015, through December 31, 2015. In addition, Employer Z offers Employee A and his dependents minimum essential coverage during that period that provides minimum value. The employee contribution for self-only coverage is $100 per calendar month, or $1,200 for the calendar year. For 2015, Employee A's Form W-2 wages with respect to employment with Employer Z are $24,000.
(ii) Conclusion. Because the employee contribution for 2015 is less than 9.5 percent of Employee A's Form W-2 wages for 2015, the coverage offered is treated as affordable with respect to Employee A for 2015 ($1,200 is 5 percent of $24,000).
Example 2 (Form W-2 wages safe harbor). (i) Facts. Employee B is employed by Employer Y from January 1, 2015, through September 30, 2015. In addition, Employer Y offers Employee B and his dependents minimum essential coverage during that period that provides minimum value. The employee contribution for self-only coverage is $100 per calendar month, or $900 for Employee B's period of employment. For 2015, Employee B's Form W-2 wages with respect to employment with Employer Y are $18,000. For purposes of applying the affordability safe harbor, the Form W-2 wages are multiplied by 9/9 (9 calendar months of coverage offered over 9 months of employment during the calendar year) or 1. Accordingly, affordability is determined by comparing the adjusted Form W-2 wages ($18,000) to the employee contribution for the period for which coverage was offered ($900).
(ii) Conclusion. Because the employee contribution for 2015 is less than 9.5 percent of Employee B's adjusted Form W-2 wages for 2015, the coverage offered is treated as affordable with respect to Employee B for 2015 ($900 is 5 percent of $18,000).
Example 3 (Form W-2 wages safe harbor). (i) Facts. Employee C is employed by Employer X from May 15, 2015, through December 31, 2015. In addition, Employer X offers Employee C and her dependents minimum essential coverage during the period from August 1, 2015, through December 31, 2015, that provides minimum value. The employee contribution for self-only coverage is $100 per calendar month, or $500 for Employee C's period of employment. For 2015, Employee C's Form W-2 wages with respect to employment with Employer X are $15,000. For purposes of applying the affordability safe harbor, the Form W-2 wages are multiplied by 5/8 (5 calendar months of coverage offered over 8 months of employment during the calendar year). Accordingly, affordability is determined by comparing the adjusted Form W-2 wages ($9,375 or $15,000 × 5/8) to the employee contribution for the period for which coverage was offered ($500).
(ii) Conclusion. Because the employee contribution of $500 is less than 9.5 percent of $9,375 (Employee C's adjusted Form W-2 wages for 2015), the coverage offered is treated as affordable with respect to Employee C for 2015 ($500 is 5.33 percent of $9,375).
Example 4 (Rate of pay safe harbor). (i) Facts. Employer W offers its full-time employees and their dependents minimum essential coverage that provides minimum value. For the 2016 calendar year, Employer W is using the rate of pay safe harbor to establish premium contribution amounts for full-time employees paid at a rate of $7.25 per hour (the minimum wage in Employer W's jurisdiction) for each calendar month of the entire 2016 calendar year. Employer W can apply the affordability safe harbor by using an assumed monthly income amount that is based on an assumed 130 hours of service multiplied by $7.25 per hour ($942.50 per calendar month). To satisfy the safe harbor, Employer W would set the employee monthly contribution amount at a rate that does not exceed 9.5 percent of the assumed monthly income of $942.50. Employer W sets the employee contribution for self-only coverage at $85 per calendar month for 2016.
(ii) Conclusion. Because $85 is less than 9.5 percent of the employee's assumed monthly income at a $7.25 rate of pay, the coverage offered is treated as affordable under the rate of pay safe harbor for each calendar month of 2016 ($85 is 9.01 percent of $942.50).
Example 5 (Rate of pay safe harbor). (i) Facts. Employee E is employed by Employer V from May 1, 2015, through December 31, 2015. Employer V offers Employee E and her dependents minimum essential coverage from May 1, 2015, through December 31, 2015, that provides minimum value. The employee contribution for self-only coverage is $100 per calendar month. From May 1, 2015, through October 31, 2015, Employee E is paid at a rate of $10 per hour. From November 1, 2015, through December 31, 2015, Employee E is paid at a rate of $12 per hour. For purposes of applying the affordability safe harbor for the calendar months May 2015 through October 2015, Employer V may assume that Employee E earned $1,300 per calendar month (130 hours of service multiplied by $10 (which is the lower of the employee's hourly rate of pay at the beginning of the coverage period ($10) and the lowest hourly rate of pay for the calendar month ($10)). Accordingly, affordability is determined by comparing the assumed income ($1,300 per month) to the employee contribution ($100 per calendar month). For the calendar months November 2015 through December 2015, Employer V may assume that Employee E earned $1,300 per calendar month (130 hours of service multiplied by $10 (which is the lower of the employee's hourly rate of pay at the beginning of the coverage period ($10) and the lowest hourly rate of pay for the calendar month ($12)). Accordingly, affordability is determined by comparing the assumed income ($1,300 per month) to the employee contribution ($100 per calendar month).
(ii) Conclusion. Because $100 is less than 9.5 percent of Employee E's assumed monthly income for each calendar month from May 2015 through December 2015, the coverage offered is treated as affordable with respect to Employee E for May 2015 through December 2015 ($100 is 7.69 percent of $1,300).
Example 6 (Federal poverty line safe harbor). (i) Facts. Employee F is employed by Employer T from January 1, 2015, through December 31, 2015. In addition, Employer T offers Employee F and his dependents minimum essential coverage during that period that provides minimum value. Employer T uses the look-back measurement method. Under that measurement method as applied by Employer T, Employee F is treated as a full-time employee for the entire calendar year 2015. Employee F is regularly credited with 35 hours of service per week but is credited with only 20 hours of service during the month of March 2015 and only 15 hours of service during the month of August 2015. Assume for this purpose that the federal poverty line for 2015 for an individual is $11,670. With respect to Employee F, Employer T sets the monthly employee contribution for employee single-only coverage for each calendar month of 2015 at $92.39 (9.5 percent of $11,670, divided by 12).
(ii) Conclusion. Regardless of Employee F's actual wages for any calendar month in 2015, including the months of March 2015 and August 2015, when Employee F has lower wages because of significantly lower hours of service, the coverage under the plan is treated as affordable with respect to Employee F, because the employee contribution does not exceed 9.5 percent of the federal poverty line.
(f) Additional guidance. With respect to assessable payments under section 4980H(b), including the determination of whether an offer of coverage is affordable for purposes of section 4980H, the Commissioner may prescribe additional guidance of general applicability, published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter).
(g) Effective/applicability date. This section is applicable for periods after December 31, 2014.
[T.D. 9655, 79 FR 8577, Feb. 12, 2014]
§ 54.4980H-6 Administration and procedure.
(a) In general. [Reserved]
(b) Effective/applicability date. This section is applicable for periods after December 31, 2014.
[T.D. 9655, 79 FR 8577, Feb. 12, 2014]
§ 54.6011-1 General requirement of return, statement, or list.
(a) Minimum funding standards or excess contributions for self-employed individuals and section 403(b)(7)(A) custodial accounts. Any employer or individual liable for tax under section 4971, 4972 or 4973(a)(2) (for a custodial account under section 403(b)(7)(A)) shall file an annual return on Form 5330 and shall include therein the information required by such form and the instructions issued with respect thereto.
(b) Tax on prohibited transactions. Every disqualified person (as defined in section 4975(e)(2)) liable for the tax imposed under section 4975(a) with respect to a prohibited transaction shall file an annual return on Form 5330 and shall include therein the information required by such form and the instructions issued with respect thereto. The annual return on Form 5330 shall be filed with respect to each prohibited transaction and for each taxable year (or part thereof) of the disqualified person in the taxable period (as defined in section 4975(f)(2)) beginning on the date on which such prohibited transaction occurs.
(c) Entity manager tax on prohibited tax shelter transactions—(1) In general. Any entity manager of a tax-exempt entity described in section 4965(c)(4), (c)(5), (c)(6), or (c)(7) who is liable for tax under section 4965(a)(2) shall file a return on Form 5330, “Return of Excise Taxes Related to Employee Benefit Plans,” on or before the 15th day of the fifth month following the close of such entity manager's taxable year during which the entity entered into the prohibited tax shelter transaction, and shall include therein the information required by such form and the instructions issued with respect thereto.
(2) Transition rule. A Form 5330, “Return of Excise Taxes Related to Employee Benefit Plans,” for an excise tax under section 4965 that was due on or before October 4, 2007, will be deemed to have been filed on the due date if it was filed by October 4, 2007, and if the section 4965 tax that was required to be reported on that Form 5330 was paid by October 4, 2007.
(d) Effective/applicability date. Paragraph (c) of this section is applicable on July 6, 2007.
[T.D. 7838, 47 FR 44249, Oct. 7, 1982, as amended by T.D. 9334, 72 FR 36873, July 6, 2007; T.D. 9492, 75 FR 38708, July 6, 2010; 75 FR 46845, Aug. 4, 2010]
§ 54.6011-1T General requirement of return, statement, or list (temporary).
(a) Tax on reversions of qualified plan assets to employer. Every employer liable for the tax imposed under section 4980(a) with respect to an employer reversion (as defined in section 4980(c)(2)) shall file a quarterly return on Form 5330 and shall include therein the information required by such form and the instructions issued with respect thereto. The quarterly return on Form 5330 shall be filed with respect to employer reversions from each qualified plan (as defined in section 4980(c)(1)).
(b) [Reserved]
[T.D. 8133, 52 FR 10563, Apr. 2, 1987, as amended by T.D. 9334, 72 FR 36873, July 6, 2007; 72 FR 45895, Aug. 16, 2007; T.D. 9492, 75 FR 38709, July 6, 2010]
§ 54.6011-2 General requirement of return, statement, or list.
Effective for any Form 8928 that is due on or after January 1, 2010, any person liable for tax under section 4980B, 4980D, 4980E, or 4980G of the Code shall file a return with respect to the tax on Form 8928. The return must include the information required by Form 8928 and the instructions issued with respect to it.
[T.D. 9457, 74 FR 45999, Sept. 8, 2009]
§ 54.6011-3 Required use of electronic form for the filing requirements for the return for certain excise taxes related to employee benefit plans.
(a) Excise tax returns required in electronic form. Any employer or individual required to file an excise tax return on Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, under § 54.6011-1 of this chapter must file the excise tax return electronically if the filer is required by the Internal Revenue Code or regulations to file at least 10 returns of any type during the calendar year that the Form 5330 is due. The Commissioner may direct the type of electronic filing and may also exempt certain returns from the electronic-filing requirements of this section through revenue procedures, publications, forms, instructions, or other guidance, including postings on the IRS.gov website. Returns filed electronically must be made in accordance with the applicable revenue procedures, publications, forms, instructions, or other guidance.
(b) Exclusions from electronic-filing requirements—(1) Waivers. The Commissioner may grant waivers of the requirements of this section in cases of undue hardship. One principal factor in determining hardship will be the amount, if any, by which the cost of filing the return electronically in accordance with this section exceeds the cost of filing the return on paper. A request for a waiver must be made in accordance with applicable IRS revenue procedures, publications, forms, instructions, or other guidance, including postings to the IRS.gov website. The waiver request will specify the type of filing (that is, a return required under § 54.6011-1 of this chapter) and the period to which it applies.
(2) Exemptions. The Commissioner may provide exemptions from the requirements of this section to promote effective and efficient tax administration. A submission claiming an exemption must be made in accordance with applicable IRS revenue procedures, publications, forms, instructions, or other guidance, including postings to the IRS.gov website.
(3) Additional exclusion. If the IRS's systems do not support electronic filing, taxpayers will not be required to file electronically.
(c) Failure to file. If a filer required to file the Form 5330 fails to file the report electronically when required to do so by this section, the filer has failed to file the report. See generally section 6651(a)(1) for the penalty for the failure to file a tax return or to pay tax. For general rules relating to the failure to file a tax return or to pay tax, see the regulations under 26 CFR 301.6651-1 (Regulations on Procedure and Administration).
(d) Meaning of terms. The following definitions apply for purposes of this section:
(1) Magnetic media or electronic form. The terms magnetic media or electronic form mean any media or form permitted under applicable regulations, revenue procedures, or publications. These generally include electronic filing, as well as magnetic tape, tape cartridge, diskette, and other media specifically permitted under the applicable regulations, procedures, publications, forms, instructions, or other guidance.
(2) Calculating the number of returns a filer is required to file—(i) In general. For purposes of this section, a filer is required to file at least 10 returns during a calendar year if the filer is required to file at least 10 returns of any type, including information returns (for example, Forms W-2 and Forms 1099), income tax returns, employment tax returns, and excise tax returns.
(ii) Definition of filer. For purposes of this section, the term filer means the person required to report the tax on the Form 5330. For general rules on who is required to report the tax on the Form 5330, see the Instructions to the Form 5330.
(e) Example. The following example illustrates the provisions of paragraph (d)(2) of this section:
(1) In 2023, Employer A (the plan sponsor and plan administrator of Plan B) is required to file Form 5330 for its nondeductible contribution under section 4972 to Plan B. During the 2024 calendar year, Employer A is required to file 20 returns (including 19 Forms 1099-R Distributions From Pensions, Annuities, Retirement, Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and one Form 5500 series, Annual Return/Report of the Employee Benefit Plan). Plan B's plan year is the calendar year. Because Employer A is required to file at least 10 returns during the 2024 calendar year, Employer A must file the 2023 Form 5330 for Plan B electronically.
(2) [Reserved]
(f) Applicability date. The rules of this section apply to any Form 5330 required to be filed for taxable years ending on or after December 31, 2023.
[T.D. 9972, 88 FR 11766, Feb. 23, 2023]
§ 54.6011-4 Requirement of statement disclosing participation in certain transactions by taxpayers.
(a) In general. If a transaction is identified as a listed transaction or a transaction of interest as defined in § 1.6011-4 of this chapter by the Commissioner in published guidance (see § 601.601(d)(2)(ii)(b) of this chapter), and the listed transaction or transaction of interest involves an excise tax under chapter 43 of subtitle D of the Internal Revenue Code (relating to qualified pension, etc., plans) the transaction must be disclosed in the manner stated in such published guidance.
(b) Effective/applicability date. This section applies to listed transactions entered into on or after January 1, 2003. This section applies to transactions of interest entered into on or after November 2, 2006.
[T.D. 9350, 72 FR 43154, Aug. 3, 2007]
§ 54.6060-1 Reporting requirements for tax return preparers.
(a) In general. A person that employs one or more tax return preparers to prepare a return or claim for refund under Chapter 43 of subtitle D of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in § 1.6060-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78458, Dec. 22, 2008]
§ 54.6061-1 Signing of returns and other documents.
Effective for any Form 8928 that is due on or after January 1, 2010, any return, statement, or other document required to be made with respect to a tax imposed by section 4980B, 4980D, 4980E, or 4980G of the Code or the regulations under section 4980B, 4980D, 4980E, or 4980G must be signed by the person required to file the return, statement, or other document, or by the persons required or duly authorized to sign in accordance with the regulations, forms, or instructions prescribed with respect to such return, statement, or document. An individual's signature on such return, statement, or other document shall be prima facie evidence that the individual is authorized to sign the return, statement, or other document.
[T.D. 9457, 74 FR 46000, Sept. 8, 2009]
§ 54.6071-1 Time for filing returns.
(a) Returns under section 4980B. (1) Due date for filing of return by employers or other persons responsible for benefits under a group health plan. If the person liable for the excise tax is an employer or other person responsible for providing or administering benefits under a group health plan (such as an insurer or a third party administrator), the return required by § 54.6011-2 must be filed on or before the due date for filing the person's income tax return and must reflect the portion of the noncompliance period for each failure under section 4980B that falls during the person's taxable year. An extension to file the person's income tax return does not extend the date for filing Form 8928.
(2) Due date for filing of return by multiemployer plans. If the person liable for the excise tax is a multiemployer plan, the return required by § 54.6011-2 must be filed on or before the last day of the seventh month following the end of the plan's plan year. The filing of Form 8928 by a plan must reflect the portion of the noncompliance period for each failure under section 4980B that falls during the plan's plan year.
(b) Returns under section 4980D. (1) Due date for filing of return by employers. If the person liable for the excise tax is an employer, the return required by § 54.6011-2 must be filed on or before the due date for filing the employer's income tax return and must reflect the portion of the noncompliance period for each failure under chapter 100 that falls during the employer's taxable year. An extension to file the employer's income tax return does not extend the date for filing Form 8928.
(2) Due date for filing of return by multiemployer plans or multiple employer health plans. If the person liable for the excise tax is a multiemployer plan or a specified multiple employer health plan, the return required by § 54.6011-2 must be filed on or before the last day of the seventh month following the end of the plan's plan year. The filing of Form 8928 by a plan must reflect the portion of the noncompliance period for each failure under chapter 100 that falls during the plan's plan year.
(c) Returns under section 4980E. Any employer who is liable for the excise tax under section 4980E must report this tax by filing the return required by § 54.6011-2 on or before the 15th day of the fourth month following the calendar year in which the noncomparable contributions were made.
(d) Returns under section 4980G. Any employer who is liable for the excise tax under section 4980E must report this tax by filing the return required by § 54.6011-2 on or before the 15th day of the fourth month following the calendar year in which the noncomparable contributions were made. See Q & A-4 of § 54.4980G-1 for the rules on computation of the excise tax under section 4980G.
(e) Effective/applicability date: The rules in this section are effective for any Form 8928 that is due on or after January 1, 2010.
[T.D. 9457, 74 FR 46000, Sept. 8, 2009]
§ 54.6081-1 Automatic extension of time for filing returns for certain excise taxes under Chapter 43.
(a) In general. An employer, other person or health plan that is required to file a return on Form 8928, “Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code,” will be allowed an automatic 6-month extension of time to file the return after the date prescribed for filing the return if the employer, other person or health plan files an application under this section in accordance with paragraph (b) of this section.
(b) Requirements. To satisfy this paragraph (b), an employer, other person or health plan must—
(1) Submit a complete application on Form 7004, “Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns,” or in any other manner prescribed by the Commissioner;
(2) File the application on or before the date prescribed for filing the return with the Internal Revenue Service office designated in the application's instructions; and
(3) Remit the amount of the properly estimated unpaid tax liability on or before the date prescribed for payment.
(c) No extension of time for the payment of tax. An automatic extension of time for filing a return granted under paragraph (a) of this section will not extend the time for payment of any tax due on such return.
(d) Termination of automatic extension. The Commissioner may terminate an automatic extension at any time by mailing to the employer, other person, or health plan a notice of termination at least 10 days prior to the termination date designated in such notice. The Commissioner must mail the notice of termination to the address shown on the Form 7004 or to the estate or trust's last known address. For further guidance regarding the definition of last known address, see § 301.6212-2 of this chapter.
(e) Penalties. See section 6651 for failure to file a pension excise tax return or failure to pay the amount shown as tax on the return.
(f) Effective/applicability date. This section is applicable for applications for an automatic extension of time to file a return due under chapter 43, filed on or after June 24, 2011.
[T.D. 9531, 76 FR 36999, June 24, 2011]
§ 54.6091-1 Place for filing excise tax returns under section 4980B, 4980D, 4980E, or 4980G.
Effective for any Form 8928 that is due on or after January 1, 2010, the return required by § 54.6011-2 must be filed at the place specified in the forms and instructions provided by the Internal Revenue Service.
[T.D. 9457, 74 FR 46000, Sept. 8, 2009]
§ 54.6107-1 Tax return preparer must furnish copy of return or claims for refund to taxpayer and must retain a copy or record.
(a) In general. A person who is a signing tax return preparer of any return or claim for refund of tax under Chapter 43 of subtitle D of the Internal Revenue Code, shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in § 1.6107-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78458, Dec. 22, 2008]
§ 54.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund filed.
(a) In general. Each tax return or claim for refund of tax under Chapter 43 of subtitle D prepared by one or more signing tax return preparers must include the identifying number of the preparer required by § 1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in § 1.6109-2 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78458, Dec. 22, 2008]
§ 54.6151-1 Time and place for paying of tax shown on returns.
Effective for any Form 8928 that is due on or after January 1, 2010, the tax shown on any return which is imposed under section 4980B, 4980D, 4980E or 4980G shall, without assessment or notice and demand, be paid to the internal revenue officer with whom the return is filed at the time and place for filing such return (determined without regard to any extension of time for filing the return). For provisions relating to the time and place for filing such return, see §§ 54.6071-1 and 54.6091-1.
[T.D. 9457, 74 FR 46000, Sept. 8, 2009]
§ 54.6694-1 Section 6694 penalties applicable to tax return preparer.
(a) In general. For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund of tax under Chapter 43 of subtitle D, see § 1.6694-1 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78458, Dec. 22, 2008]
§ 54.6694-2 Penalties for understatement due to an unreasonable position.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under Chapter 43 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in § 1.6694-2 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78458, Dec. 22, 2008]
§ 54.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct.
(a) In general. A person who is a tax return preparer of any return or claim for refund of excise tax under chapter 43 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in § 1.6694-3 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78458, Dec. 22, 2008]
§ 54.6694-4 Extension of period of collection when tax return preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters.
(a) In general. For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for tax under chapter 43 of subtitle D of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability, and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under § 1.6694-4 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 54.6695-1 Other assessable penalties with respect to the preparation of tax returns for other persons.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under chapter 43 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in § 1.6695-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 54.6696-1 Claims for credit or refund by tax return preparers.
(a) In general. For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for excise tax under chapter 43 of subtitle D of the Internal Revenue Code, the rules under § 1.6696-1 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 54.7701-1 Tax return preparer.
(a) In general. For the definition of a tax return preparer, see § 301.7701-15 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 54.9801-1 Basis and scope.
(a) Statutory basis. This section and sections 54.9801-2 through 54.9801-6, 54.9802-1, 54.9802-2, 54.9802-3T, 54.9811-1, 54.9812-1T, 54.9831-1, and 54.9833-1 (portability sections) implement Chapter 100 of Subtitle K of the Internal Revenue Code of 1986.
(b) Scope. A group health plan or health insurance issuer offering group health insurance coverage may provide greater rights to participants and beneficiaries than those set forth in the portability and market reform sections of this part 54. This part 54 sets forth minimum requirements for group health plans and group health insurance issuers offering group health insurance coverage concerning certain consumer protections of the Health Insurance Portability and Accountability Act (HIPAA), including special enrollment periods and the prohibition against discrimination based on a health factor, as amended by the Patient Protection and Affordable Care Act (Affordable Care Act). Other consumer protection provisions, including other protections provided by the Affordable Care Act and the Mental Health Parity and Addiction Equity Act, are set forth in this part 54.
(c) Similar requirements under the Employee Retirement Income Security Act and the Public Health Service Act. Sections 701, 702, 703, 711, 712, 732, and 733 of the Employee Retirement Income Security Act of 1974 and sections 2701, 2702, 2704, 2705, 2721, and 2791 of the Public Health Service Act impose requirements similar to those imposed under Chapter 100 of Subtitle K with respect to health insurance issuers offering group health insurance coverage. See 29 CFR part 2590 and 45 CFR parts 144, 146, and 148. See also part B of title XXVII of the Public Health Service Act and 45 CFR part 148 for other rules applicable to health insurance offered in the individual market (defined in § 54.9801-2).
[T.D. 9166, 69 FR 78746, Dec. 30, 2004, as amended by T.D. 9299, 71 FR 75056, Dec. 13, 2006; T.D. 9427, 73 FR 62419, Oct. 20, 2008; T.D. 9464, 74 FR 51678, Oct. 7, 2009; T.D. 9656, 79 FR 10303, Feb. 24, 2014]
§ 54.9801-1T Basis and scope (temporary).
(a) Statutory basis. This section and §§ 54.9801-2 through 54.9801-6, 54.9802-1, 54.9802-2, 54.9802-3T, 54.9802-4, 54.9811-1, 54.9812-1, 54.9815-1251, 54.9815-2704, 54.9815-2705, 54.9815-2708, 54.9815-2711, 54.9815-2712, 54.9815-2713, 54.9815-2713A, 54.9815-2714, 54.9815-2715, 54.9815-2715A1, 54.9815-2715A2, 54.9815-2715A3, 54.9815-2719, 54.9815-2715A, 54.9816-1 through 9816-7, 54.9831-1, and 54.9833-1 implement Chapter 100 of Subtitle K of the Internal Revenue Code of 1986.
(b) Scope. A group health plan or health insurance issuer offering group health insurance coverage may provide greater rights to participants and beneficiaries than those set forth in the portability and market reform sections of this part. This part sets forth minimum requirements for group health plans and group health insurance issuers offering group health insurance coverage concerning certain consumer protections of the Health Insurance Portability and Accountability Act (HIPAA), including special enrollment periods and the prohibition against discrimination based on a health factor, as amended by the Patient Protection and Affordable Care Act (Affordable Care Act). Other consumer protection provisions, including other protections provided by the Affordable Care Act, the Mental Health Parity and Addiction Equity Act, and the No Surprises Act are set forth in this part.
(c) Similar requirements under the Employee Retirement Income Security Act and the Public Health Service Act. Sections 701, 702, 703, 711, 712, 716, 717, 732, and 733 of the Employee Retirement Income Security Act of 1974 and sections 2701, 2702, 2704, 2705, 2721, 2791, 2799A-1, and 2799A-2 of the Public Health Service Act impose requirements similar to those imposed under Chapter 100 of Subtitle K with respect to health insurance issuers offering group health insurance coverage. See 29 CFR part 2590 and 45 CFR parts 144, 146, 148, and 149. See also part B of Title XXVII of the Public Health Service Act and 45 CFR parts 148 and 149 for other rules applicable to health insurance offered in the individual market (defined in § 54.9801-2).
[T.D. 9951, 86 FR 36947, July 13, 2021]
§ 54.9801-2 Definitions.
Unless otherwise provided, the definitions in this section govern in applying the provisions of sections 9801 through 9815 and 9831 through 9833.
Affiliation period means a period of time that must expire before health insurance coverage provided by an HMO becomes effective, and during which the HMO is not required to provide benefits.
COBRA definitions:
(1) COBRA means title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.
(2) COBRA continuation coverage means coverage, under a group health plan, that satisfies an applicable COBRA continuation provision.
(3) COBRA continuation provision means section 4980B (other than paragraph (f)(1) of section 4980B insofar as it relates to pediatric vaccines), sections 601-608 of ERISA, or title XXII of the PHS Act.
(4) Exhaustion of COBRA continuation coverage means that an individual's COBRA continuation coverage ceases for any reason other than either failure of the individual to pay premiums on a timely basis, or for cause (such as making a fraudulent claim or an intentional misrepresentation of a material fact in connection with the plan). An individual is considered to have exhausted COBRA continuation coverage if such coverage ceases—
(i) Due to the failure of the employer or other responsible entity to remit premiums on a timely basis;
(ii) When the individual no longer resides, lives, or works in the service area of an HMO or similar program (whether or not within the choice of the individual) and there is no other COBRA continuation coverage available to the individual; or
(iii) When the individual incurs a claim that would meet or exceed a lifetime limit on all benefits and there is no other COBRA continuation coverage available to the individual.
Condition means a medical condition.
Creditable coverage means creditable coverage within the meaning of § 54.9801-4(a).
Dependent means any individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to a participant.
Employee Retirement Income Security Act of 1974 (ERISA) means the Employee Retirement Income Security Act of 1974, as amended (29 U.S.C. 1001 et seq.).
Enroll means to become covered for benefits under a group health plan (that is, when coverage becomes effective), without regard to when the individual may have completed or filed any forms that are required in order to become covered under the plan. For this purpose, an individual who has health coverage under a group health plan is enrolled in the plan regardless of whether the individual elects coverage, the individual is a dependent who becomes covered as a result of an election by a participant, or the individual becomes covered without an election.
Enrollment date means the first day of coverage or, if there is a waiting period, the first day of the waiting period. If an individual receiving benefits under a group health plan changes benefit packages, or if the plan changes group health insurance issuers, the individual's enrollment date does not change.
Excepted benefits means the benefits described as excepted in § 54.9831(c).
First day of coverage means, in the case of an individual covered for benefits under a group health plan, the first day of coverage under the plan and, in the case of an individual covered by health insurance coverage in the individual market, the first day of coverage under the policy or contract.
Genetic information has the meaning given the term in § 54.9802-3T(a)(3).
Group health insurance coverage means health insurance coverage offered in connection with a group health plan. Individual health insurance coverage reimbursed by the arrangements described in 29 CFR 2510.3-1(l) is not offered in connection with a group health plan, and is not group health insurance coverage, provided all the conditions in 29 CFR 2510.3-1(l) are satisfied.
Group health plan or plan means a group health plan within the meaning of § 54.9831-1(a).
Group market means the market for health insurance coverage offered in connection with a group health plan. (However, certain very small plans may be treated as being in the individual market, rather than the group market; see the definition of individual market in this section.)
Health insurance coverage means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or HMO contract offered by a health insurance issuer. Health insurance coverage includes group health insurance coverage, individual health insurance coverage, and short-term, limited-duration insurance. However, benefits described in § 54.9831(c)(2) are not treated as benefits consisting of medical care.
Health insurance issuer or issuer means an insurance company, insurance service, or insurance organization (including an HMO) that is required to be licensed to engage in the business of insurance in a State and that is subject to State law that regulates insurance (within the meaning of section 514(b)(2) of ERISA). Such term does not include a group health plan.
Health maintenance organization or HMO means—
(1) A federally qualified health maintenance organization (as defined in section 1301(a) of the PHS Act);
(2) An organization recognized under State law as a health maintenance organization; or
(3) A similar organization regulated under State law for solvency in the same manner and to the same extent as such a health maintenance organization.
Individual health insurance coverage means health insurance coverage offered to individuals in the individual market, but does not include short-term, limited-duration insurance. Individual health insurance coverage can include dependent coverage.
Individual market means the market for health insurance coverage offered to individuals other than in connection with a group health plan. Unless a State elects otherwise in accordance with section 2791(e)(1)(B)(ii) of the PHS Act, such term also includes coverage offered in connection with a group health plan that has fewer than two participants who are current employees on the first day of the plan year.
Issuer means a health insurance issuer.
Late enrollee means an individual whose enrollment in a plan is a late enrollment.
Late enrollment means enrollment of an individual under a group health plan other than on the earliest date on which coverage can become effective for the individual under the terms of the plan; or through special enrollment. (For rules relating to special enrollment, see § 54.9801-6.) If an individual ceases to be eligible for coverage under a plan, and then subsequently becomes eligible for coverage under the plan, only the individual's most recent period of eligibility is taken into account in determining whether the individual is a late enrollee under the plan with respect to the most recent period of coverage. Similar rules apply if an individual again becomes eligible for coverage following a suspension of coverage that applied generally under the plan.
Medical care has the meaning given such term by section 213(d), determined without regard to section 213(d)(1)(C) and so much of section 213(d)(1)(D) as relates to qualified long-term care insurance.
Medical condition or condition means any condition, whether physical or mental, including, but not limited to, any condition resulting from illness, injury (whether or not the injury is accidental), pregnancy, or congenital malformation. However, genetic information is not a condition.
Participant means participant within the meaning of section 3(7) of ERISA.
Placement, or being placed, for adoption means the assumption and retention of a legal obligation for total or partial support of a child by a person with whom the child has been placed in anticipation of the child's adoption. The child's placement for adoption with such person ends upon the termination of such legal obligation.
Plan year means the year that is designated as the plan year in the plan document of a group health plan, except that if the plan document does not designate a plan year or if there is no plan document, the plan year is—
(1) The deductible or limit year used under the plan;
(2) If the plan does not impose deductibles or limits on a yearly basis, then the plan year is the policy year;
(3) If the plan does not impose deductibles or limits on a yearly basis, and either the plan is not insured or the insurance policy is not renewed on an annual basis, then the plan year is the employer's taxable year; or
(4) In any other case, the plan year is the calendar year.
Preexisting condition exclusion means a limitation or exclusion of benefits (including a denial of coverage) based on the fact that the condition was present before the effective date of coverage (or if coverage is denied, the date of the denial) under a group health plan or group or individual health insurance coverage (or other coverage provided to Federally eligible individuals pursuant to 45 CFR part 148), whether or not any medical advice, diagnosis, care, or treatment was recommended or received before that day. A preexisting condition exclusion includes any limitation or exclusion of benefits (including a denial of coverage) applicable to an individual as a result of information relating to an individual's health status before the individual's effective date of coverage (or if coverage is denied, the date of the denial) under a group health plan, or group or individual health insurance coverage (or other coverage provided to Federally eligible individuals pursuant to 45 CFR part 148), such as a condition identified as a result of a pre-enrollment questionnaire or physical examination given to the individual, or review of medical records relating to the pre-enrollment period.
Public health plan means public health plan within the meaning of § 54.9801-4(a)(1)(ix).
Public Health Service Act (PHS Act) means the Public Health Service Act (42 U.S.C. 201, et seq.).
Short-term, limited-duration insurance means health insurance coverage provided pursuant to a policy, certificate, or contract of insurance with an issuer that meets the conditions of paragraph (1) of this definition.
(1) Short-term, limited-duration insurance means health insurance coverage provided pursuant to a policy, certificate, or contract of insurance with an issuer that:
(i) Has an expiration date specified in the policy, certificate, or contract of insurance that is no more than 3 months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than 4 months in total. For purposes of this paragraph (1)(i), a renewal or extension includes the term of a new short-term, limited-duration insurance policy, certificate, or contract of insurance issued by the same issuer, or if the issuer is a member of a controlled group, any other issuer that is a member of such controlled group, to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance; and
(ii) Displays prominently on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll (or reenroll) in the coverage, in at least 14-point font, the language in the following notice:
(2) For purposes of paragraph (1)(i) of this definition, the term “controlled group” means any group treated as a single employer under section 52(a), 52(b), 414(m), or 414(o) of the Code.
(3) If any provision of this definition is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of the definition and shall not affect the remainder thereof.
Significant break in coverage means a significant break in coverage within the meaning of § 54.9801-4(b)(2)(iii).
Special enrollment means enrollment in a group health plan under the rights described in § 54.9801-6 or in group health insurance coverage under the rights described in 29 CFR 2590.701-6 or 45 CFR 146.117.
State health benefits risk pool means a State health benefits risk pool within the meaning of § 54.9801-4(a)(1)(vii).
Travel insurance means insurance coverage for personal risks incident to planned travel, which may include, but is not limited to, interruption or cancellation of trip or event, loss of baggage or personal effects, damages to accommodations or rental vehicles, and sickness, accident, disability, or death occurring during travel, provided that the health benefits are not offered on a stand-alone basis and are incidental to other coverage. For this purpose, the term travel insurance does not include major medical plans that provide comprehensive medical protection for travelers with trips lasting 6 months or longer, including, for example, those working overseas as an expatriate or military personnel being deployed.
Waiting period means waiting period within the meaning of § 54.9815-2708(b).
[T.D. 9166, 69 FR 78746, Dec. 30, 2004, as amended by T.D. 9299, 71 FR 75056, Dec. 13, 2006; T.D. 9427, 73 FR 62420, Oct. 20, 2008; T.D. 9464, 74 FR 51678, Oct. 7, 2009; T.D. 9491, 75 FR 37222, June 28, 2010; T.D. 9656, 79 FR 10304, Feb. 24, 2014; T.D. 9744, 80 FR 72238, Nov. 18, 2015; T.D. 9791, 81 FR 75324, Oct. 31, 2016; T.D. 9837, 83 FR 38241, Aug. 3, 2018; T.D. 9867, 84 FR 28987, June 20, 2019; T.D. 9990, 89 FR 23410, Apr. 3, 2024]
§ 54.9801-2T Definitions (temporary).
Unless otherwise provided, the definitions in this section and § 54.9801-2 govern in applying the provisions of sections 9801 through 9825 and 9831 through 9834.
Affiliation period means a period of time that must expire before health insurance coverage provided by an HMO becomes effective, and during which the HMO is not required to provide benefits.
COBRA definitions:
(1) COBRA means title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.
(2) COBRA continuation coverage means coverage, under a group health plan, that satisfies an applicable COBRA continuation provision.
(3) COBRA continuation provision means section 4980B (other than paragraph (f)(1) of section 4980B insofar as it relates to pediatric vaccines), sections 601-608 of ERISA, or title XXII of the PHS Act.
(4) Exhaustion of COBRA continuation coverage means that an individual's COBRA continuation coverage ceases for any reason other than either failure of the individual to pay premiums on a timely basis, or for cause (such as making a fraudulent claim or an intentional misrepresentation of a material fact in connection with the plan). An individual is considered to have exhausted COBRA continuation coverage if such coverage ceases—
(i) Due to the failure of the employer or other responsible entity to remit premiums on a timely basis;
(ii) When the individual no longer resides, lives, or works in the service area of an HMO or similar program (whether or not within the choice of the individual) and there is no other COBRA continuation coverage available to the individual; or
(iii) When the individual incurs a claim that would meet or exceed a lifetime limit on all benefits and there is no other COBRA continuation coverage available to the individual.
Condition means a medical condition.
Creditable coverage means creditable coverage within the meaning of § 54.9801-4(a).
Dependent means any individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to a participant.
Employee Retirement Income Security Act of 1974 (ERISA) means the Employee Retirement Income Security Act of 1974, as amended (29 U.S.C. 1001 et seq.).
Enroll means to become covered for benefits under a group health plan (that is, when coverage becomes effective), without regard to when the individual may have completed or filed any forms that are required in order to become covered under the plan. For this purpose, an individual who has health coverage under a group health plan is enrolled in the plan regardless of whether the individual elects coverage, the individual is a dependent who becomes covered as a result of an election by a participant, or the individual becomes covered without an election.
Enrollment date means the first day of coverage or, if there is a waiting period, the first day of the waiting period. If an individual receiving benefits under a group health plan changes benefit packages, or if the plan changes group health insurance issuers, the individual's enrollment date does not change.
Excepted benefits means the benefits described as excepted in § 54.9831(c).
First day of coverage means, in the case of an individual covered for benefits under a group health plan, the first day of coverage under the plan and, in the case of an individual covered by health insurance coverage in the individual market, the first day of coverage under the policy or contract.
Genetic information has the meaning given the term in § 54.9802-3T(a)(3).
Group health insurance coverage means health insurance coverage offered in connection with a group health plan. Individual health insurance coverage reimbursed by the arrangements described in 29 CFR 2510.3-1(l) is not offered in connection with a group health plan, and is not group health insurance coverage, provided all the conditions in 29 CFR 2510.3-1(l) are satisfied.
Group health plan or plan means a group health plan within the meaning of § 54.9831-1(a).
Group market means the market for health insurance coverage offered in connection with a group health plan. (However, certain very small plans may be treated as being in the individual market, rather than the group market; see the definition of individual market in this section.)
Health insurance coverage means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or HMO contract offered by a health insurance issuer. Health insurance coverage includes group health insurance coverage, individual health insurance coverage, and short-term, limited-duration insurance. However, benefits described in § 54.9831(c)(2) are not treated as benefits consisting of medical care.
Health insurance issuer or issuer means an insurance company, insurance service, or insurance organization (including an HMO) that is required to be licensed to engage in the business of insurance in a State and that is subject to State law that regulates insurance (within the meaning of section 514(b)(2) of ERISA). Such term does not include a group health plan.
Health maintenance organization or HMO means—
(1) A federally qualified health maintenance organization (as defined in section 1301(a) of the PHS Act);
(2) An organization recognized under State law as a health maintenance organization; or
(3) A similar organization regulated under State law for solvency in the same manner and to the same extent as such a health maintenance organization.
Individual health insurance coverage means health insurance coverage offered to individuals in the individual market, but does not include short-term, limited-duration insurance. Individual health insurance coverage can include dependent coverage.
Individual market means the market for health insurance coverage offered to individuals other than in connection with a group health plan. Unless a State elects otherwise in accordance with section 2791(e)(1)(B)(ii) of the PHS Act, such term also includes coverage offered in connection with a group health plan that has fewer than two participants who are current employees on the first day of the plan year.
Issuer means a health insurance issuer.
Late enrollee means an individual whose enrollment in a plan is a late enrollment.
Late enrollment means enrollment of an individual under a group health plan other than on the earliest date on which coverage can become effective for the individual under the terms of the plan; or through special enrollment. (For rules relating to special enrollment, see § 54.9801-6.) If an individual ceases to be eligible for coverage under a plan, and then subsequently becomes eligible for coverage under the plan, only the individual's most recent period of eligibility is taken into account in determining whether the individual is a late enrollee under the plan with respect to the most recent period of coverage. Similar rules apply if an individual again becomes eligible for coverage following a suspension of coverage that applied generally under the plan.
Medical care has the meaning given such term by section 213(d), determined without regard to section 213(d)(1)(C) and so much of section 213(d)(1)(D) as relates to qualified long-term care insurance.
Medical condition or condition means any condition, whether physical or mental, including, but not limited to, any condition resulting from illness, injury (whether or not the injury is accidental), pregnancy, or congenital malformation. However, genetic information is not a condition.
Participant means participant within the meaning of section 3(7) of ERISA.
Placement, or being placed, for adoption means the assumption and retention of a legal obligation for total or partial support of a child by a person with whom the child has been placed in anticipation of the child's adoption. The child's placement for adoption with such person ends upon the termination of such legal obligation.
Plan year means the year that is designated as the plan year in the plan document of a group health plan, except that if the plan document does not designate a plan year or if there is no plan document, the plan year is—
(1) The deductible or limit year used under the plan;
(2) If the plan does not impose deductibles or limits on a yearly basis, then the plan year is the policy year;
(3) If the plan does not impose deductibles or limits on a yearly basis, and either the plan is not insured or the insurance policy is not renewed on an annual basis, then the plan year is the employer's taxable year; or
(4) In any other case, the plan year is the calendar year.
Preexisting condition exclusion means a limitation or exclusion of benefits (including a denial of coverage) based on the fact that the condition was present before the effective date of coverage (or if coverage is denied, the date of the denial) under a group health plan or group or individual health insurance coverage (or other coverage provided to federally eligible individuals pursuant to 45 CFR part 148), whether or not any medical advice, diagnosis, care, or treatment was recommended or received before that day. A preexisting condition exclusion includes any limitation or exclusion of benefits (including a denial of coverage) applicable to an individual as a result of information relating to an individual's health status before the individual's effective date of coverage (or if coverage is denied, the date of the denial) under a group health plan, or group or individual health insurance coverage (or other coverage provided to federally eligible individuals pursuant to 45 CFR part 148), such as a condition identified as a result of a pre-enrollment questionnaire or physical examination given to the individual, or review of medical records relating to the pre-enrollment period.
Public health plan means public health plan within the meaning of § 54.9801-4(a)(1)(ix).
Public Health Service Act (PHS Act) means the Public Health Service Act (42 U.S.C. 201, et seq.).
Short-term, limited-duration insurance means health insurance coverage provided pursuant to a contract with an issuer that:
(1) Has an expiration date specified in the contract that is less than 12 months after the original effective date of the contract and, taking into account renewals or extensions, has a duration of no longer than 36 months in total;
(2) With respect to policies having a coverage start date before January 1, 2019, displays prominently in the contract and in any application materials provided in connection with enrollment in such coverage in at least 14 point type the language in the following Notice 1, excluding the heading “Notice 1,” with any additional information required by applicable state law:
Notice 1
This coverage is not required to comply with certain federal market requirements for health insurance, principally those contained in the Affordable Care Act. Be sure to check your policy carefully to make sure you are aware of any exclusions or limitations regarding coverage of preexisting conditions or health benefits (such as hospitalization, emergency services, maternity care, preventive care, prescription drugs, and mental health and substance use disorder services). Your policy might also have lifetime and/or annual dollar limits on health benefits. If this coverage expires or you lose eligibility for this coverage, you might have to wait until an open enrollment period to get other health insurance coverage. Also, this coverage is not “minimum essential coverage.” If you don't have minimum essential coverage for any month in 2018, you may have to make a payment when you file your tax return unless you qualify for an exemption from the requirement that you have health coverage for that month.
(3) With respect to policies having a coverage start date on or after January 1, 2019, displays prominently in the contract and in any application materials provided in connection with enrollment in such coverage in at least 14 point type the language in the following Notice 2, excluding the heading “Notice 2,” with any additional information required by applicable state law:
Notice 2
This coverage is not required to comply with certain federal market requirements for health insurance, principally those contained in the Affordable Care Act. Be sure to check your policy carefully to make sure you are aware of any exclusions or limitations regarding coverage of preexisting conditions or health benefits (such as hospitalization, emergency services, maternity care, preventive care, prescription drugs, and mental health and substance use disorder services). Your policy might also have lifetime and/or annual dollar limits on health benefits. If this coverage expires or you lose eligibility for this coverage, you might have to wait until an open enrollment period to get other health insurance coverage.
(4) If a court holds the 36-month maximum duration provision set forth in paragraph (1) of this definition or its applicability to any person or circumstances invalid, the remaining provisions and their applicability to other people or circumstances shall continue in effect.
Significant break in coverage means a significant break in coverage within the meaning of § 54.9801-4(b)(2)(iii).
Special enrollment means enrollment in a group health plan under the rights described in § 54.9801-6 or in group health insurance coverage under the rights described in 29 CFR 2590.701-6 or 45 CFR 146.117.
State health benefits risk pool means a State health benefits risk pool within the meaning of § 54.9801-4(a)(1)(vii).
Travel insurance means insurance coverage for personal risks incident to planned travel, which may include, but is not limited to, interruption or cancellation of trip or event, loss of baggage or personal effects, damages to accommodations or rental vehicles, and sickness, accident, disability, or death occurring during travel, provided that the health benefits are not offered on a stand-alone basis and are incidental to other coverage. For this purpose, the term travel insurance does not include major medical plans that provide comprehensive medical protection for travelers with trips lasting 6 months or longer, including, for example, those working overseas as an expatriate or military personnel being deployed.
Waiting period means waiting period within the meaning of § 54.9815-2708(b).
[T.D. 9951, 86 FR 36948, July 13, 2021]
§ 54.9801-3 Limitations on preexisting condition exclusion period.
(a) Preexisting condition exclusion defined. (1) A preexisting condition exclusion means a preexisting condition exclusion within the meaning of § 54.9801-2.
(2) Examples. The rules of this paragraph (a)(1) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan provides benefits solely through an insurance policy offered by Issuer S. At the expiration of the policy, the plan switches coverage to a policy offered by Issuer T. Issuer T's policy excludes benefits for any prosthesis if the body part was lost before the effective date of coverage under the policy.
(ii) Conclusion. In this Example 1, the exclusion of benefits for any prosthesis if the body part was lost before the effective date of coverage is a preexisting condition exclusion because it operates to exclude benefits for a condition based on the fact that the condition was present before the effective date of coverage under the policy. The exclusion of benefits, therefore, is prohibited.
Example 2. (i) Facts. A group health plan provides coverage for cosmetic surgery in cases of accidental injury, but only if the injury occurred while the individual was covered under the plan.
(ii) Conclusion. In this Example 2, the plan provision excluding cosmetic surgery benefits for individuals injured before enrolling in the plan is a preexisting condition exclusion because it operates to exclude benefits relating to a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is prohibited.
Example 3. (i) Facts. A group health plan provides coverage for the treatment of diabetes, generally not subject to any requirement to obtain an approval for a treatment plan. However, if an individual was diagnosed with diabetes before the effective date of coverage under the plan, diabetes coverage is subject to a requirement to obtain approval of a treatment plan in advance.
(ii) Conclusion. In this Example 3, the requirement to obtain advance approval of a treatment plan is a preexisting condition exclusion because it limits benefits for a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is prohibited.
Example 4. (i) Facts. A group health plan provides coverage for three infertility treatments. The plan counts against the three-treatment limit benefits provided under prior health coverage.
(ii) Conclusion. In this Example 4, counting benefits for a specific condition provided under prior health coverage against a treatment limit for that condition is a preexisting condition exclusion because it operates to limit benefits for a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is prohibited.
Example 5. (i) Facts. When an individual's coverage begins under a group health plan, the individual generally becomes eligible for all benefits. However, benefits for pregnancy are not available until the individual has been covered under the plan for 12 months.
(ii) Conclusion. In this Example 5, the requirement to be covered under the plan for 12 months to be eligible for pregnancy benefits is a subterfuge for a preexisting condition exclusion because it is designed to exclude benefits for a condition (pregnancy) that arose before the effective date of coverage. The plan provision, therefore, is prohibited.
Example 6. (i) Facts. A group health plan provides coverage for medically necessary items and services, generally including treatment of heart conditions. However, the plan does not cover those same items and services when used for treatment of congenital heart conditions.
(ii) Conclusion. In this Example 6, the exclusion of coverage for treatment of congenital heart conditions is a preexisting condition exclusion because it operates to exclude benefits relating to a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is prohibited.
Example 7. (i) Facts. A group health plan generally provides coverage for medically necessary items and services. However, the plan excludes coverage for the treatment of cleft palate.
(ii) Conclusion. In this Example 7, the exclusion of coverage for treatment of cleft palate is not a preexisting condition exclusion because the exclusion applies regardless of when the condition arose relative to the effective date of coverage. The plan provision, therefore, is not prohibited. (But see 45 CFR 147.150, which may require coverage of cleft palate as an essential health benefit for health insurance coverage in the individual or small group market, depending on the essential health benefits benchmark plan as defined in 45 CFR 156.20).
Example 8. (i) Facts. A group health plan provides coverage for treatment of cleft palate, but only if the individual being treated has been continuously covered under the plan from the date of birth.
(ii) Conclusion. In this Example 8, the exclusion of coverage for treatment of cleft palate for individuals who have not been covered under the plan from the date of birth operates to exclude benefits in relation to a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is prohibited.
(b) General rules. See section 2704 of the Public Health Service Act, incorporated into section 9815 of the Code, and its implementing regulations for rules prohibiting the imposition of a preexisting condition exclusion.
[T.D. 9166, 69 FR 78746, Dec. 30, 2004, as amended by T.D. 9491, 75 FR 37223, June 28, 2010; T.D. 9656, 79 FR 10304, Feb. 24, 2014; T.D. 9744, 80 FR 72238, Nov. 18, 2015]
§ 54.9801-4 Rules relating to creditable coverage.
(a) General rules—(1) Creditable coverage. For purposes of this section, except as provided in paragraph (a)(2) of this section, the term creditable coverage means coverage of an individual under any of the following:
(i) A group health plan as defined in § 54.9831-1(a).
(ii) Health insurance coverage as defined in § 54.9801-2 (whether or not the entity offering the coverage is subject to Chapter 100 of Subtitle K, and without regard to whether the coverage is offered in the group market, the individual market, or otherwise).
(iii) Part A or B of title XVIII of the Social Security Act (Medicare).
(iv) Title XIX of the Social Security Act (Medicaid), other than coverage consisting solely of benefits under section 1928 of the Social Security Act (the program for distribution of pediatric vaccines).
(v) Title 10 U.S.C. Chapter 55 (medical and dental care for members and certain former members of the uniformed services, and for their dependents; for purposes of title 10 U.S.C. Chapter 55, uniformed services means the armed forces and the Commissioned Corps of the National Oceanic and Atmospheric Administration and of the Public Health Service).
(vi) A medical care program of the Indian Health Service or of a tribal organization.
(vii) A State health benefits risk pool. For purposes of this section, a State health benefits risk pool means—
(A) An organization qualifying under section 501(c)(26);
(B) A qualified high risk pool described in section 2744(c)(2) of the PHS Act; or
(C) Any other arrangement sponsored by a State, the membership composition of which is specified by the State and which is established and maintained primarily to provide health coverage for individuals who are residents of such State and who, by reason of the existence or history of a medical condition—
(1) Are unable to acquire medical care coverage for such condition through insurance or from an HMO, or
(2) Are able to acquire such coverage only at a rate which is substantially in excess of the rate for such coverage through the membership organization.
(viii) A health plan offered under title 5 U.S.C. Chapter 89 (the Federal Employees Health Benefits Program).
(ix) A public health plan. For purposes of this section, a public health plan means any plan established or maintained by a State, the U.S. government, a foreign country, or any political subdivision of a State, the U.S. government, or a foreign country that provides health coverage to individuals who are enrolled in the plan.
(x) A health benefit plan under section 5(e) of the Peace Corps Act (22 U.S.C. 2504(e)).
(xi) Title XXI of the Social Security Act (State Children's Health Insurance Program).
(2) Excluded coverage. Creditable coverage does not include coverage of solely excepted benefits (described in § 54.9831-1).
(b) Counting creditable coverage rules superseded by prohibition on preexisting condition exclusion. See section 2704 of the Public Health Service Act, incorporated into section 9815 of the Code, and its implementing regulations for rules prohibiting the imposition of a preexisting condition exclusion.
[T.D. 9166, 69 FR 78746, Dec. 30, 2004, as amended by T.D. 9656, 79 FR 10304, Feb. 24, 2014]
§ 54.9801-5 Evidence of creditable coverage.
(a) In general. The rules for providing certificates of creditable coverage and demonstrating creditable coverage have been superseded by the prohibition on preexisting condition exclusions. See section 2704 of the Public Health Service Act, incorporated into section 9815 of the Code, and its implementing regulations for rules prohibiting the imposition of a preexisting condition exclusion.
(b) Applicability. The provisions of this section apply beginning December 31, 2014.
[T.D. 9656, 79 FR 10305, Feb. 24, 2014]
§ 54.9801-6 Special enrollment periods.
(a) Special enrollment for certain individuals who lose coverage—(1) In general. A group health plan is required to permit current employees and dependents (as defined in § 54.9801-2) who are described in paragraph (a)(2) of this section to enroll for coverage under the terms of the plan if the conditions in paragraph (a)(3) of this section are satisfied. The special enrollment rights under this paragraph (a) apply without regard to the dates on which an individual would otherwise be able to enroll under the plan. (See section 701(f)(1) of ERISA and section 2701(f)(1) of the PHS Act, under which this obligation is also imposed on a health insurance issuer offering group health insurance coverage.)
(2) Individuals eligible for special enrollment—(i) When employee loses coverage. A current employee and any dependents (including the employee's spouse) each are eligible for special enrollment in any benefit package under the plan (subject to plan eligibility rules conditioning dependent enrollment on enrollment of the employee) if—
(A) The employee and the dependents are otherwise eligible to enroll in the benefit package;
(B) When coverage under the plan was previously offered, the employee had coverage under any group health plan or health insurance coverage; and
(C) The employee satisfies the conditions of paragraph (a)(3)(i), (ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) of this section.
(ii) When dependent loses coverage—(A) A dependent of a current employee (including the employee's spouse) and the employee each are eligible for special enrollment in any benefit package under the plan (subject to plan eligibility rules conditioning dependent enrollment on enrollment of the employee) if—
(1) The dependent and the employee are otherwise eligible to enroll in the benefit package;
(2) When coverage under the plan was previously offered, the dependent had coverage under any group health plan or health insurance coverage; and
(3) The dependent satisfies the conditions of paragraph (a)(3)(i), (ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) of this section.
(B) However, the plan is not required to enroll any other dependent unless that dependent satisfies the criteria of this paragraph (a)(2)(ii), or the employee satisfies the criteria of paragraph (a)(2)(i) of this section.
(iii) Examples. The rules of this paragraph (a)(2) are illustrated by the following examples:
Example 1. (i) Facts. Individual A works for Employer X. A, A's spouse, and A's dependent children are eligible but not enrolled for coverage under X's group health plan. A's spouse works for Employer Y and at the time coverage was offered under X's plan, A was enrolled in coverage under Y's plan. Then, A loses eligibility for coverage under Y's plan.
(ii) Conclusion. In this Example 1, because A satisfies the conditions for special enrollment under paragraph (a)(2)(i) of this section, A, A's spouse, and A's dependent children are eligible for special enrollment under X's plan.
Example 2. (i) Facts. Individual A and A's spouse are eligible but not enrolled for coverage under Group Health Plan P maintained by A's employer. When A was first presented with an opportunity to enroll A and A's spouse, they did not have other coverage. Later, A and A's spouse enroll in Group Health Plan Q maintained by the employer of A's spouse. During a subsequent open enrollment period in P, A and A's spouse did not enroll because of their coverage under Q. They then lose eligibility for coverage under Q.
(ii) Conclusion. In this Example 2, because A and A's spouse were covered under Q when they did not enroll in P during open enrollment, they satisfy the conditions for special enrollment under paragraphs (a)(2)(i) and (ii) of this section. Consequently, A and A's spouse are eligible for special enrollment under P.
Example 3. (i) Facts. Individual B works for Employer X. B and B's spouse are eligible but not enrolled for coverage under X's group health plan. B's spouse works for Employer Y and at the time coverage was offered under X's plan, B's spouse was enrolled in self-only coverage under Y's group health plan. Then, B's spouse loses eligibility for coverage under Y's plan.
(ii) Conclusion. In this Example 3, because B's spouse satisfies the conditions for special enrollment under paragraph (a)(2)(ii) of this section, both B and B's spouse are eligible for special enrollment under X's plan.
Example 4. (i) Facts. Individual A works for Employer X. X maintains a group health plan with two benefit packages—an HMO option and an indemnity option. Self-only and family coverage are available under both options. A enrolls for self-only coverage in the HMO option. A's spouse works for Employer Y and was enrolled for self-only coverage under Y's plan at the time coverage was offered under X's plan. Then, A's spouse loses coverage under Y's plan. A requests special enrollment for A and A's spouse under the plan's indemnity option.
(ii) Conclusion. In this Example 4, because A's spouse satisfies the conditions for special enrollment under paragraph (a)(2)(ii) of this section, both A and A's spouse can enroll in either benefit package under X's plan. Therefore, if A requests enrollment in accordance with the requirements of this section, the plan must allow A and A's spouse to enroll in the indemnity option.
(3) Conditions for special enrollment—(i) Loss of eligibility for coverage. In the case of an employee or dependent who has coverage that is not COBRA continuation coverage, the conditions of this paragraph (a)(3)(i) are satisfied at the time the coverage is terminated as a result of loss of eligibility (regardless of whether the individual is eligible for or elects COBRA continuation coverage). Loss of eligibility under this paragraph (a)(3)(i) does not include a loss due to the failure of the employee or dependent to pay premiums on a timely basis or termination of coverage for cause (such as making a fraudulent claim or an intentional misrepresentation of a material fact in connection with the plan). Loss of eligibility for coverage under this paragraph (a)(3)(i) includes (but is not limited to)—
(A) Loss of eligibility for coverage as a result of legal separation, divorce, cessation of dependent status (such as attaining the maximum age to be eligible as a dependent child under the plan), death of an employee, termination of employment, reduction in the number of hours of employment, and any loss of eligibility for coverage after a period that is measured by reference to any of the foregoing;
(B) In the case of coverage offered through an HMO, or other arrangement, in the individual market that does not provide benefits to individuals who no longer reside, live, or work in a service area, loss of coverage because an individual no longer resides, lives, or works in the service area (whether or not within the choice of the individual);
(C) In the case of coverage offered through an HMO, or other arrangement, in the group market that does not provide benefits to individuals who no longer reside, live, or work in a service area, loss of coverage because an individual no longer resides, lives, or works in the service area (whether or not within the choice of the individual), and no other benefit package is available to the individual; and
(D) A situation in which a plan no longer offers any benefits to the class of similarly situated individuals (as described in § 54.9802-1(d)) that includes the individual.
(ii) Termination of employer contributions. In the case of an employee or dependent who has coverage that is not COBRA continuation coverage, the conditions of this paragraph (a)(3)(ii) are satisfied at the time employer contributions towards the employee's or dependent's coverage terminate. Employer contributions include contributions by any current or former employer that was contributing to coverage for the employee or dependent.
(iii) Exhaustion of COBRA continuation coverage. In the case of an employee or dependent who has coverage that is COBRA continuation coverage, the conditions of this paragraph (a)(3)(iii) are satisfied at the time the COBRA continuation coverage is exhausted. For purposes of this paragraph (a)(3)(iii), an individual who satisfies the conditions for special enrollment of paragraph (a)(3)(i) of this section, does not enroll, and instead elects and exhausts COBRA continuation coverage satisfies the conditions of this paragraph (a)(3)(iii). (Exhaustion of COBRA continuation coverage is defined in § 54.9801-2.)
(iv) Written statement. A plan may require an employee declining coverage (for the employee or any dependent of the employee) to state in writing whether the coverage is being declined due to other health coverage only if, at or before the time the employee declines coverage, the employee is provided with notice of the requirement to provide the statement (and the consequences of the employee's failure to provide the statement). If a plan requires such a statement, and an employee does not provide it, the plan is not required to provide special enrollment to the employee or any dependent of the employee under this paragraph (a)(3). A plan must treat an employee as having satisfied the plan requirement permitted under this paragraph (a)(3)(iv) if the employee provides a written statement that coverage was being declined because the employee or dependent had other coverage; a plan cannot require anything more for the employee to satisfy the plan's requirement to provide a written statement. (For example, the plan cannot require that the statement be notarized.)
(v) The rules of this paragraph (a)(3) are illustrated by the following examples:
Example 1. (i) Facts. Individual D enrolls in a group health plan maintained by Employer Y. At the time D enrolls, Y pays 70 percent of the cost of employee coverage and D pays the rest. Y announces that beginning January 1, Y will no longer make employer contributions towards the coverage. Employees may maintain coverage, however, if they pay the total cost of the coverage.
(ii) Conclusion. In this Example 1, employer contributions towards D's coverage ceased on January 1 and the conditions of paragraph (a)(3)(ii) of this section are satisfied on this date (regardless of whether D elects to pay the total cost and continue coverage under Y's plan).
Example 2. (i) Facts. A group health plan provides coverage through two options—Option 1 and Option 2. Employees can enroll in either option only within 30 days of hire or on January 1 of each year. Employee A is eligible for both options and enrolls in Option 1. Effective July 1 the plan terminates coverage under Option 1 and the plan does not create an immediate open enrollment opportunity into Option 2.
(ii) Conclusion. In this Example 2, A has experienced a loss of eligibility for coverage that satisfies paragraph (a)(3)(i) of this section, and has satisfied the other conditions for special enrollment under paragraph (a)(2)(i) of this section. Therefore, if A satisfies the other conditions of this paragraph (a), the plan must permit A to enroll in Option 2 as a special enrollee. (A may also be eligible to enroll in another group health plan, such as a plan maintained by the employer of A's spouse, as a special enrollee.) The outcome would be the same if Option 1 was terminated by an issuer and the plan made no other coverage available to A.
Example 3. (i) Facts. Individual C is covered under a group health plan maintained by Employer X. While covered under X's plan, C was eligible for but did not enroll in a plan maintained by Employer Z, the employer of C's spouse. C terminates employment with X and loses eligibility for coverage under X's plan. C has a special enrollment right to enroll in Z's plan, but C instead elects COBRA continuation coverage under X's plan. C exhausts COBRA continuation coverage under X's plan and requests special enrollment in Z's plan.
(ii) Conclusion. In this Example 3, C has satisfied the conditions for special enrollment under paragraph (a)(3)(iii) of this section, and has satisfied the other conditions for special enrollment under paragraph (a)(2)(i) of this section. The special enrollment right that C had into Z's plan immediately after the loss of eligibility for coverage under X's plan was an offer of coverage under Z's plan. When C later exhausts COBRA coverage under X's plan, C has a second special enrollment right in Z's plan.
(4) Applying for special enrollment and effective date of coverage. (i) A plan or issuer must allow an employee a period of at least 30 days after an event described in paragraph (a)(3) of this section to request enrollment (for the employee or the employee's dependent).
(ii) Coverage must begin no later than the first day of the first calendar month beginning after the date the plan or issuer receives the request for special enrollment.
(b) Special enrollment with respect to certain dependent beneficiaries—(1) In general. A group health plan that makes coverage available with respect to dependents is required to permit individuals described in paragraph (b)(2) of this section to be enrolled for coverage in a benefit package under the terms of the plan. Paragraph (b)(3) of this section describes the required special enrollment period and the date by which coverage must begin. The special enrollment rights under this paragraph (b) apply without regard to the dates on which an individual would otherwise be able to enroll under the plan. (See 29 CFR 2590.701-6(b) and 45 CFR 146.117(b), under which this obligation is also imposed on a health insurance issuer offering group health insurance coverage.)
(2) Individuals eligible for special enrollment. An individual is described in this paragraph (b)(2) if the individual is otherwise eligible for coverage in a benefit package under the plan and if the individual is described in paragraph (b)(2)(i), (ii), (iii), (iv), (v), or (vi) of this section.
(i) Current employee only. A current employee is described in this paragraph (b)(2)(i) if a person becomes a dependent of the individual through marriage, birth, adoption, or placement for adoption.
(ii) Spouse of a participant only. An individual is described in this paragraph (b)(2)(ii) if either—
(A) The individual becomes the spouse of a participant; or
(B) The individual is a spouse of a participant and a child becomes a dependent of the participant through birth, adoption, or placement for adoption.
(iii) Current employee and spouse. A current employee and an individual who is or becomes a spouse of such an employee, are described in this paragraph (b)(2)(iii) if either—
(A) The employee and the spouse become married; or
(B) The employee and spouse are married and a child becomes a dependent of the employee through birth, adoption, or placement for adoption.
(iv) Dependent of a participant only. An individual is described in this paragraph (b)(2)(iv) if the individual is a dependent (as defined in § 54.9801-2) of a participant and the individual has become a dependent of the participant through marriage, birth, adoption, or placement for adoption.
(v) Current employee and a new dependent. A current employee and an individual who is a dependent of the employee, are described in this paragraph (b)(2)(v) if the individual becomes a dependent of the employee through marriage, birth, adoption, or placement for adoption.
(vi) Current employee, spouse, and a new dependent. A current employee, the employee's spouse, and the employee's dependent are described in this paragraph (b)(2)(vi) if the dependent becomes a dependent of the employee through marriage, birth, adoption, or placement for adoption.
(3) Applying for special enrollment and effective date of coverage—(i) Request. A plan must allow an individual a period of at least 30 days after the date of the marriage, birth, adoption, or placement for adoption (or, if dependent coverage is not generally made available at the time of the marriage, birth, adoption, or placement for adoption, a period of at least 30 days after the date the plan makes dependent coverage generally available) to request enrollment (for the individual or the individual's dependent).
(ii) Reasonable procedures for special enrollment. [Reserved]
(iii) Date coverage must begin—(A) Marriage. In the case of marriage, coverage must begin no later than the first day of the first calendar month beginning after the date the plan (or any issuer offering health insurance coverage under the plan) receives the request for special enrollment.
(B) Birth, adoption, or placement for adoption. Coverage must begin in the case of a dependent's birth on the date of birth and in the case of a dependent's adoption or placement for adoption no later than the date of such adoption or placement for adoption (or, if dependent coverage is not made generally available at the time of the birth, adoption, or placement for adoption, the date the plan makes dependent coverage available).
(4) Examples. The rules of this paragraph (b) are illustrated by the following examples:
Example 1. (i) Facts. An employer maintains a group health plan that offers all employees employee-only coverage, employee-plus-spouse coverage, or family coverage. Under the terms of the plan, any employee may elect to enroll when first hired (with coverage beginning on the date of hire) or during an annual open enrollment period held each December (with coverage beginning the following January 1). Employee A is hired on September 3. A is married to B, and they have no children. On March 15 in the following year a child C is born to A and B. Before that date, A and B have not been enrolled in the plan.
(ii) Conclusion. In this Example 1, the conditions for special enrollment of an employee with a spouse and new dependent under paragraph (b)(2)(vi) of this section are satisfied. If A satisfies the conditions of paragraph (b)(3) of this section for requesting enrollment timely, the plan will satisfy this paragraph (b) if it allows A to enroll either with employee-only coverage, with employee-plus-spouse coverage (for A and B), or with family coverage (for A, B, and C). The plan must allow whatever coverage is chosen to begin on March 15, the date of C's birth.
Example 2. (i) Facts. Individual D works for Employer X. X maintains a group health plan with two benefit packages—an HMO option and an indemnity option. Self-only and family coverage are available under both options. D enrolls for self-only coverage in the HMO option. Then, a child, E, is placed for adoption with D. Within 30 days of the placement of E for adoption, D requests enrollment for D and E under the plan's indemnity option.
(ii) Conclusion. In this Example 2, D and E satisfy the conditions for special enrollment under paragraphs (b)(2)(v) and (b)(3) of this section. Therefore, the plan must allow D and E to enroll in the indemnity coverage, effective as of the date of the placement for adoption.
(c) Notice of special enrollment. At or before the time an employee is initially offered the opportunity to enroll in a group health plan, the plan must furnish the employee with a notice of special enrollment that complies with the requirements of this paragraph (c).
(1) Description of special enrollment rights. The notice of special enrollment must include a description of special enrollment rights. The following model language may be used to satisfy this requirement:
If you are declining enrollment for yourself or your dependents (including your spouse) because of other health insurance or group health plan coverage, you may be able to enroll yourself and your dependents in this plan if you or your dependents lose eligibility for that other coverage (or if the employer stops contributing towards your or your dependents' other coverage). However, you must request enrollment within [insert “30 days” or any longer period that applies under the plan] after your or your dependents' other coverage ends (or after the employer stops contributing toward the other coverage).
In addition, if you have a new dependent as a result of marriage, birth, adoption, or placement for adoption, you may be able to enroll yourself and your dependents. However, you must request enrollment within [insert “30 days” or any longer period that applies under the plan] after the marriage, birth, adoption, or placement for adoption.
To request special enrollment or obtain more information, contact [insert the name, title, telephone number, and any additional contact information of the appropriate plan representative].
(2) Additional information that may be required. The notice of special enrollment must also include, if applicable, the notice described in paragraph (a)(3)(iv) of this section (the notice required to be furnished to an individual declining coverage if the plan requires the reason for declining coverage to be in writing).
(d) Treatment of special enrollees—(1) If an individual requests enrollment while the individual is entitled to special enrollment under either paragraph (a) or (b) of this section, the individual is a special enrollee, even if the request for enrollment coincides with a late enrollment opportunity under the plan. Therefore, the individual cannot be treated as a late enrollee.
(2) Special enrollees must be offered all the benefit packages available to similarly situated individuals who enroll when first eligible. For this purpose, any difference in benefits or cost-sharing requirements for different individuals constitutes a different benefit package. In addition, a special enrollee cannot be required to pay more for coverage than a similarly situated individual who enrolls in the same coverage when first eligible.
(3) The rules of this section are illustrated by the following example:
Example 2. (i) Facts. Employer Y maintains a group health plan that has an enrollment period for late enrollees every November 1 through November 30 with coverage effective the following January 1. On October 18, Individual B loses coverage under another group health plan and satisfies the requirements of paragraphs (a)(2), (3), and (4) of this section. B submits a completed application for coverage on November 2.
(ii) Conclusion. In this Example, B is a special enrollee. Therefore, even though B's request for enrollment coincides with an open enrollment period, B's coverage is required to be made effective no later than December 1 (rather than the plan's January 1 effective date for late enrollees).
[T.D. 9166, 69 FR 78746, Dec. 30, 2004, as amended by T.D. 9656, 79 FR 10305, Feb. 24, 2014]
§ 54.9802-1 Prohibiting discrimination against participants and beneficiaries based on a health factor.
(a) Health factors. (1) The term health factor means, in relation to an individual, any of the following health status-related factors:
(i) Health status;
(ii) Medical condition (including both physical and mental illnesses), as defined in § 54.9801-2;
(iii) Claims experience;
(iv) Receipt of health care;
(v) Medical history;
(vi) Genetic information, as defined in § 54.9802-3T.
(vii) Evidence of insurability; or
(viii) Disability.
(2) Evidence of insurability includes—
(i) Conditions arising out of acts of domestic violence; and
(ii) Participation in activities such as motorcycling, snowmobiling, all-terrain vehicle riding, horseback riding, skiing, and other similar activities.
(3) The decision whether health coverage is elected for an individual (including the time chosen to enroll, such as under special enrollment or late enrollment) is not, itself, within the scope of any health factor. (However, under § 54.9801-6, a plan must treat special enrollees the same as similarly situated individuals who are enrolled when first eligible.)
(b) Prohibited discrimination in rules for eligibility—(1) In general. (i) A group health plan, and a health insurance issuer offering health insurance coverage in connection with a group health plan, may not establish any rule for eligibility (including continued eligibility) of any individual to enroll for benefits under the terms of the plan or group health insurance coverage that discriminates based on any health factor that relates to that individual or a dependent of that individual. This rule is subject to the provisions of paragraph (b)(2) of this section (explaining how this rule applies to benefits), paragraph (d) of this section (containing rules for establishing groups of similarly situated individuals), paragraph (e) of this section (relating to nonconfinement, actively-at-work, and other service requirements), paragraph (f) of this section (relating to wellness programs), and paragraph (g) of this section (permitting favorable treatment of individuals with adverse health factors).
(ii) For purposes of this section, rules for eligibility include, but are not limited to, rules relating to—
(A) Enrollment;
(B) The effective date of coverage;
(C) Waiting (or affiliation) periods;
(D) Late and special enrollment;
(E) Eligibility for benefit packages (including rules for individuals to change their selection among benefit packages);
(F) Benefits (including rules relating to covered benefits, benefit restrictions, and cost-sharing mechanisms such as coinsurance, copayments, and deductibles), as described in paragraphs (b)(2) and (3) of this section;
(G) Continued eligibility; and
(H) Terminating coverage (including disenrollment) of any individual under the plan.
(iii) The rules of this paragraph (b)(1) are illustrated by the following examples:
Example 1. (i) Facts. An employer sponsors a group health plan that is available to all employees who enroll within the first 30 days of their employment. However, employees who do not enroll within the first 30 days cannot enroll later unless they pass a physical examination.
(ii) Conclusion. In this Example 1, the requirement to pass a physical examination in order to enroll in the plan is a rule for eligibility that discriminates based on one or more health factors and thus violates this paragraph (b)(1).
Example 2. (i) Facts. Under an employer's group health plan, employees who enroll during the first 30 days of employment (and during special enrollment periods) may choose between two benefit packages: An indemnity option and an HMO option. However, employees who enroll during late enrollment are permitted to enroll only in the HMO option and only if they provide evidence of good health.
(ii) Conclusion. In this Example 2, the requirement to provide evidence of good health in order to be eligible for late enrollment in the HMO option is a rule for eligibility that discriminates based on one or more health factors and thus violates this paragraph (b)(1). However, if the plan did not require evidence of good health but limited late enrollees to the HMO option, the plan's rules for eligibility would not discriminate based on any health factor, and thus would not violate this paragraph (b)(1), because the time an individual chooses to enroll is not, itself, within the scope of any health factor.
Example 3. (i) Facts. Under an employer's group health plan, all employees generally may enroll within the first 30 days of employment. However, individuals who participate in certain recreational activities, including motorcycling, are excluded from coverage.
(ii) Conclusion. In this Example 3, excluding from the plan individuals who participate in recreational activities, such as motorcycling, is a rule for eligibility that discriminates based on one or more health factors and thus violates this paragraph (b)(1).
Example 4. (i) Facts. A group health plan applies for a group health policy offered by an issuer. As part of the application, the issuer receives health information about individuals to be covered under the plan. Individual A is an employee of the employer maintaining the plan. A and A's dependents have a history of high health claims. Based on the information about A and A's dependents, the issuer excludes A and A's dependents from the group policy it offers to the employer.
(ii) Conclusion. See Example 4 in 29 CFR 2590.702(b)(1) and 45 CFR 146.121(b)(1) for a conclusion that the exclusion by the issuer of A and A's dependents from coverage is a rule for eligibility that discriminates based on one or more health factors and violates rules under 29 CFR 2590.702(b)(1) and 45 CFR 146.121(b)(1) similar to the rules under this paragraph (b)(1). (If the employer is a small employer under 45 CFR 144.103 (generally, an employer with 50 or fewer employees), the issuer also may violate 45 CFR 146.150, which requires issuers to offer all the policies they sell in the small group market on a guaranteed available basis to all small employers and to accept every eligible individual in every small employer group.) If the plan provides coverage through this policy and does not provide equivalent coverage for A and A's dependents through other means, the plan violates this paragraph (b)(1).
(2) Application to benefits—(i) General rule—(A) Under this section, a group health plan is not required to provide coverage for any particular benefit to any group of similarly situated individuals.
(B) However, benefits provided under a plan must be uniformly available to all similarly situated individuals (as described in paragraph (d) of this section). Likewise, any restriction on a benefit or benefits must apply uniformly to all similarly situated individuals and must not be directed at individual participants or beneficiaries based on any health factor of the participants or beneficiaries (determined based on all the relevant facts and circumstances). Thus, for example, a plan may limit or exclude benefits in relation to a specific disease or condition, limit or exclude benefits for certain types of treatments or drugs, or limit or exclude benefits based on a determination of whether the benefits are experimental or not medically necessary, but only if the benefit limitation or exclusion applies uniformly to all similarly situated individuals and is not directed at individual participants or beneficiaries based on any health factor of the participants or beneficiaries. In addition, a plan or issuer may require the satisfaction of a deductible, copayment, coinsurance, or other cost-sharing requirement in order to obtain a benefit if the limit or cost-sharing requirement applies uniformly to all similarly situated individuals and is not directed at individual participants or beneficiaries based on any health factor of the participants or beneficiaries. In the case of a cost-sharing requirement, see also paragraph (b)(2)(ii) of this section, which permits variances in the application of a cost-sharing mechanism made available under a wellness program. (Whether any plan provision or practice with respect to benefits complies with this paragraph (b)(2)(i) does not affect whether the provision or practice is permitted under ERISA, the Affordable Care Act (including the requirements related to essential health benefits), the Americans With Disabilities Act, or any other law, whether State or Federal.)
(C) For purposes of this paragraph (b)(2)(i), a plan amendment applicable to all individuals in one or more groups of similarly situated individuals under the plan and made effective no earlier than the first day of the first plan year after the amendment is adopted is not considered to be directed at any individual participants or beneficiaries.
(D) The rules of this paragraph (b)(2)(i) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan applies a $10,000 annual limit on a specific covered benefit that is not an essential health benefit to each participant or beneficiary covered under the plan. The limit is not directed at individual participants or beneficiaries.
(ii) Conclusion. In this Example 1, the limit does not violate this paragraph (b)(2)(i) because coverage of the specific, non-essential health benefit up to $10,000 is available uniformly to each participant and beneficiary under the plan and because the limit is applied uniformly to all participants and beneficiaries and is not directed at individual participants or beneficiaries.
Example 2. (i) Facts. A group health plan has a $500 deductible on all benefits for participants covered under the plan. Participant B files a claim for the treatment of AIDS. At the next corporate board meeting of the plan sponsor, the claim is discussed. Shortly thereafter, the plan is modified to impose a $2,000 deductible on benefits for the treatment of AIDS, effective before the beginning of the next plan year.
(ii) Conclusion. The facts of this Example 2 strongly suggest that the plan modification is directed at B based on B's claim. Absent outweighing evidence to the contrary, the plan violates this paragraph (b)(2)(i).
Example 3. (i) A group health plan applies for a group health policy offered by an issuer. Individual C is covered under the plan and has an adverse health condition. As part of the application, the issuer receives health information about the individuals to be covered, including information about C's adverse health condition. The policy form offered by the issuer generally provides benefits for the adverse health condition that C has, but in this case the issuer offers the plan a policy modified by a rider that excludes benefits for C for that condition. The exclusionary rider is made effective the first day of the next plan year.
(ii) Conclusion. See Example 3 in 29 CFR 2590.702(b)(2)(i) and 45 CFR 146.121(b)(2)(i) for a conclusion that the issuer violates rules under 29 CFR 2590.702(b)(2)(i) and 45 CFR 146.121(b)(2)(i) similar to the rules under this paragraph (b)(2)(i) because benefits for C's condition are available to other individuals in the group of similarly situated individuals that includes C but are not available to C. Thus, the benefits are not uniformly available to all similarly situated individuals. Even though the exclusionary rider is made effective the first day of the next plan year, because the rider does not apply to all similarly situated individuals, the issuer violates the rules under 29 CFR 2590.702(b)(2)(i) and 45 CFR 146.121(b)(2)(i). If the plan provides coverage through this policy and does not provide equivalent coverage for C through other means, the plan violates this paragraph (b)(2)(i).
Example 4. (i) Facts. A group health plan has a $2,000 lifetime limit for the treatment of temporomandibular joint syndrome (TMJ). The limit is applied uniformly to all similarly situated individuals and is not directed at individual participants or beneficiaries.
(ii) Conclusion. In this Example 4, the limit does not violate this paragraph (b)(2)(i) because $2,000 of benefits for the treatment of TMJ are available uniformly to all similarly situated individuals and a plan may limit benefits covered in relation to a specific disease or condition if the limit applies uniformly to all similarly situated individuals and is not directed at individual participants or beneficiaries. (However, applying a lifetime limit on TMJ may violate PHS Act section 2711 and its implementing regulations, if TMJ coverage is an essential health benefit, depending on the essential health benefits benchmark plan as defined in 45 CFR 156.20. This example does not address whether the plan provision is permissible under any other applicable law, including PHS Act section 2711 or the Americans with Disabilities Act.)
Example 5. (i) Facts. A group health plan applies a $2 million lifetime limit on all benefits. However, the $2 million lifetime limit is reduced to $10,000 for any participant or beneficiary covered under the plan who has a congenital heart defect.
(ii) Conclusion. In this Example 5, the lower lifetime limit for participants and beneficiaries with a congenital heart defect violates this paragraph (b)(2)(i) because benefits under the plan are not uniformly available to all similarly situated individuals and the plan's lifetime limit on benefits does not apply uniformly to all similarly situated individuals. Additionally, this plan provision is prohibited under PHS Act section 2711 and its implementing regulations because it imposes a lifetime limit on essential health benefits.
Example 6. (i) Facts. A group health plan limits benefits for prescription drugs to those listed on a drug formulary. The limit is applied uniformly to all similarly situated individuals and is not directed at individual participants or beneficiaries.
(ii) Conclusion. In this Example 6, the exclusion from coverage of drugs not listed on the drug formulary does not violate this paragraph (b)(2)(i) because benefits for prescription drugs listed on the formulary are uniformly available to all similarly situated individuals and because the exclusion of drugs not listed on the formulary applies uniformly to all similarly situated individuals and is not directed at individual participants or beneficiaries.
Example 7. (i) Facts. Under a group health plan, doctor visits are generally subject to a $250 annual deductible and 20 percent coinsurance requirement. However, prenatal doctor visits are not subject to any deductible or coinsurance requirement. These rules are applied uniformly to all similarly situated individuals and are not directed at individual participants or beneficiaries.
(ii) Conclusion. In this Example 7, imposing different deductible and coinsurance requirements for prenatal doctor visits and other visits does not violate this paragraph (b)(2)(i) because a plan may establish different deductibles or coinsurance requirements for different services if the deductible or coinsurance requirement is applied uniformly to all similarly situated individuals and is not directed at individual participants or beneficiaries.
(ii) Exception for wellness programs. A group health plan may vary benefits, including cost-sharing mechanisms (such as a deductible, copayment, or coinsurance), based on whether an individual has met the standards of a wellness program that satisfies the requirements of paragraph (f) of this section.
(iii) Specific rule relating to source-of-injury exclusions—(A) If a group health plan generally provides benefits for a type of injury, the plan may not deny benefits otherwise provided for treatment of the injury if the injury results from an act of domestic violence or a medical condition (including both physical and mental health conditions). This rule applies in the case of an injury resulting from a medical condition even if the condition is not diagnosed before the injury.
(B) The rules of this paragraph (b)(2)(iii) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan generally provides medical/surgical benefits, including benefits for hospital stays, that are medically necessary. However, the plan excludes benefits for self-inflicted injuries or injuries sustained in connection with attempted suicide. Because of depression, Individual D attempts suicide. As a result, D sustains injuries and is hospitalized for treatment of the injuries. Under the exclusion, the plan denies D benefits for treatment of the injuries.
(ii) Conclusion. In this Example 1, the suicide attempt is the result of a medical condition (depression). Accordingly, the denial of benefits for the treatments of D's injuries violates the requirements of this paragraph (b)(2)(iii) because the plan provision excludes benefits for treatment of an injury resulting from a medical condition.
Example 2. (i) Facts. A group health plan provides benefits for head injuries generally. The plan also has a general exclusion for any injury sustained while participating in any of a number of recreational activities, including bungee jumping. However, this exclusion does not apply to any injury that results from a medical condition (nor from domestic violence). Participant E sustains a head injury while bungee jumping. The injury did not result from a medical condition (nor from domestic violence). Accordingly, the plan denies benefits for E's head injury.
(ii) Conclusion. In this Example 2, the plan provision that denies benefits based on the source of an injury does not restrict benefits based on an act of domestic violence or any medical condition. Therefore, the provision is permissible under this paragraph (b)(2)(iii) and does not violate this section. (However, if the plan did not allow E to enroll in the plan (or applied different rules for eligibility to E) because E frequently participates in bungee jumping, the plan would violate paragraph (b)(1) of this section.)
(c) Prohibited discrimination in premiums or contributions—(1) In general—(i) A group health plan may not require an individual, as a condition of enrollment or continued enrollment under the plan, to pay a premium or contribution that is greater than the premium or contribution for a similarly situated individual (described in paragraph (d) of this section) enrolled in the plan based on any health factor that relates to the individual or a dependent of the individual.
(ii) Discounts, rebates, payments in kind, and any other premium differential mechanisms are taken into account in determining an individual's premium or contribution rate. (For rules relating to cost-sharing mechanisms, see paragraph (b)(2) of this section (addressing benefits).)
(2) Rules relating to premium rates—(i) Group rating based on health factors not restricted under this section. Nothing in this section restricts the aggregate amount that an employer may be charged for coverage under a group health plan. But see § 54.9802-3T(b), which prohibits adjustments in group premium or contribution rates based on genetic information.
(ii) List billing based on a health factor prohibited. However, a group health plan may not quote or charge an employer (or an individual) a different premium for an individual in a group of similarly situated individuals based on a health factor. (But see paragraph (g) of this section permitting favorable treatment of individuals with adverse health factors.)
(iii) Examples. The rules of this paragraph (c)(2) are illustrated by the following examples:
Example 1. (i) Facts. An employer sponsors a group health plan and purchases coverage from a health insurance issuer. In order to determine the premium rate for the upcoming plan year, the issuer reviews the claims experience of individuals covered under the plan. The issuer finds that Individual F had significantly higher claims experience than similarly situated individuals in the plan. The issuer quotes the plan a higher per-participant rate because of F's claims experience.
(ii) Conclusion. See Example 1 in 29 CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2) for a conclusion that the issuer does not violate the provisions of 29 CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2) similar to the provisions of this paragraph (c)(2) because the issuer blends the rate so that the employer is not quoted a higher rate for F than for a similarly situated individual based on F's claims experience. (However, those examples conclude that if the issuer used genetic information in computing the group rate, it would violate 29 CFR 2590.702-1(b) or 45 CFR 146.122(b).)
Example 2. (i) Facts. Same facts as Example 1, except that the issuer quotes the employer a higher premium rate for F, because of F's claims experience, than for a similarly situated individual.
(ii) Conclusion. See Example 2 in 29 CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2) for a conclusion that the issuer violates provisions of 29 CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2) similar to the provisions of this paragraph (c)(2). Moreover, even if the plan purchased the policy based on the quote but did not require a higher participant contribution for F than for a similarly situated individual, see Example 2 in 29 CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2) for a conclusion that the issuer would still violate 29 CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2) (but in such a case the plan would not violate this paragraph (c)(2)).
(3) Exception for wellness programs. Notwithstanding paragraphs (c)(1) and (2) of this section, a plan may vary the amount of premium or contribution it requires similarly situated individuals to pay based on whether an individual has met the standards of a wellness program that satisfies the requirements of paragraph (f) of this section.
(d) Similarly situated individuals. The requirements of this section apply only within a group of individuals who are treated as similarly situated individuals. A plan may treat participants as a group of similarly situated individuals separate from beneficiaries. In addition, participants may be treated as two or more distinct groups of similarly situated individuals and beneficiaries may be treated as two or more distinct groups of similarly situated individuals in accordance with the rules of this paragraph (d). Moreover, if individuals have a choice of two or more benefit packages, individuals choosing one benefit package may be treated as one or more groups of similarly situated individuals distinct from individuals choosing another benefit package.
(1) Participants. Subject to paragraph (d)(3) of this section, a plan may treat participants as two or more distinct groups of similarly situated individuals if the distinction between or among the groups of participants is based on a bona fide employment-based classification consistent with the employer's usual business practice. Whether an employment-based classification is bona fide is determined on the basis of all the relevant facts and circumstances. Relevant facts and circumstances include whether the employer uses the classification for purposes independent of qualification for health coverage (for example, determining eligibility for other employee benefits or determining other terms of employment). Subject to paragraph (d)(3) of this section, examples of classifications that, based on all the relevant facts and circumstances, may be bona fide include full-time versus part-time status, different geographic location, membership in a collective bargaining unit, date of hire, length of service, current employee versus former employee status, and different occupations. However, a classification based on any health factor is not a bona fide employment-based classification, unless the requirements of paragraph (g) of this section are satisfied (permitting favorable treatment of individuals with adverse health factors).
(2) Beneficiaries—(i) Subject to paragraph (d)(3) of this section, a plan may treat beneficiaries as two or more distinct groups of similarly situated individuals if the distinction between or among the groups of beneficiaries is based on any of the following factors:
(A) A bona fide employment-based classification of the participant through whom the beneficiary is receiving coverage;
(B) Relationship to the participant (for example, as a spouse or as a dependent child);
(C) Marital status;
(D) With respect to children of a participant, age or student status; or
(E) Any other factor if the factor is not a health factor.
(ii) Paragraph (d)(2)(i) of this section does not prevent more favorable treatment of individuals with adverse health factors in accordance with paragraph (g) of this section.
(3) Discrimination directed at individuals. Notwithstanding paragraphs (d)(1) and (2) of this section, if the creation or modification of an employment or coverage classification is directed at individual participants or beneficiaries based on any health factor of the participants or beneficiaries, the classification is not permitted under this paragraph (d), unless it is permitted under paragraph (g) of this section (permitting favorable treatment of individuals with adverse health factors). Thus, if an employer modified an employment-based classification to single out, based on a health factor, individual participants and beneficiaries and deny them health coverage, the new classification would not be permitted under this section.
(4) Examples. The rules of this paragraph (d) are illustrated by the following examples:
Example 1. (i) Facts. An employer sponsors a group health plan for full-time employees only. Under the plan (consistent with the employer's usual business practice), employees who normally work at least 30 hours per week are considered to be working full-time. Other employees are considered to be working part-time. There is no evidence to suggest that the classification is directed at individual participants or beneficiaries.
(ii) Conclusion. In this Example 1, treating the full-time and part-time employees as two separate groups of similarly situated individuals is permitted under this paragraph (d) because the classification is bona fide and is not directed at individual participants or beneficiaries.
Example 2. (i) Facts. Under a group health plan, coverage is made available to employees, their spouses, and their children. However, coverage is made available to a child only if the child is under age 26 (or under age 29 if the child is continuously enrolled full-time in an institution of higher learning (full-time students)). There is no evidence to suggest that these classifications are directed at individual participants or beneficiaries.
(ii) Conclusion. In this Example 2, treating spouses and children differently by imposing an age limitation on children, but not on spouses, is permitted under this paragraph (d). Specifically, the distinction between spouses and children is permitted under paragraph (d)(2) of this section and is not prohibited under paragraph (d)(3) of this section because it is not directed at individual participants or beneficiaries. It is also permissible to treat children who are under age 26 (or full-time students under age 29) as a group of similarly situated individuals separate from those who are age 26 or older (or age 29 or older if they are not full-time students) because the classification is permitted under paragraph (d)(2) of this section and is not directed at individual participants or beneficiaries.
Example 3. (i) Facts. A university sponsors a group health plan that provides one health benefit package to faculty and another health benefit package to other staff. Faculty and staff are treated differently with respect to other employee benefits such as retirement benefits and leaves of absence. There is no evidence to suggest that the distinction is directed at individual participants or beneficiaries.
(ii) Conclusion. In this Example 3, the classification is permitted under this paragraph (d) because there is a distinction based on a bona fide employment-based classification consistent with the employer's usual business practice and the distinction is not directed at individual participants and beneficiaries.
Example 4. (i) Facts. An employer sponsors a group health plan that is available to all current employees. Former employees may also be eligible, but only if they complete a specified number of years of service, are enrolled under the plan at the time of termination of employment, and are continuously enrolled from that date. There is no evidence to suggest that these distinctions are directed at individual participants or beneficiaries.
(ii) Conclusion. In this Example 4, imposing additional eligibility requirements on former employees is permitted because a classification that distinguishes between current and former employees is a bona fide employment-based classification that is permitted under this paragraph (d), provided that it is not directed at individual participants or beneficiaries. In addition, it is permissible to distinguish between former employees who satisfy the service requirement and those who do not, provided that the distinction is not directed at individual participants or beneficiaries. (However, former employees who do not satisfy the eligibility criteria may, nonetheless, be eligible for continued coverage pursuant to a COBRA continuation provision or similar State law.)
Example 5. (i) Facts. An employer sponsors a group health plan that provides the same benefit package to all seven employees of the employer. Six of the seven employees have the same job title and responsibilities, but Employee G has a different job title and different responsibilities. After G files an expensive claim for benefits under the plan, coverage under the plan is modified so that employees with G's job title receive a different benefit package that includes a higher deductible than in the benefit package made available to the other six employees.
(ii) Conclusion. Under the facts of this Example 5, changing the coverage classification for G based on the existing employment classification for G is not permitted under this paragraph (d) because the creation of the new coverage classification for G is directed at G based on one or more health factors.
(e) Nonconfinement and actively-at-work provisions—(1) Nonconfinement provisions—(i) General rule. Under the rules of paragraphs (b) and (c) of this section, a plan may not establish a rule for eligibility (as described in paragraph (b)(1)(ii) of this section) or set any individual's premium or contribution rate based on whether an individual is confined to a hospital or other health care institution. In addition, under the rules of paragraphs (b) and (c) of this section, a plan may not establish a rule for eligibility or set any individual's premium or contribution rate based on an individual's ability to engage in normal life activities, except to the extent permitted under paragraphs (e)(2)(ii) and (3) of this section (permitting plans, under certain circumstances, to distinguish among employees based on the performance of services).
(ii) Examples. The rules of this paragraph (e)(1) are illustrated by the following examples:
Example 1. (i) Facts. Under a group health plan, coverage for employees and their dependents generally becomes effective on the first day of employment. However, coverage for a dependent who is confined to a hospital or other health care institution does not become effective until the confinement ends.
(ii) Conclusion. In this Example 1, the plan violates this paragraph (e)(1) because the plan delays the effective date of coverage for dependents based on confinement to a hospital or other health care institution.
Example 2. (i) Facts. In previous years, a group health plan has provided coverage through a group health insurance policy offered by Issuer M. However, for the current year, the plan provides coverage through a group health insurance policy offered by Issuer N. Under Issuer N's policy, items and services provided in connection with the confinement of a dependent to a hospital or other health care institution are not covered if the confinement is covered under an extension of benefits clause from a previous health insurance issuer.
(ii) Conclusion. See Example 2 in 29 CFR 2590.702(e)(1) and 45 CFR 146.121(e)(1) for a conclusion that Issuer N violates provisions of 29 CFR 2590.702(e)(1) and 45 CFR 146.121(e)(1) similar to the provisions of this paragraph (e)(1) because the group health insurance coverage restricts benefits based on whether a dependent is confined to a hospital or other health care institution that is covered under an extension of benefits from a previous issuer. See Example 2 in 29 CFR 2590.702(e)(1) and 45 CFR 146.121(e)(1) for the additional conclusions that under State law Issuer M may also be responsible for providing benefits to such a dependent; and that in a case in which Issuer N has an obligation under 29 CFR 2590.702(e)(1) or 45 CFR 146.121(e)(1) to provide benefits and Issuer M has an obligation under State law to provide benefits, any State laws designed to prevent more than 100% reimbursement, such as State coordination-of-benefits laws, continue to apply.
(2) Actively-at-work and continuous service provisions—(i) General rule—(A) Under the rules of paragraphs (b) and (c) of this section and subject to the exception for the first day of work described in paragraph (e)(2)(ii) of this section, a plan may not establish a rule for eligibility (as described in paragraph (b)(1)(ii) of this section) or set any individual's premium or contribution rate based on whether an individual is actively at work (including whether an individual is continuously employed), unless absence from work due to any health factor (such as being absent from work on sick leave) is treated, for purposes of the plan, as being actively at work.
(B) The rules of this paragraph (e)(2)(i) are illustrated by the following examples:
Example 1. (i) Facts. Under a group health plan, an employee generally becomes eligible to enroll 30 days after the first day of employment. However, if the employee is not actively at work on the first day after the end of the 30-day period, then eligibility for enrollment is delayed until the first day the employee is actively at work.
(ii) Conclusion. In this Example 1, the plan violates this paragraph (e)(2) (and thus also violates paragraph (b) of this section). However, the plan would not violate paragraph (e)(2) or (b) of this section if, under the plan, an absence due to any health factor is considered being actively at work.
Example 2. (i) Facts. Under a group health plan, coverage for an employee becomes effective after 90 days of continuous service; that is, if an employee is absent from work (for any reason) before completing 90 days of service, the beginning of the 90-day period is measured from the day the employee returns to work (without any credit for service before the absence).
(ii) Conclusion. In this Example 2, the plan violates this paragraph (e)(2) (and thus also paragraph (b) of this section) because the 90-day continuous service requirement is a rule for eligibility based on whether an individual is actively at work. However, the plan would not violate this paragraph (e)(2) or paragraph (b) of this section if, under the plan, an absence due to any health factor is not considered an absence for purposes of measuring 90 days of continuous service. (In addition, any eligibility provision that is time-based must comply with the requirements of PHS Act section 2708 and its implementing regulations.)
(ii) Exception for the first day of work—(A) Notwithstanding the general rule in paragraph (e)(2)(i) of this section, a plan may establish a rule for eligibility that requires an individual to begin work for the employer sponsoring the plan (or, in the case of a multiemployer plan, to begin a job in covered employment) before coverage becomes effective, provided that such a rule for eligibility applies regardless of the reason for the absence.
(B) The rules of this paragraph (e)(2)(ii) are illustrated by the following examples:
Example 1. (i) Facts. Under the eligibility provision of a group health plan, coverage for new employees becomes effective on the first day that the employee reports to work. Individual H is scheduled to begin work on August 3. However, H is unable to begin work on that day because of illness. H begins working on August 4, and H's coverage is effective on August 4.
(ii) Conclusion. In this Example 1, the plan provision does not violate this section. However, if coverage for individuals who do not report to work on the first day they were scheduled to work for a reason unrelated to a health factor (such as vacation or bereavement) becomes effective on the first day they were scheduled to work, then the plan would violate this section.
Example 2. (i) Facts. Under a group health plan, coverage for new employees becomes effective on the first day of the month following the employee's first day of work, regardless of whether the employee is actively at work on the first day of the month. Individual J is scheduled to begin work on March 24. However, J is unable to begin work on March 24 because of illness. J begins working on April 7 and J's coverage is effective May 1.
(ii) Conclusion. In this Example 2, the plan provision does not violate this section. However, as in Example 1, if coverage for individuals absent from work for reasons unrelated to a health factor became effective despite their absence, then the plan would violate this section.
(3) Relationship to plan provisions defining similarly situated individuals—(i) Notwithstanding the rules of paragraphs (e)(1) and (2) of this section, a plan may establish rules for eligibility or set any individual's premium or contribution rate in accordance with the rules relating to similarly situated individuals in paragraph (d) of this section. Accordingly, a plan may distinguish in rules for eligibility under the plan between full-time and part-time employees, between permanent and temporary or seasonal employees, between current and former employees, and between employees currently performing services and employees no longer performing services for the employer, subject to paragraph (d) of this section. However, other Federal or State laws (including the COBRA continuation provisions and the Family and Medical Leave Act of 1993) may require an employee or the employee's dependents to be offered coverage and set limits on the premium or contribution rate even though the employee is not performing services.
(ii) The rules of this paragraph (e)(3) are illustrated by the following examples:
Example 1. (i) Facts. Under a group health plan, employees are eligible for coverage if they perform services for the employer for 30 or more hours per week or if they are on paid leave (such as vacation, sick, or bereavement leave). Employees on unpaid leave are treated as a separate group of similarly situated individuals in accordance with the rules of paragraph (d) of this section.
(ii) Conclusion. In this Example 1, the plan provisions do not violate this section. However, if the plan treated individuals performing services for the employer for 30 or more hours per week, individuals on vacation leave, and individuals on bereavement leave as a group of similarly situated individuals separate from individuals on sick leave, the plan would violate this paragraph (e) (and thus also would violate paragraph (b) of this section) because groups of similarly situated individuals cannot be established based on a health factor (including the taking of sick leave) under paragraph (d) of this section.
Example 2. (i) Facts. To be eligible for coverage under a bona fide collectively bargained group health plan in the current calendar quarter, the plan requires an individual to have worked 250 hours in covered employment during the three-month period that ends one month before the beginning of the current calendar quarter. The distinction between employees working at least 250 hours and those working less than 250 hours in the earlier three-month period is not directed at individual participants or beneficiaries based on any health factor of the participants or beneficiaries.
(ii) Conclusion. In this Example 2, the plan provision does not violate this section because, under the rules for similarly situated individuals allowing full-time employees to be treated differently than part-time employees, employees who work at least 250 hours in a three-month period can be treated differently than employees who fail to work 250 hours in that period. The result would be the same if the plan permitted individuals to apply excess hours from previous periods to satisfy the requirement for the current quarter.
Example 3. (i) Facts. Under a group health plan, coverage of an employee is terminated when the individual's employment is terminated, in accordance with the rules of paragraph (d) of this section. Employee B has been covered under the plan. B experiences a disabling illness that prevents B from working. B takes a leave of absence under the Family and Medical Leave Act of 1993. At the end of such leave, B terminates employment and consequently loses coverage under the plan. (This termination of coverage is without regard to whatever rights the employee (or members of the employee's family) may have for COBRA continuation.)
(ii) Conclusion. In this Example 3, the plan provision terminating B's coverage upon B's termination of employment does not violate this section.
Example 4. (i) Facts. Under a group health plan, coverage of an employee is terminated when the employee ceases to perform services for the employer sponsoring the plan, in accordance with the rules of paragraph (d) of this section. Employee C is laid off for three months. When the layoff begins, C's coverage under the plan is terminated. (This termination of coverage is without regard to whatever rights the employee (or members of the employee's family) may have for COBRA continuation coverage.)
(ii) Conclusion. In this Example 4, the plan provision terminating C's coverage upon the cessation of C's performance of services does not violate this section.
(f) Nondiscriminatory wellness programs—in general. A wellness program is a program of health promotion or disease prevention. Paragraphs (b)(2)(ii) and (c)(3) of this section provide exceptions to the general prohibitions against discrimination based on a health factor for plan provisions that vary benefits (including cost-sharing mechanisms) or the premium or contribution for similarly situated individuals in connection with a wellness program that satisfies the requirements of this paragraph (f).
(1) Definitions. The definitions in this paragraph (f)(1) govern in applying the provisions of this paragraph (f).
(i) Reward. Except where expressly provided otherwise, references in this section to an individual obtaining a reward include both obtaining a reward (such as a discount or rebate of a premium or contribution, a waiver of all or part of a cost-sharing mechanism, an additional benefit, or any financial or other incentive) and avoiding a penalty (such as the absence of a premium surcharge or other financial or nonfinancial disincentive). References in this section to a plan providing a reward include both providing a reward (such as a discount or rebate of a premium or contribution, a waiver of all or part of a cost-sharing mechanism, an additional benefit, or any financial or other incentive) and imposing a penalty (such as a surcharge or other financial or nonfinancial disincentive).
(ii) Participatory wellness programs. If none of the conditions for obtaining a reward under a wellness program is based on an individual satisfying a standard that is related to a health factor (or if a wellness program does not provide a reward), the wellness program is a participatory wellness program. Examples of participatory wellness programs are:
(A) A program that reimburses employees for all or part of the cost for membership in a fitness center.
(B) A diagnostic testing program that provides a reward for participation in that program and does not base any part of the reward on outcomes.
(C) A program that encourages preventive care through the waiver of the copayment or deductible requirement under a group health plan for the costs of, for example, prenatal care or well-baby visits. (Note that, with respect to non-grandfathered plans, § 54.9815-2713T requires benefits for certain preventive health services without the imposition of cost sharing.)
(D) A program that reimburses employees for the costs of participating, or that otherwise provides a reward for participating, in a smoking cessation program without regard to whether the employee quits smoking.
(E) A program that provides a reward to employees for attending a monthly, no-cost health education seminar.
(F) A program that provides a reward to employees who complete a health risk assessment regarding current health status, without any further action (educational or otherwise) required by the employee with regard to the health issues identified as part of the assessment. (See also § 54.9802-3T for rules prohibiting collection of genetic information.)
(iii) Health-contingent wellness programs. A health-contingent wellness program is a program that requires an individual to satisfy a standard related to a health factor to obtain a reward (or requires an individual to undertake more than a similarly situated individual based on a health factor in order to obtain the same reward). A health-contingent wellness program may be an activity-only wellness program or an outcome-based wellness program.
(iv) Activity-only wellness programs. An activity-only wellness program is a type of health-contingent wellness program that requires an individual to perform or complete an activity related to a health factor in order to obtain a reward but does not require the individual to attain or maintain a specific health outcome. Examples include walking, diet, or exercise programs, which some individuals may be unable to participate in or complete (or have difficulty participating in or completing) due to a health factor, such as severe asthma, pregnancy, or a recent surgery. See paragraph (f)(3) of this section for requirements applicable to activity-only wellness programs.
(v) Outcome-based wellness programs. An outcome-based wellness program is a type of health-contingent wellness program that requires an individual to attain or maintain a specific health outcome (such as not smoking or attaining certain results on biometric screenings) in order to obtain a reward. To comply with the rules of this paragraph (f), an outcome-based wellness program typically has two tiers. That is, for individuals who do not attain or maintain the specific health outcome, compliance with an educational program or an activity may be offered as an alternative to achieve the same reward. This alternative pathway, however, does not mean that the overall program, which has an outcome-based component, is not an outcome-based wellness program. That is, if a measurement, test, or screening is used as part of an initial standard and individuals who meet the standard are granted the reward, the program is considered an outcome-based wellness program. For example, if a wellness program tests individuals for specified medical conditions or risk factors (including biometric screening such as testing for high cholesterol, high blood pressure, abnormal body mass index, or high glucose level) and provides a reward to individuals identified as within a normal or healthy range for these medical conditions or risk factors, while requiring individuals who are identified as outside the normal or healthy range (or at risk) to take additional steps (such as meeting with a health coach, taking a health or fitness course, adhering to a health improvement action plan, complying with a walking or exercise program, or complying with a health care provider's plan of care) to obtain the same reward, the program is an outcome-based wellness program. See paragraph (f)(4) of this section for requirements applicable to outcome-based wellness programs.
(2) Requirement for participatory wellness programs. A participatory wellness program, as described in paragraph (f)(1)(ii) of this section, does not violate the provisions of this section only if participation in the program is made available to all similarly situated individuals, regardless of health status.
(3) Requirements for activity-only wellness programs. A health-contingent wellness program that is an activity-only wellness program, as described in paragraph (f)(1)(iv) of this section, does not violate the provisions of this section only if all of the following requirements are satisfied:
(i) Frequency of opportunity to qualify. The program must give individuals eligible for the program the opportunity to qualify for the reward under the program at least once per year.
(ii) Size of reward. The reward for the activity-only wellness program, together with the reward for other health-contingent wellness programs with respect to the plan, must not exceed the applicable percentage (as defined in paragraph (f)(5) of this section) of the total cost of employee-only coverage under the plan. However, 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 total cost of the coverage in which an employee 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 employee contributions towards the cost of coverage for the benefit package under which the employee is (or the employee and any dependents are) receiving coverage.
(iii) Reasonable design. The program must be reasonably designed to promote health or prevent disease. A program satisfies this standard if it has a reasonable chance of improving the health of, or preventing disease in, participating individuals, and it is not overly burdensome, is not a subterfuge for discriminating based on a health factor, and is not highly suspect in the method chosen to promote health or prevent disease. This determination is based on all the relevant facts and circumstances.
(iv) Uniform availability and reasonable alternative standards. The full reward under the activity-only wellness program must be available to all similarly situated individuals.
(A) Under this paragraph (f)(3)(iv), a reward under an activity-only wellness 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 alternative standard (or waiver of the otherwise 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 otherwise applicable standard; and
(2) The program allows a reasonable alternative standard (or waiver of the otherwise 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 and issuers are not required to determine a particular reasonable alternative standard in advance of an individual's request for one, if an individual is described in either paragraph (f)(3)(iv)(A)(1) or (2) of this section, a reasonable alternative standard must be furnished by the plan or issuer upon the individual's request or the condition for obtaining the reward must be waived.
(C) All the facts and circumstances are taken into account in determining whether a plan or issuer has furnished a reasonable alternative standard, including but not limited to the following:
(1) If the reasonable alternative standard is completion of an educational program, the plan or issuer must make the educational program available or assist the employee in finding such a program (instead of requiring an individual to find such a program unassisted), and may not require an individual to pay for the cost of the program.
(2) The time commitment required must be reasonable (for example, requiring attendance nightly at a one-hour class would be unreasonable).
(3) 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.
(4) If an individual's personal physician states that a plan standard (including, if applicable, the recommendations of the plan's medical professional) is not medically appropriate for that individual, the plan or issuer must provide a reasonable alternative standard that accommodates the recommendations of the individual's personal physician with regard to medical appropriateness. Plans and issuers may impose standard cost sharing under the plan or coverage for medical items and services furnished pursuant to the physician's recommendations.
(D) To the extent that a reasonable alternative standard under an activity-only wellness program is, itself, an activity-only wellness program, it must comply with the requirements of this paragraph (f)(3) in the same manner as if it were an initial program standard. (Thus, for example, if a plan or issuer provides a walking program as a reasonable alternative standard to a running program, individuals for whom it is unreasonably difficult due to a medical condition to complete the walking program (or for whom it is medically inadvisable to attempt to complete the walking program) must be provided a reasonable alternative standard to the walking program.) To the extent that a reasonable alternative standard under an activity-only wellness program is, itself, an outcome-based wellness program, it must comply with the requirements of paragraph (f)(4) of this section, including paragraph (f)(4)(iv)(D).
(E) If reasonable under the circumstances, a plan or issuer may seek verification, such as a statement from an 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 applicable standard of an activity-only wellness program. Plans and issuers may seek verification with respect to requests for a reasonable alternative standard for which it is reasonable to determine that medical judgment is required to evaluate the validity of the request.
(v) Notice of availability of reasonable alternative standard. The plan or issuer must disclose in all plan materials describing the terms of an activity-only wellness program the availability of a reasonable alternative standard to qualify for the reward (and, if applicable, the possibility of waiver of the otherwise applicable standard), including contact information for obtaining a reasonable alternative standard and a statement that recommendations of an individual's personal physician will be accommodated. If plan materials merely mention that such a program is available, without describing its terms, this disclosure is not required. Sample language is provided in paragraph (f)(6) of this section, as well as in certain examples of this section.
(vi) Example. The provisions of this paragraph (f)(3) are illustrated by the following example:
Example. (i) Facts. A group health plan provides a reward to individuals who participate in a reasonable specified walking program. If it is unreasonably difficult due to a medical condition for an individual to participate (or if it is medically inadvisable for an individual to attempt to participate), the plan will waive the walking program requirement and provide the reward. All materials describing the terms of the walking program disclose the availability of the waiver.
(ii) Conclusion. In this Example, the program satisfies the requirements of paragraph (f)(3)(iii) of this section because the walking program is reasonably designed to promote health and prevent disease. The program satisfies the requirements of paragraph (f)(3)(iv) of this section because the reward under the program is available to all similarly situated individuals. It accommodates individuals for whom it is unreasonably difficult to participate in the walking program due to a medical condition (or for whom it would be medically inadvisable to attempt to participate) by providing them with the reward even if they do not participate in the walking program (that is, by waiving the condition). The plan also complies with the disclosure requirement of paragraph (f)(3)(v) of this section. Thus, the plan satisfies paragraphs (f)(3)(iii), (iv), and (v) of this section.
(4) Requirements for outcome-based wellness programs. A health-contingent wellness program that is an outcome-based wellness program, as described in paragraph (f)(1)(v) of this section, does not violate the provisions of this section only if all of the following requirements are satisfied:
(i) Frequency of opportunity to qualify. The program must give individuals eligible for the program the opportunity to qualify for the reward under the program at least once per year.
(ii) Size of reward. The reward for the outcome-based wellness program, together with the reward for other health-contingent wellness programs with respect to the plan, must not exceed the applicable percentage (as defined in paragraph (f)(5) of this section) of the total cost of employee-only coverage under the plan. However, 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 total cost of the coverage in which an employee and any dependents are enrolled. For purposes of this paragraph (f)(4)(ii), the cost of coverage is determined based on the total amount of employer and employee contributions towards the cost of coverage for the benefit package under which the employee is (or the employee and any dependents are) receiving coverage.
(iii) Reasonable design. The program must be reasonably designed to promote health or prevent disease. A program satisfies this standard if it has a reasonable chance of improving the health of, or preventing disease in, participating individuals, and it is not overly burdensome, is not a subterfuge for discriminating based on a health factor, and is not highly suspect in the method chosen to promote health or prevent disease. This determination is based on all the relevant facts and circumstances. To ensure that an outcome-based wellness program is reasonably designed to improve health and does not act as a subterfuge for underwriting or reducing benefits based on a health factor, a reasonable alternative standard to qualify for the reward must be provided to any individual who does not meet the initial standard based on a measurement, test, or screening that is related to a health factor, as explained in paragraph (f)(4)(iv) of this section.
(iv) Uniform availability and reasonable alternative standards. The full reward under the outcome-based wellness program must be available to all similarly situated individuals.
(A) Under this paragraph (f)(4)(iv), a reward under an outcome-based wellness program is not available to all similarly situated individuals for a period unless the program allows a reasonable alternative standard (or waiver of the otherwise applicable standard) for obtaining the reward for any individual who does not meet the initial standard based on the measurement, test, or screening, as described in this paragraph (f)(4)(iv).
(B) While plans and issuers are not required to determine a particular reasonable alternative standard in advance of an individual's request for one, if an individual is described in paragraph (f)(4)(iv)(A) of this section, a reasonable alternative standard must be furnished by the plan or issuer upon the individual's request or the condition for obtaining the reward must be waived.
(C) All the facts and circumstances are taken into account in determining whether a plan or issuer has furnished a reasonable alternative standard, including but not limited to the following:
(1) If the reasonable alternative standard is completion of an educational program, the plan or issuer must make the educational program available or assist the employee in finding such a program (instead of requiring an individual to find such a program unassisted), and may not require an individual to pay for the cost of the program.
(2) The time commitment required must be reasonable (for example, requiring attendance nightly at a one-hour class would be unreasonable).
(3) 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.
(4) If an individual's personal physician states that a plan standard (including, if applicable, the recommendations of the plan's medical professional) is not medically appropriate for that individual, the plan or issuer must provide a reasonable alternative standard that accommodates the recommendations of the individual's personal physician with regard to medical appropriateness. Plans and issuers may impose standard cost sharing under the plan or coverage for medical items and services furnished pursuant to the physician's recommendations.
(D) To the extent that a reasonable alternative standard under an outcome-based wellness program is, itself, an activity-only wellness program, it must comply with the requirements of paragraph (f)(3) of this section in the same manner as if it were an initial program standard. To the extent that a reasonable alternative standard under an outcome-based wellness program is, itself, another outcome-based wellness program, it must comply with the requirements of this paragraph (f)(4), subject to the following special rules:
(1) The reasonable alternative standard cannot be a requirement to meet a different level of the same standard without additional time to comply that takes into account the individual's circumstances. For example, if the initial standard is to achieve a BMI less than 30, the reasonable alternative standard cannot be to achieve a BMI less than 31 on that same date. However, if the initial standard is to achieve a BMI less than 30, a reasonable alternative standard for the individual could be to reduce the individual's BMI by a small amount or small percentage, over a realistic period of time, such as within a year.
(2) An individual must be given the opportunity to comply with the recommendations of the individual's personal physician as a second reasonable alternative standard to meeting the reasonable alternative standard defined by the plan or issuer, but only if the physician joins in the request. The individual can make a request to involve a personal physician's recommendations at any time and the personal physician can adjust the physician's recommendations at any time, consistent with medical appropriateness.
(E) It is not reasonable to seek verification, such as a statement from an individual's personal physician, under an outcome-based wellness program 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 applicable standard as a condition of providing a reasonable alternative to the initial standard. However, if a plan or issuer provides an alternative standard to the otherwise applicable measurement, test, or screening that involves an activity that is related to a health factor, then the rules of paragraph (f)(3) of this section for activity-only wellness programs apply to that component of the wellness program and the plan or issuer may, if reasonable under the circumstances, seek verification that it is unreasonably difficult due to a medical condition for an individual to perform or complete the activity (or it is medically inadvisable to attempt to perform or complete the activity). (For example, if an outcome-based wellness program requires participants to maintain a certain healthy weight and provides a diet and exercise program for individuals who do not meet the targeted weight, a plan or issuer may seek verification, as described in paragraph (f)(3)(iv)(D) of this section, if reasonable under the circumstances, that a second reasonable alternative standard is needed for certain individuals because, for those individuals, it would be unreasonably difficult due to a medical condition to comply, or medically inadvisable to attempt to comply, with the diet and exercise program, due to a medical condition.)
(v) Notice of availability of reasonable alternative standard. The plan or issuer must disclose in all plan materials describing the terms of an outcome-based wellness program, and in any disclosure that an individual did not satisfy an initial outcome-based standard, the availability of a reasonable alternative standard to qualify for the reward (and, if applicable, the possibility of waiver of the otherwise applicable standard), including contact information for obtaining a reasonable alternative standard and a statement that recommendations of an individual's personal physician will be accommodated. If plan materials merely mention that such a program is available, without describing its terms, this disclosure is not required. Sample language is provided in paragraph (f)(6) of this section, as well as in certain examples of this section.
(vi) Examples. The rules of this paragraph (f)(4) are illustrated by the following examples:
Example 1—Cholesterol screening with reasonable alternative standard to work with personal physician. (i) Facts. A group health plan offers a reward to participants who achieve a count under 200 on a total cholesterol test. If a participant does not achieve the targeted cholesterol count, the plan allows the participant to develop an alternative cholesterol action plan in conjunction with the participant's personal physician that may include recommendations for medication and additional screening. The plan allows the physician to modify the standards, as medically necessary, over the year. (For example, if a participant develops asthma or depression, requires surgery and convalescence, or some other medical condition or consideration makes completion of the original action plan inadvisable or unreasonably difficult, the physician may modify the original action plan.) All plan materials describing the terms of the program include the following statement: “Your health plan wants to help you take charge of your health. Rewards are available to all employees who participate in our Cholesterol Awareness Wellness Program. If your total cholesterol 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 and your doctor to find a Health Smart program that is right for you.” In addition, when any individual participant receives notification that his or her cholesterol count is 200 or higher, the notification includes the following statement: “Your plan offers a Health Smart program under which we will work with you and your doctor to try to lower your cholesterol. If you complete this program, you will qualify for a reward. Please contact us at [contact information] to get started.”
(ii) Conclusion. In this Example 1, the program is an outcome-based wellness program because the initial standard requires an individual to attain or maintain a specific health outcome (a certain cholesterol level) to obtain a reward. The program satisfies the requirements of paragraph (f)(4)(iii) of this section because the cholesterol program is reasonably designed to promote health and prevent disease. The program satisfies the requirements of paragraph (f)(4)(iv) of this section because it makes available to all participants who do not meet the cholesterol standard a reasonable alternative standard to qualify for the reward. Lastly, the plan also discloses in all materials describing the terms of the program and in any disclosure that an individual did not satisfy the initial outcome-based standard the availability of a reasonable alternative standard (including contact information and the individual's ability to involve his or her personal physician), as required by paragraph (f)(4)(v) of this section. Thus, the program satisfies the requirements of paragraphs (f)(4)(iii), (iv), and (v) of this section.
Example 2—Cholesterol screening with plan alternative and no opportunity for personal physician involvement. (i) Facts. Same facts as Example 1, except that the wellness program's physician or nurse practitioner (rather than the individual's personal physician) determines the alternative cholesterol action plan. The plan does not provide an opportunity for a participant's personal physician to modify the action plan if it is not medically appropriate for that individual.
(ii) Conclusion. In this Example 2, the wellness program does not satisfy the requirements of paragraph (f)(4)(iii) of this section because the program does not accommodate the recommendations of the participant's personal physician with regard to medical appropriateness, as required under paragraph (f)(4)(iv)(C)(3) of this section. Thus, the program is not reasonably designed under paragraph (f)(4)(iii) of this section and is not available to all similarly situated individuals under paragraph (f)(4)(iv) of this section. The notice also does not provide all the content required under paragraph (f)(4)(v) of this section.
Example 3—Cholesterol screening with plan alternative that can be modified by personal physician. (i) Facts. Same facts as Example 2, except that if a participant's personal physician disagrees with any part of the action plan, the personal physician may modify the action plan at any time, and the plan discloses this to participants.
(ii) Conclusion. In this Example 3, the wellness program satisfies the requirements of paragraph (f)(4)(iii) of this section because the participant's personal physician may modify the action plan determined by the wellness program's physician or nurse practitioner at any time if the physician states that the recommendations are not medically appropriate, as required under paragraph (f)(4)(iv)(C)(3) of this section. Thus, the program is reasonably designed under paragraph (f)(4)(iii) of this section and is available to all similarly situated individuals under paragraph (f)(4)(iv) of this section. The notice, which includes a statement that recommendations of an individual's personal physician will be accommodated, also complies with paragraph (f)(4)(v) of this section.
Example 4—BMI screening with walking program alternative. (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 participant who does not meet the target BMI is given the same discount if the participant complies with an exercise 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 participant satisfies an alternative standard that is reasonable taking into consideration the participant's medical situation, is not unreasonably burdensome or impractical to comply with, and is otherwise reasonably designed based on all the relevant facts and circumstances. All plan materials describing 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 considered overweight because you have a BMI of over 26, 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 work with you (and, if you wish, your own doctor) to develop a wellness program that is.)” Participant E is unable to achieve a BMI that is 26 or lower within the plan's timeframe and receives notification that complies with paragraph (f)(4)(v) of this section. Nevertheless, it is unreasonably difficult due to a medical condition for E to comply with the walking program. E proposes a program based on the recommendations of E's physician. The plan agrees to make the same discount available to E that is available to other participants in the BMI program or the alternative walking program, but only if E actually follows the physician's recommendations.
(ii) Conclusion. In this Example 4, the program is an outcome-based wellness program because the initial standard requires an individual to attain or maintain a specific health outcome (a certain BMI level) to obtain a reward. The program satisfies the requirements of paragraph (f)(4)(iii) of this section because it is reasonably designed to promote health and prevent disease. The program also satisfies the requirements of paragraph (f)(4)(iv) of this section because it makes available to all individuals who do not satisfy the BMI standard a reasonable alternative standard to qualify for the reward (in this case, 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 walking program is, itself, an activity-only standard and the plan complies with the requirements of paragraph (f)(3) of this section (including the requirement of paragraph (f)(3)(iv) that, if there are individuals 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 provide a reasonable alternative to those individuals). Moreover, the plan satisfies the requirements of paragraph (f)(4)(v) of this section because it discloses, in all materials describing the terms of the program and in any disclosure that an individual did not satisfy the initial outcome-based standard, the availability of a reasonable alternative standard (including contact information and the individual's option to involve his or her personal physician) to qualify for the reward or the possibility of waiver of the otherwise applicable standard. Thus, the program satisfies the requirements of paragraphs (f)(4)(iii), (iv), and (v) of this section.
Example 5—BMI screening with alternatives available to either lower BMI or meet personal physician's recommendations. (i) Facts. Same facts as Example 4 except that, with respect to any participant who does not meet the target BMI, instead of a walking program, the participant is expected to reduce BMI by one point. At any point during the year upon request, any individual can obtain a second reasonable alternative standard, which is compliance with the recommendations of the participant's personal physician regarding weight, diet, and exercise as set forth in a treatment plan that the physician recommends or to which the physician agrees. The participant's personal physician is permitted to change or adjust the treatment plan at any time and the option of following the participant's personal physician's recommendations is clearly disclosed.
(ii) Conclusion. In this Example 5, the reasonable alternative standard to qualify for the reward (the alternative BMI standard requiring a one-point reduction) does not make the program unreasonable under paragraph (f)(4)(iii) or (iv) of this section because the program complies with paragraph (f)(4)(iv)(C)(4) of this section by allowing a second reasonable alternative standard to qualify for the reward (compliance with the recommendations of the participant's personal physician, which can be changed or adjusted at any time). Accordingly, the program continues to satisfy the applicable requirements of paragraph (f) of this section.
Example 6—Tobacco use surcharge with smoking cessation program alternative. (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 complete the program, you can avoid this surcharge.” The plan accommodates participants who smoke by facilitating their enrollment in a smoking cessation 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, and discloses contact information and the individual's option to involve his or her personal physician. The plan pays for the cost of participation in the smoking cessation program. Any participant can avoid the surcharge for the plan year by participating in the program, regardless of whether the participant stops smoking, but the plan can require a participant who wants to avoid the surcharge in a subsequent year to complete the smoking cessation program again.
(ii) Conclusion. In this Example 6, the premium differential satisfies the requirements of paragraphs (f)(4)(iii), (iv), and (v). The program is an outcome-based wellness program because the initial standard for obtaining a reward is dependent on the results of a health risk assessment (a measurement, test, or screening). The program is reasonably designed under paragraph (f)(4)(iii) because the plan provides a reasonable alternative standard (as required under paragraph (f)(4)(iv) of this section) to qualify for the reward to all tobacco users (a smoking cessation program). The plan discloses, in all materials describing the terms of the program, the availability of the reasonable alternative standard (including contact information and the individual's option to involve his or her personal physician). Thus, the program satisfies the requirements of paragraphs (f)(4)(iii), (iv), and (v) of this section.
Example 7—Tobacco use surcharge with alternative program requiring actual cessation. (i) Facts. Same facts as Example 6, except the plan does not provide participant F with the reward in subsequent years unless F actually stops smoking after participating in the tobacco cessation program.
(ii) Conclusion. In this Example 7, the program is not reasonably designed under paragraph (f)(4)(iii) of this section and does not provide a reasonable alternative standard as required under paragraph (f)(4)(iv) of this section. The plan cannot cease to provide a reasonable alternative standard merely because the participant did not stop smoking after participating in a smoking cessation program. The plan must continue to offer a reasonable alternative standard whether it is the same or different (such as a new recommendation from F's personal physician or a new nicotine replacement therapy).
Example 8—Tobacco use surcharge with smoking cessation program alternative that is not reasonable. (i) Facts. Same facts as Example 6, except the plan does not facilitate participant F's enrollment in a smoking cessation program. Instead the plan advises F to find a program, pay for it, and provide a certificate of completion to the plan.
(ii) Conclusion. In this Example 8, the requirement for F to find and pay for F's own smoking cessation program means that the alternative program is not reasonable. Accordingly, the plan has not offered a reasonable alternative standard that complies with paragraphs (f)(4)(iii) and (iv) of this section and the program fails to satisfy the requirements of paragraph (f) of this section.
(5) Applicable percentage—(i) For purposes of this paragraph (f), the applicable percentage is 30 percent, except that the applicable percentage is increased by an additional 20 percentage points (to 50 percent) to the extent that the additional percentage is in connection with a program designed to prevent or reduce tobacco use.
(ii) The provisions of this paragraph (f)(5) are illustrated by the following 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 with several components, focused on exercise, blood sugar, weight, cholesterol, and blood pressure. The reward for compliance is an annual premium rebate of $600.
(ii) Conclusion. In this Example 1, the reward for the wellness program, $600, does not exceed the applicable percentage of 30 percent of the total annual cost of employee-only coverage, $1,800. ($6,000 × 30% = $1,800.)
Example 2. (i) Facts. Same facts as Example 1, except the wellness program is exclusively a tobacco prevention program. Employees who have used tobacco 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 employee contribution towards the coverage). (Those who participate in the plan's tobacco cessation program are not assessed the $1,000 surcharge.)
(ii) Conclusion. In this Example 2, the reward for the wellness program (absence of a $1,000 surcharge), does not exceed the applicable percentage of 50 percent of the total annual cost of employee-only coverage, $3,000. ($6,000 × 50% = $3,000.)
Example 3. (i) Facts. Same facts as Example 1, except that, in addition to the $600 reward for compliance with the health-contingent wellness program, the plan also imposes an additional $2,000 tobacco premium surcharge on employees who have used tobacco 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. In this Example 3, the total of all rewards (including absence of a surcharge for participating in the tobacco program) is $2,600 ($600 + $2,000 = $2,600), which does not exceed the applicable percentage of 50 percent of the total annual cost of employee-only coverage ($3,000); and, tested separately, the $600 reward for the wellness program unrelated to tobacco use does not exceed the applicable percentage of 30 percent of the total annual cost of employee-only coverage ($1,800).
Example 4. (i) Facts. An employer sponsors a 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 employees 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 program, with an opportunity to earn a $1,500 reward.
(ii) Conclusion. In this Example 4, even though the total reward for all wellness programs under the plan is $1,750 ($250 + $1,500 = $1,750, which exceeds the applicable percentage of 30 percent of the cost of the annual premium for employee-only coverage ($5,000 × 30% = $1,500)), only the reward offered for compliance with the health-contingent wellness program ($1,500) is taken into account in determining whether the rules of this paragraph (f)(5) are met. (The $250 reward is offered in connection with a participatory wellness program and therefore is not taken into account.) Accordingly, the health-contingent wellness program offers a reward that does not exceed the applicable percentage of 30 percent of the total annual cost of employee-only coverage.
(6) Sample language. The following language, or substantially similar language, can be used to satisfy the notice requirement of paragraphs (f)(3)(v) or (f)(4)(v) of this section: “Your health plan is committed to helping you achieve your best health. Rewards for participating in a wellness program are available to all employees. 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 different means. Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.”
(g) More favorable treatment of individuals with adverse health factors permitted—(1) In rules for eligibility. (i) Nothing in this section prevents a group health plan from establishing more favorable rules for eligibility (described in paragraph (b)(1) of this section) for individuals with an adverse health factor, such as disability, than for individuals without the adverse health factor. Moreover, nothing in this section prevents a plan from charging a higher premium or contribution with respect to individuals with an adverse health factor if they would not be eligible for the coverage were it not for the adverse health factor. (However, other laws, including State insurance laws, may set or limit premium rates; these laws are not affected by this section.)
(ii) The rules of this paragraph (g)(1) are illustrated by the following examples:
Example 1. (i) Facts. An employer sponsors a group health plan that generally is available to employees, spouses of employees, and dependent children until age 26. However, dependent children who are disabled are eligible for coverage beyond age 26.
(ii) Conclusion. In this Example 1, the plan provision allowing coverage for disabled dependent children beyond age 26 satisfies this paragraph (g)(1) (and thus does not violate this section).
Example 2. (i) Facts. An employer sponsors a group health plan, which is generally available to employees (and members of the employee's family) until the last day of the month in which the employee ceases to perform services for the employer. The plan generally charges employees $50 per month for employee-only coverage and $125 per month for family coverage. However, an employee who ceases to perform services for the employer by reason of disability may remain covered under the plan until the last day of the month that is 12 months after the month in which the employee ceased to perform services for the employer. During this extended period of coverage, the plan charges the employee $100 per month for employee-only coverage and $250 per month for family coverage. (This extended period of coverage is without regard to whatever rights the employee (or members of the employee's family) may have for COBRA continuation coverage.)
(ii) Conclusion. In this Example 2, the plan provision allowing extended coverage for disabled employees and their families satisfies this paragraph (g)(1) (and thus does not violate this section). In addition, the plan is permitted, under this paragraph (g)(1), to charge the disabled employees a higher premium during the extended period of coverage.
Example 3. (i) Facts. To comply with the requirements of a COBRA continuation provision, a group health plan generally makes COBRA continuation coverage available for a maximum period of 18 months in connection with a termination of employment but makes the coverage available for a maximum period of 29 months to certain disabled individuals and certain members of the disabled individual's family. Although the plan generally requires payment of 102 percent of the applicable premium for the first 18 months of COBRA continuation coverage, the plan requires payment of 150 percent of the applicable premium for the disabled individual's COBRA continuation coverage during the disability extension if the disabled individual would not be entitled to COBRA continuation coverage but for the disability.
(ii) Conclusion. In this Example 3, the plan provision allowing extended COBRA continuation coverage for disabled individuals satisfies this paragraph (g)(1) (and thus does not violate this section). In addition, the plan is permitted, under this paragraph (g)(1), to charge the disabled individuals a higher premium for the extended coverage if the individuals would not be eligible for COBRA continuation coverage were it not for the disability. (Similarly, if the plan provided an extended period of coverage for disabled individuals pursuant to State law or plan provision rather than pursuant to a COBRA continuation coverage provision, the plan could likewise charge the disabled individuals a higher premium for the extended coverage.)
(2) In premiums or contributions—(i) Nothing in this section prevents a group health plan from charging individuals a premium or contribution that is less than the premium (or contribution) for similarly situated individuals if the lower charge is based on an adverse health factor, such as disability.
(ii) The rules of this paragraph (g)(2) are illustrated by the following example:
Example. (i) Facts. Under a group health plan, employees are generally required to pay $50 per month for employee-only coverage and $125 per month for family coverage under the plan. However, employees who are disabled receive coverage (whether employee-only or family coverage) under the plan free of charge.
(ii) Conclusion. In this Example, the plan provision waiving premium payment for disabled employees is permitted under this paragraph (g)(2) (and thus does not violate this section).
(h) No effect on other laws. Compliance with this section is not determinative of compliance with any provision of ERISA (including the COBRA continuation provisions) or any other State or Federal law, such as the Americans with Disabilities Act. Therefore, although the rules of this section would not prohibit a plan from treating one group of similarly situated individuals differently from another (such as providing different benefit packages to current and former employees), other Federal or State laws may require that two separate groups of similarly situated individuals be treated the same for certain purposes (such as making the same benefit package available to COBRA qualified beneficiaries as is made available to active employees). In addition, although this section generally does not impose new disclosure obligations on plans, this section does not affect any other laws, including those that require accurate disclosures and prohibit intentional misrepresentation.
(i) Applicability dates. This section applies for plan years beginning on or after July 1, 2007.
[T.D. 9298, 71 FR 75030, Dec. 13, 2006; 72 FR 7929, Feb. 22, 2007, as amended by T.D. 9464, 74 FR 51678, Oct. 7, 2009; T.D. 9620, 78 FR 33176, June 3, 2013; T.D. 9656, 79 FR 10305, Feb. 24, 2014]
§ 54.9802-2 Special rules for certain church plans.
(a) Exception for certain church plans—(1) Church plans in general. A church plan described in paragraph (b) of this section is not treated as failing to meet the requirements of section 9802 or § 54.9802-1 solely because the plan requires evidence of good health for coverage of individuals under plan provisions described in paragraph (b)(2) or (3) of this section.
(2) Health insurance issuers. See sections 2702 and 2721(b)(1)(B) of the Public Health Service Act (42 U.S.C. 300gg-2 and 300gg-21(b)(1)(B)) and 45 CFR 146.121, which require health insurance issuers providing health insurance coverage under a church plan that is a group health plan to comply with nondiscrimination requirements similar to those that church plans are required to comply with under section 9802 and § 54.9802-1 except that those nondiscrimination requirements do not include an exception for health insurance issuers comparable to the exception for church plans under section 9802(c) and this section.
(b) Church plans to which this section applies—(1) Church plans with certain coverage provisions in effect on July 15, 1997. This section applies to any church plan (as defined in section 414(e)) for a plan year if, on July 15, 1997 and at all times thereafter before the beginning of the plan year, the plan contains either the provisions described in paragraph (b)(2) of this section or the provisions described in paragraph (b)(3) of this section.
(2) Plan provisions applicable to individuals employed by employers of 10 or fewer employees and self-employed individuals. (i) A plan contains the provisions described in this paragraph (b)(2) if it requires evidence of good health of both—
(A) Any employee of an employer of 10 or fewer employees (determined without regard to section 414(e)(3)(C), under which a church or convention or association of churches is treated as the employer); and
(B) Any self-employed individual.
(ii) A plan does not contain the provisions described in this paragraph (b)(2) if the plan contains only one of the provisions described in this paragraph (b)(2). Thus, for example, a plan that requires evidence of good health of any self-employed individual, but not of any employee of an employer with 10 or fewer employees, does not contain the provisions described in this paragraph (b)(2). Moreover, a plan does not contain the provision described in paragraph (b)(2)(i)(A) of this section if the plan requires evidence of good health of any employee of an employer of fewer than 10 (or greater than 10) employees. Thus, for example, a plan does not contain the provision described in paragraph (b)(2)(i)(A) of this section if the plan requires evidence of good health of any employee of an employer with five or fewer employees.
(3) Plan provisions applicable to individuals who enroll after the first 90 days of initial eligibility. (i) A plan contains the provisions described in this paragraph (b)(3) if it requires evidence of good health of any individual who enrolls after the first 90 days of initial eligibility under the plan.
(ii) A plan does not contain the provisions described in this paragraph (b)(3) if it provides for a longer (or shorter) period than 90 days. Thus, for example, a plan requiring evidence of good health of any individual who enrolls after the first 120 days of initial eligibility under the plan does not contain the provisions described in this paragraph (b)(3).
(c) Examples. The rules of this section are illustrated by the following examples:
Example 1. (i) Facts. A church organization maintains two church plans for entities affiliated with the church. One plan is a group health plan that provides health coverage to all employees (including ministers and lay workers) of any affiliated church entity that has more than 10 employees. The other plan is Plan O, which is a group health plan that is not funded through insurance coverage and that provides health coverage to any employee (including ministers and lay workers) of any affiliated church entity that has 10 or fewer employees and any self-employed individual affiliated with the church (including a self-employed minister of the church). Plan O requires evidence of good health in order for any individual of a church entity that has 10 or fewer employees to be covered and in order for any self-employed individual to be covered. On July 15, 1997 and at all times thereafter before the beginning of the plan year, Plan O has contained all the preceding provisions.
(ii) Conclusion. In this Example 1, because Plan O contains the plan provisions described in paragraph (b)(2) of this section and because those provisions were in the plan on July 15, 1997 and at all times thereafter before the beginning of the plan year, Plan O will not be treated as failing to meet the requirements of section 9802 or § 54.9802-1 for the plan year solely because the plan requires evidence of good health for coverage of the individuals described in those plan provisions.
Example 2. (i) Facts. A church organization maintains Plan P, which is a church plan that is not funded through insurance coverage and that is a group health plan providing health coverage to individuals employed by entities affiliated with the church and self-employed individuals affiliated with the church (such as ministers). On July 15, 1997 and at all times thereafter before the beginning of the plan year, Plan P has required evidence of good health for coverage of any individual who enrolls after the first 90 days of initial eligibility under the plan.
(ii) Conclusion. In this Example 2, because Plan P contains the plan provisions described in paragraph (b)(3) of this section and because those provisions were in the plan on July 15, 1997 and at all times thereafter before the beginning of the plan year, Plan P will not be treated as failing to meet the requirements of section 9802 or § 54.9802-1 for the plan year solely because the plan requires evidence of good health for coverage of individuals enrolling after the first 90 days of initial eligibility under the plan.
(d) Applicability date. This section is applicable to plan years beginning on or after July 1, 2007.
[T.D. 9299, 71 FR 75056, Dec. 13, 2006]
§ 54.9802-3T Additional requirements prohibiting discrimination based on genetic information (temporary).
(a) Definitions. Unless otherwise provided, the definitions in this paragraph (a) govern in applying the provisions of this section.
(1) Collect means, with respect to information, to request, require, or purchase such information.
(2) Family member means, with respect to an individual —
(i) A dependent (as defined for purposes of § 54.9801-2) of the individual; or
(ii) Any other person who is a first-degree, second-degree, third-degree, or fourth-degree relative of the individual or of a dependent of the individual. Relatives by affinity (such as by marriage or adoption) are treated the same as relatives by consanguinity (that is, relatives who share a common biological ancestor). In determining the degree of the relationship, relatives by less than full consanguinity (such as half-siblings, who share only one parent) are treated the same as relatives by full consanguinity (such as siblings who share both parents).
(A) First-degree relatives include parents, spouses, siblings, and children.
(B) Second-degree relatives include grandparents, grandchildren, aunts, uncles, nephews, and nieces.
(C) Third-degree relatives include great-grandparents, great-grandchildren, great aunts, great uncles, and first cousins.
(D) Fourth-degree relatives include great-great grandparents, great-great grandchildren, and children of first cousins.
(3) Genetic information means—
(i) Subject to paragraphs (a)(3)(ii) and (a)(3)(iii) of this section, with respect to an individual, information about—
(A) The individual's genetic tests (as defined in paragraph (a)(5) of this section);
(B) The genetic tests of family members of the individual;
(C) The manifestation (as defined in paragraph (a)(6) of this section) of a disease or disorder in family members of the individual; or
(D) Any request for, or receipt of, genetic services (as defined in paragraph (a)(4) of this section), or participation in clinical research which includes genetic services, by the individual or any family member of the individual.
(ii) The term genetic information does not include information about the sex or age of any individual.
(iii) The term genetic information includes—
(A) With respect to a pregnant woman (or a family member of the pregnant woman), genetic information of any fetus carried by the pregnant woman; and
(B) With respect to an individual (or a family member of the individual) who is utilizing an assisted reproductive technology, genetic information of any embryo legally held by the individual or family member.
(4) Genetic services means—
(i) A genetic test, as defined in paragraph (a)(5) of this section;
(ii) Genetic counseling (including obtaining, interpreting, or assessing genetic information); or
(iii) Genetic education.
(5)(i) Genetic test means an analysis of human DNA, RNA, chromosomes, proteins, or metabolites, if the analysis detects genotypes, mutations, or chromosomal changes. However, a genetic test does not include an analysis of proteins or metabolites that is directly related to a manifested disease, disorder, or pathological condition. Accordingly, a test to determine whether an individual has a BRCA1 or BRCA2 variant is a genetic test. Similarly, a test to determine whether an individual has a genetic variant associated with hereditary nonpolyposis colorectal cancer is a genetic test. However, an HIV test, complete blood count, cholesterol test, liver function test, or test for the presence of alcohol or drugs is not a genetic test.
(ii) The rules of this paragraph (a)(5) are illustrated by the following example:
Example. (i) Facts. Individual A is a newborn covered under a group health plan. A undergoes a phenylketonuria (PKU) screening, which measures the concentration of a metabolite, phenylalanine, in A's blood. In PKU, a mutation occurs in the phenylalanine hydroxylase (PAH) gene which contains instructions for making the enzyme needed to break down the amino acid phenylalanine. Individuals with the mutation, who have a deficiency in the enzyme to break down phenylalanine, have high concentrations of phenylalanine.
(ii) Conclusion. In this Example, the PKU screening is a genetic test with respect to A because the screening is an analysis of metabolites that detects a genetic mutation.
(6)(i) Manifestation or manifested means, with respect to a disease, disorder, or pathological condition, that an individual has been or could reasonably be diagnosed with the disease, disorder, or pathological condition by a health care professional with appropriate training and expertise in the field of medicine involved. For purposes of this section, a disease, disorder, or pathological condition is not manifested if a diagnosis is based principally on genetic information.
(ii) The rules of this paragraph (a)(6) are illustrated by the following examples:
Example 1. (i) Facts. Individual A has a family medical history of diabetes. A begins to experience excessive sweating, thirst, and fatigue. A's physician examines A and orders blood glucose testing (which is not a genetic test). Based on the physician's examination, A's symptoms, and test results that show elevated levels of blood glucose, A's physician diagnoses A as having adult onset diabetes mellitus (Type 2 diabetes).
(ii) Conclusion. In this Example 1, A has been diagnosed by a health care professional with appropriate training and expertise in the field of medicine involved. The diagnosis is not based principally on genetic information. Thus, Type 2 diabetes is manifested with respect to A.
Example 2. (i) Facts. Individual B has several family members with colon cancer. One of them underwent genetic testing which detected a mutation in the MSH2 gene associated with hereditary nonpolyposis colorectal cancer (HNPCC). B's physician, a health care professional with appropriate training and expertise in the field of medicine involved, recommends that B undergo a targeted genetic test to look for the specific mutation found in B's relative to determine if B has an elevated risk for cancer. The genetic test with respect to B showed that B also carries the mutation and is at increased risk to develop colorectal and other cancers associated with HNPCC. B has a colonoscopy which indicates no signs of disease, and B has no symptoms.
(ii) Conclusion. In this Example 2, because B has no signs or symptoms of colorectal cancer, B has not been and could not reasonably be diagnosed with HNPCC. Thus, HNPCC is not manifested with respect to B.
Example 3. (i) Facts. Same facts as Example 2, except that B's colonoscopy and subsequent tests indicate the presence of HNPCC. Based on the colonoscopy and subsequent test results, B's physician makes a diagnosis of HNPCC.
(ii) Conclusion. In this Example 3, HNPCC is manifested with respect to B because a health care professional with appropriate training and expertise in the field of medicine involved has made a diagnosis that is not based principally on genetic information.
Example 4. (i) Facts. Individual C has a family member that has been diagnosed with Huntington's Disease. A genetic test indicates that C has the Huntington's Disease gene variant. At age 42, C begins suffering from occasional moodiness and disorientation, symptoms which are associated with Huntington's Disease. C is examined by a neurologist (a physician with appropriate training and expertise for diagnosing Huntington's Disease). The examination includes a clinical neurological exam. The results of the examination do not support a diagnosis of Huntington's Disease.
(ii) Conclusion. In this Example 4, C is not and could not reasonably be diagnosed with Huntington's Disease by a health care professional with appropriate training and expertise. Therefore, Huntington's Disease is not manifested with respect to C.
Example 5. (i) Facts. Same facts as Example 4, except that C exhibits additional neurological and behavioral symptoms, and the results of the examination support a diagnosis of Huntington's Disease with respect to C.
(ii) Conclusion. In this Example 5, C could reasonably be diagnosed with Huntington's Disease by a health care professional with appropriate training and expertise. Therefore, Huntington's Disease is manifested with respect to C.
(7) Underwriting purposes has the meaning given in paragraph (d)(1) of this section.
(b) No group-based discrimination based on genetic information—(1) In general. For purposes of this section, a group health plan must not adjust premium or contribution amounts for any employer, or any group of similarly situated individuals under the plan, on the basis of genetic information. For this purpose, “similarly situated individuals” are those described in § 54.9802-1(d).
(2) Rule of construction. Nothing in paragraph (b)(1) of this section (or in paragraph (d)(1) or (d)(2) of this section) limits the ability of a group health plan to increase the premium for an employer or for a group of similarly situated individuals under the plan based on the manifestation of a disease or disorder of an individual who is enrolled in the plan. In such a case, however, the manifestation of a disease or disorder in one individual cannot also be used as genetic information about other group members to further increase the premium for an employer or a group of similarly situated individuals under the plan.
(3) Examples. The rules of this paragraph (b) are illustrated by the following examples:
Example 1. (i) Facts. An employer sponsors a group health plan that provides coverage through a health insurance issuer. In order to determine the premium rate for the upcoming plan year, the issuer reviews the claims experience of individuals covered under the plan and other health status information of the individuals, including genetic information. The issuer finds that three individuals covered under the plan had unusually high claims experience. In addition, the issuer finds that the genetic information of two other individuals indicates the individuals have a higher probability of developing certain illnesses although the illnesses are not manifested at this time. The issuer quotes the plan a higher per-participant rate because of both the genetic information and the higher claims experience.
(ii) Conclusion. See Example 1 in 29 CFR 2590.702-1(b)(3) or 45 CFR 146.122(b)(3) for a conclusion that the issuer violates the provisions of 29 CFR 2590.702-1(b) or 45 CFR 146.122(b) similar to the requirements of this paragraph (b) because the issuer adjusts the premium based on genetic information. However, if the adjustment related solely to claims experience, the adjustment would not violate the requirements of 29 CFR 2590.702-1 or 45 CFR 146.122 similar to the requirements of this section (nor would it violate the requirements of paragraph (c) of 29 CFR 2590.702 or 45 CFR 146.121 similar to the requirements of paragraph (c) of § 54.9802-1, which prohibits discrimination in individual premiums or contributions based on a health factor but permits increases in the group rate based on a health factor).
Example 2. (i) Facts. An employer sponsors a group health plan that provides coverage through a health insurance issuer. In order to determine the premium rate for the upcoming plan year, the issuer reviews the claims experience of individuals covered under the plan and other health status information of the individuals, including genetic information. The issuer finds that Employee A has made claims for treatment of polycystic kidney disease. A also has two dependent children covered under the plan. The issuer quotes the plan a higher per-participant rate because of both A's claims experience and the family medical history of A's children (that is, the fact that A has the disease).
(ii) Conclusion. See Example 2 in 29 CFR 2590.702-1(b)(3) or 45 CFR 146.122(b)(3) for a conclusion that the issuer violates the provisions of 29 CFR 2590.702-1(b) or 45 CFR 146.122(b) similar to the requirements of this paragraph (b) because, by taking the likelihood that A's children may develop polycystic kidney disease into account in computing the rate for the plan, the issuer adjusts the premium based on genetic information relating to a condition that has not been manifested in A's children. However, the issuer does not violate the requirements of 29 CFR 2590.702-1(b) or 45 CFR 146.122(b) similar to the requirements of this paragraph (b) by increasing the premium based on A's claims experience.
(c) Limitation on requesting or requiring genetic testing—(1) General rule. Except as otherwise provided in this paragraph (c), a group health plan must not request or require an individual or a family member of the individual to undergo a genetic test.
(2) Health care professional may recommend a genetic test. Nothing in paragraph (c)(1) of this section limits the authority of a health care professional who is providing health care services to an individual to request that the individual undergo a genetic test.
(3) Examples. The rules of paragraphs (c)(1) and (c)(2) of this section are illustrated by the following examples:
Example 1. (i) Facts. Individual A goes to a physician for a routine physical examination. The physician reviews A's family medical history and A informs the physician that A's mother has been diagnosed with Huntington's Disease. The physician advises A that Huntington's Disease is hereditary and recommends that A undergo a genetic test.
(ii) Conclusion. In this Example 1, the physician is a health care professional who is providing health care services to A. Therefore, the physician's recommendation that A undergo the genetic test does not violate this paragraph (c).
Example 2. (i) Facts. Individual B is covered by a health maintenance organization (HMO). B is a child being treated for leukemia. B's physician, who is employed by the HMO, is considering a treatment plan that includes six-mercaptopurine, a drug for treating leukemia in most children. However, the drug could be fatal if taken by a small percentage of children with a particular gene variant. B's physician recommends that B undergo a genetic test to detect this variant before proceeding with this course of treatment.
(ii) Conclusion. In this Example 2, even though the physician is employed by the HMO, the physician is nonetheless a health care professional who is providing health care services to B. Therefore, the physician's recommendation that B undergo the genetic test does not violate this paragraph (c).
(4) Determination regarding payment—(i) In general. As provided in this paragraph (c)(4), nothing in paragraph (c)(1) of this section precludes a plan from obtaining and using the results of a genetic test in making a determination regarding payment. For this purpose, “payment” has the meaning given such term in 45 CFR 164.501 of the privacy regulations issued under the Health Insurance Portability and Accountability Act. Thus, if a plan conditions payment for an item or service based on its medical appropriateness and the medical appropriateness of the item or service depends on the genetic makeup of a patient, then the plan is permitted to condition payment for the item or service on the outcome of a genetic test. The plan may also refuse payment if the patient does not undergo the genetic test.
(ii) Limitation. A plan is permitted to request only the minimum amount of information necessary to make a determination regarding payment. The minimum amount of information necessary is determined in accordance with the minimum necessary standard in 45 CFR 164.502(b) of the privacy regulations issued under the Health Insurance Portability and Accountability Act.
(iii) Examples. See paragraph (e) of this section for examples illustrating the rules of this paragraph (c)(4), as well as other provisions of this section.
(5) Research exception. Notwithstanding paragraph (c)(1) of this section, a plan may request, but not require, that a participant or beneficiary undergo a genetic test if all of the conditions of this paragraph (c)(5) are met:
(i) Research in accordance with Federal regulations and applicable State or local law or regulations. The plan makes the request pursuant to research, as defined in 45 CFR 46.102(d), that complies with 45 CFR Part 46 or equivalent Federal regulations, and any applicable State or local law or regulations for the protection of human subjects in research.
(ii) Written request for participation in research. The plan makes the request in writing, and the request clearly indicates to each participant or beneficiary (or, in the case of a minor child, to the legal guardian of the beneficiary) that—
(A) Compliance with the request is voluntary; and
(B) Noncompliance will have no effect on eligibility for benefits (as described in § 54.9802-1(b)(1)) or premium or contribution amounts.
(iii) Prohibition on underwriting. No genetic information collected or acquired under this paragraph (c)(5) can be used for underwriting purposes (as described in paragraph (d)(1) of this section).
(iv) Notice to Federal agencies. The plan completes a copy of the “Notice of Research Exception under the Genetic Information Nondiscrimination Act” authorized by the Secretary and provides the notice to the address specified in the instructions thereto.
(d) Prohibitions on collection of genetic information—(1) For underwriting purposes—(i) General rule. A group health plan must not collect (as defined in paragraph (a)(1) of this section) genetic information for underwriting purposes. See paragraph (e) of this section for examples illustrating the rules of this paragraph (d)(1), as well as other provisions of this section.
(ii) Underwriting purposes defined. Subject to paragraph (d)(1)(iii) of this section, underwriting purposes means, with respect to any group health plan, or health insurance coverage offered in connection with a group health plan—
(A) Rules for, or determination of, eligibility (including enrollment and continued eligibility) for benefits under the plan or coverage as described in § 54.9802-1(b)(1)(ii) (including changes in deductibles or other cost-sharing mechanisms in return for activities such as completing a health risk assessment or participating in a wellness program);
(B) The computation of premium or contribution amounts under the plan or coverage (including discounts, rebates, payments in kind, or other premium differential mechanisms in return for activities such as completing a health risk assessment or participating in a wellness program);
(C) The application of any preexisting condition exclusion under the plan or coverage; and
(D) Other activities related to the creation, renewal, or replacement of a contract of health insurance or health benefits.
(iii) Medical appropriateness. If an individual seeks a benefit under a group health plan, the plan may limit or exclude the benefit based on whether the benefit is medically appropriate, and the determination of whether the benefit is medically appropriate is not within the meaning of underwriting purposes. Accordingly, if an individual seeks a benefit under the plan and the plan conditions the benefit based on its medical appropriateness and the medical appropriateness of the benefit depends on genetic information of the individual, then the plan is permitted to condition the benefit on the genetic information. A plan is permitted to request only the minimum amount of genetic information necessary to determine medical appropriateness. The plan may deny the benefit if the patient does not provide the genetic information required to determine medical appropriateness. If an individual is not seeking a benefit, the medical appropriateness exception of this paragraph (d)(1)(iii) to the definition of underwriting purposes does not apply. See paragraph (e) of this section for examples illustrating the medical appropriateness provisions of this paragraph (d)(1)(iii), as well as other provisions of this section.
(2) Prior to or in connection with enrollment—(i) In general. A group health plan must not collect genetic information with respect to any individual prior to that individual's effective date of coverage under that plan, nor in connection with the rules for eligibility (as defined in § 54.9802-1(b)(1)(ii)) that apply to that individual. Whether or not an individual's information is collected prior to that individual's effective date of coverage is determined at the time of collection.
(ii) Incidental collection exception—(A) In general. If a group health plan obtains genetic information incidental to the collection of other information concerning any individual, the collection is not a violation of this paragraph (d)(2), as long as the collection is not for underwriting purposes in violation of paragraph (d)(1) of this section.
(B) Limitation. The incidental collection exception of this paragraph (d)(2)(ii) does not apply in connection with any collection where it is reasonable to anticipate that health information will be received, unless the collection explicitly states that genetic information should not be provided.
(3) Examples. The rules of this paragraph (d) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan provides a premium reduction to enrollees who complete a health risk assessment. The health risk assessment is requested to be completed after enrollment. Whether or not it is completed or what responses are given on it has no effect on an individual's enrollment status, or on the enrollment status of members of the individual's family. The health risk assessment includes questions about the individual's family medical history.
(ii) Conclusion. In this Example 1, the health risk assessment includes a request for genetic information (that is, the individual's family medical history). Because completing the health risk assessment results in a premium reduction, the request for genetic information is for underwriting purposes. Consequently, the request violates the prohibition on the collection of genetic information in paragraph (d)(1) of this section.
Example 2. (i) Facts. The same facts as Example 1, except there is no premium reduction or any other reward for completing the health risk assessment.
(ii) Conclusion. In this Example 2, the request is not for underwriting purposes, nor is it prior to or in connection with enrollment. Therefore, it does not violate the prohibition on the collection of genetic information in this paragraph (d).
Example 3. (i) Facts. A group health plan requests that enrollees complete a health risk assessment prior to enrollment, and includes questions about the individual's family medical history. There is no reward or penalty for completing the health risk assessment.
(ii) Conclusion. In this Example 3, because the health risk assessment includes a request for genetic information (that is, the individual's family medical history), and requests the information prior to enrollment, the request violates the prohibition on the collection of genetic information in paragraph (d)(2) of this section. Moreover, because it is a request for genetic information, it is not an incidental collection under paragraph (d)(2)(ii) of this section.
Example 4. (i) Facts. The facts are the same as in Example 1, except there is no premium reduction or any other reward given for completion of the health risk assessment. However, certain people completing the health risk assessment may become eligible for additional benefits under the plan by being enrolled in a disease management program based on their answers to questions about family medical history. Other people may become eligible for the disease management program based solely on their answers to questions about their individual medical history.
(ii) Conclusion. In this Example 4, the request for information about an individual's family medical history could result in the individual being eligible for benefits for which the individual would not otherwise be eligible. Therefore, the questions about family medical history on the health risk assessment are a request for genetic information for underwriting purposes and are prohibited under this paragraph (d). Although the plan conditions eligibility for the disease management program based on determinations of medical appropriateness, the exception for determinations of medical appropriateness does not apply because the individual is not seeking benefits.
Example 5. (i) Facts. A group health plan requests enrollees to complete two distinct health risk assessments (HRAs) after and unrelated to enrollment. The first HRA instructs the individual to answer only for the individual and not for the individual's family. The first HRA does not ask about any genetic tests the individual has undergone or any genetic services the individual has received. The plan offers a reward for completing the first HRA. The second HRA asks about family medical history and the results of genetic tests the individual has undergone. The plan offers no reward for completing the second HRA and the instructions make clear that completion of the second HRA is wholly voluntary and will not affect the reward given for completion of the first HRA.
(ii) Conclusion. In this Example 5, no genetic information is collected in connection with the first HRA, which offers a reward, and no benefits or other rewards are conditioned on the request for genetic information in the second HRA. Consequently, the request for genetic information in the second HRA is not for underwriting purposes, and the two HRAs do not violate the prohibition on the collection of genetic information in this paragraph (d).
Example 6. (i) Facts. A group health plan waives its annual deductible for enrollees who complete an HRA. The HRA is requested to be completed after enrollment. Whether or not the HRA is completed or what responses are given on it has no effect on an individual's enrollment status, or on the enrollment status of members of the individual's family. The HRA does not include any direct questions about the individual's genetic information (including family medical history). However, the last question reads, “Is there anything else relevant to your health that you would like us to know or discuss with you?”
(ii) Conclusion. In this Example 6, the plan's request for medical information does not explicitly state that genetic information should not be provided. Therefore, any genetic information collected in response to the question is not within the incidental collection exception and is prohibited under this paragraph (d).
Example 7. (i) Facts. Same facts as Example 6, except that the last question goes on to state, “In answering this question, you should not include any genetic information. That is, please do not include any family medical history or any information related to genetic testing, genetic services, genetic counseling, or genetic diseases for which you believe you may be at risk.”
(ii) Conclusion. In this Example 7, the plan's request for medical information explicitly states that genetic information should not be provided. Therefore, any genetic information collected in response to the question is within the incidental collection exception. However, the plan may not use any genetic information it obtains incidentally for underwriting purposes.
Example 8. (i) Facts. Issuer M acquires Issuer N. M requests N's records, stating that N should not provide genetic information and should review the records to excise any genetic information. N assembles the data requested by M and, although N reviews it to delete genetic information, the data from a specific region included some individuals' family medical history. Consequently, M receives genetic information about some of N's covered individuals.
(ii) Conclusion. In this Example 8, M's request for health information explicitly stated that genetic information should not be provided. See Example 8 in 29 CFR 2590.702-1(d)(3) or 45 CFR 146.122(d)(3) for a conclusion that the collection of genetic information was within the incidental collection exception of 29 CFR 2590.702-1(d)(2)(ii) or 45 CFR 146.122(d)(ii) similar to the incidental exception of paragraph (d)(2)(ii) of this section. See Example 8 in 29 CFR 2590.702-1(d)(3) or 45 CFR 146.122(d)(3) also for a caveat that M may not use the genetic information it obtained incidentally for underwriting purposes.
(e) Examples regarding determinations of medical appropriateness. The application of the rules of paragraphs (c) and (d) of this section to plan determinations of medical appropriateness is illustrated by the following examples:
Example 1. (i) Facts. Individual A's group health plan covers genetic testing for celiac disease for individuals who have family members with this condition. After A's son is diagnosed with celiac disease, A undergoes a genetic test and promptly submits a claim for the test to A's issuer for reimbursement. The issuer asks A to provide the results of the genetic test before the claim is paid.
(ii) Conclusion. See Example 1 in 29 CFR 2590.702-1(e) or 45 CFR 146.122(e) for a conclusion under the rules of paragraph (c)(4) of 29 CFR 2590.702-1 or 45 CFR 146.122 similar to the rules of paragraph (c)(4) of this section that the issuer is permitted to request only the minimum amount of information necessary to make a decision regarding payment. Because the results of the test are not necessary for the issuer to make a decision regarding the payment of A's claim, the conclusion in Example 1 in 29 CFR 2590.702-1(e) or 45 CFR 146.122(e) concludes that the issuer's request for the results of the genetic test violates paragraph (c) of 29 CFR 2590.702-1 or 45 CFR 146.122 similar to paragraph (c) of this section.
Example 2. (i) Facts. Individual B's group health plan covers a yearly mammogram for participants and beneficiaries starting at age 40, or at age 30 for those with increased risk for breast cancer, including individuals with BRCA1 or BRCA2 gene mutations. B is 33 years old and has the BRCA2 mutation. B undergoes a mammogram and promptly submits a claim to B's plan for reimbursement. Following an established policy, the plan asks B for evidence of increased risk of breast cancer, such as the results of a genetic test or a family history of breast cancer, before the claim for the mammogram is paid. This policy is applied uniformly to all similarly situated individuals and is not directed at individuals based on any genetic information.
(ii) Conclusion. In this Example 2, the plan does not violate paragraphs (c) or (d) of this section. Under paragraph (c), the plan is permitted to request and use the results of a genetic test to make a determination regarding payment, provided the plan requests only the minimum amount of information necessary. Because the medical appropriateness of the mammogram depends on the genetic makeup of the patient, the minimum amount of information necessary includes the results of the genetic test. Similarly, the plan does not violate paragraph (d) of this section because the plan is permitted to request genetic information in making a determination regarding the medical appropriateness of a claim if the genetic information is necessary to make the determination (and if the genetic information is not used for underwriting purposes).
Example 3. (i) Facts. Individual C was previously diagnosed with and treated for breast cancer, which is currently in remission. In accordance with the recommendation of C's physician, C has been taking a regular dose of tamoxifen to help prevent a recurrence. C's group health plan adopts a new policy requiring patients taking tamoxifen to undergo a genetic test to ensure that tamoxifen is medically appropriate for their genetic makeup. In accordance with, at the time, the latest scientific research, tamoxifen is not helpful in up to 7 percent of breast cancer patients, those with certain variations of the gene for making the CYP2D6 enzyme. If a patient has a gene variant making tamoxifen not medically appropriate, the plan does not pay for the tamoxifen prescription.
(ii) Conclusion. In this Example 3, the plan does not violate paragraph (c) of this section if it conditions future payments for the tamoxifen prescription on C's undergoing a genetic test to determine what genetic markers C has for making the CYP2D6 enzyme. Nor does the plan violate paragraph (c) of this section if the plan refuses future payment if the results of the genetic test indicate that tamoxifen is not medically appropriate for C.
Example 4. (i) Facts. A group health plan offers a diabetes disease management program to all similarly situated individuals for whom it is medically appropriate based on whether the individuals have or are at risk for diabetes. The program provides enhanced benefits related only to diabetes for individuals who qualify for the program. The plan sends out a notice to all participants that describes the diabetes disease management program and explains the terms for eligibility. Individuals interested in enrolling in the program are advised to contact the plan to demonstrate that they have diabetes or that they are at risk for diabetes. For individuals who do not currently have diabetes, genetic information may be used to demonstrate that an individual is at risk.
(ii) Conclusion. In this Example 4, the plan may condition benefits under the disease management program upon a showing by an individual that the individual is at risk for diabetes, even if such showing may involve genetic information, provided that the plan requests genetic information only when necessary to make a determination regarding whether the disease management program is medically appropriate for the individual and only requests the minimum amount of information necessary to make that determination.
Example 5. (i) Facts. Same facts as Example 4, except that the plan includes a questionnaire that asks about the occurrence of diabetes in members of the individual's family as part of the notice describing the disease management program.
(ii) Conclusion. In this Example 5, the plan violates the requirements of paragraph (d)(1) of this section because the requests for genetic information are not limited to those situations in which it is necessary to make a determination regarding whether the disease management program is medically appropriate for the individuals.
Example 6. (i) Facts. Same facts as Example 4, except the disease management program provides an enhanced benefit in the form of a lower annual deductible to individuals under the program; the lower deductible applies with respect to all medical expenses incurred by the individual. Thus, whether or not a claim relates to diabetes, the individual is provided with a lower deductible based on the individual providing the plan with genetic information.
(ii) Conclusion. In this Example 6, because the enhanced benefits include benefits not related to the determination of medical appropriateness, making available the enhanced benefits is within the meaning of underwriting purposes. Accordingly, the plan may not request or require genetic information (including family history information) in determining eligibility for enhanced benefits under the program because such a request would be for underwriting purposes and would violate paragraph (d)(1) of this section.
(f) Effective/applicability date. This section applies for plan years beginning on or after December 7, 2009.
(g) Expiration date. This section expires on or before October 1, 2012.
[T.D. 9464, 74 FR 51678, Oct. 7, 2009]
§ 54.9802-4 Special Rule Allowing Integration of Health Reimbursement Arrangements (HRAs) and Other Account-Based Group Health Plans with Individual Health Insurance Coverage and Medicare and Prohibiting Discrimination In HRAs and Other Account-Based Group Health Plans.
(a) Scope. This section applies to health reimbursement arrangements (HRAs) and other account-based group health plans, as defined in § 54.9815-2711(d)(6)(i) of this chapter. For ease of reference, the term “HRA” is used in this section to include other account-based group health plans. For related regulations, see 26 CFR 1.36B-2(c)(3)(i) and (c)(5), 29 CFR 2510.3-1(l), and 45 CFR 155.420.
(b) Purpose. This section provides the conditions that an HRA must satisfy in order to be integrated with individual health insurance coverage for purposes of Public Health Service Act (PHS Act) sections 2711 and 2713 and § 54.9815-2711(d)(4) of this chapter (referred to as an individual coverage HRA). This section also allows an individual coverage HRA to be integrated with Medicare for purposes of PHS Act sections 2711 and 2713 and § 54.9815-2711(d)(4), subject to the conditions provided in this section (see paragraph (e) of this section). Some of the conditions set forth in this section specifically relate to compliance with PHS Act sections 2711 and 2713 and some relate to the effect of having or being offered an individual coverage HRA on eligibility for the premium tax credit under section 36B. In addition, this section provides conditions that an individual coverage HRA must satisfy in order to comply with the nondiscrimination provisions in section 9802 and PHS Act section 2705 (which is incorporated in section 9815) and that are consistent with the provisions of the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), each as amended, that are designed to create a competitive individual market. These conditions are intended to prevent an HRA plan sponsor from intentionally or unintentionally, directly or indirectly, steering any participants or dependents with adverse health factors away from its traditional group health plan, if any, and toward individual health insurance coverage.
(c) General rule. An HRA will be considered to be integrated with individual health insurance coverage for purposes of PHS Act sections 2711 and 2713 and § 54.9815-2711(d)(4) of this chapter and will not be considered to discriminate in violation of section 9802 and PHS Act section 2705 solely because it is integrated with individual health insurance coverage, provided that the conditions of this paragraph (c) are satisfied. See paragraph (e) of this section for how these conditions apply to an individual coverage HRA integrated with Medicare. For purposes of this section, medical care expenses means medical care expenses as defined in § 54.9815-2711(d)(6)(ii) of this chapter and Exchange means Exchange as defined in 45 CFR 155.20.
(1) Enrollment in individual health insurance coverage—(i) In general. The HRA must require that the participant and any dependent(s) are enrolled in individual health insurance coverage that is subject to and complies with the requirements in PHS Act section 2711 (and § 54.9815-2711(a)(2) of this chapter) and PHS Act section 2713 (and § 54.9815-2713(a)(1) of this chapter), for each month that the individual(s) are covered by the HRA. For purposes of this paragraph (c), all individual health insurance coverage, except for individual health insurance coverage that consists solely of excepted benefits, is treated as being subject to and complying with PHS Act sections 2711 and 2713. References to individual health insurance coverage in this paragraph (c) do not include individual health insurance coverage that consists solely of excepted benefits.
(ii) Forfeiture. The HRA must provide that if any individual covered by the HRA ceases to be covered by individual health insurance coverage, the HRA will not reimburse medical care expenses that are incurred by that individual after the individual health insurance coverage ceases. In addition, if the participant and all dependents covered by the participant's HRA cease to be covered by individual health insurance coverage, the participant must forfeit the HRA. In either case, the HRA must reimburse medical care expenses incurred by the individual prior to the cessation of individual health insurance coverage to the extent the medical care expenses are otherwise covered by the HRA, but the HRA may limit the period to submit medical care expenses for reimbursement to a reasonable specified time period. If a participant or dependent loses coverage under the HRA for a reason other than cessation of individual health insurance coverage, COBRA and other continuation coverage requirements may apply.
(iii) Grace periods and retroactive termination of individual health insurance coverage. In the event an individual is initially enrolled in individual health insurance coverage and subsequently timely fails to pay premiums for the coverage, with the result that the individual is in a grace period, the individual is considered to be enrolled in individual health insurance coverage for purposes of this paragraph (c)(1) and the individual coverage HRA must reimburse medical care expenses incurred by the individual during that time period to the extent the medical care expenses are otherwise covered by the HRA. If the individual fails to pay the applicable premium(s) by the end of the grace period and the coverage is cancelled or terminated, including retroactively, or if the individual health insurance coverage is cancelled or terminated retroactively for some other reason (for example, a rescission), an individual coverage HRA must require that a participant notify the HRA that coverage has been cancelled or terminated and the date on which the cancellation or termination is effective. After the individual coverage HRA has received the notice of cancellation or termination, the HRA may not reimburse medical care expenses incurred on and after the date the individual health insurance coverage was cancelled or terminated, which is considered to be the date of termination of coverage under the HRA.
(2) No traditional group health plan may be offered to same participants. To the extent a plan sponsor offers any class of employees (as defined in paragraph (d) of this section) an individual coverage HRA, the plan sponsor may not also offer a traditional group health plan to the same class of employees, except as provided in paragraph (d)(5) of this section. For purposes of this section, a traditional group health plan is any group health plan other than either an account-based group health plan or a group health plan that consists solely of excepted benefits. Therefore, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any participant or dependent.
(3) Same terms requirement—(i) In general. If a plan sponsor offers an individual coverage HRA to a class of employees described in paragraph (d) of this section, the HRA must be offered on the same terms to all participants within the class, except as provided in paragraphs (c)(3)(ii) through (vi) and (d)(5) of this section.
(ii) Carryover amounts, salary reduction arrangements, and transfer amounts. Amounts that are not used to reimburse medical care expenses for any plan year that are made available to participants in later plan years are disregarded for purposes of determining whether an HRA is offered on the same terms, provided that the method for determining whether participants have access to unused amounts in future years, and the methodology and formula for determining the amounts of unused funds which they may access in future years, is the same for all participants in a class of employees. In addition, the ability to pay the portion of the premium for individual health insurance coverage that is not covered by the HRA, if any, by using a salary reduction arrangement under section 125 is considered to be a term of the HRA for purposes of this paragraph (c)(3). Therefore, an HRA is not provided on the same terms unless the salary reduction arrangement, if made available to any participant in a class of employees, is made available on the same terms to all participants (other than former employees, as defined in paragraph (c)(3)(iv) of this section) in the class of employees. Further, to the extent that a participant in an individual coverage HRA was previously covered by another HRA and the current individual coverage HRA makes available amounts that were not used to reimburse medical care expenses under the prior HRA (transferred amounts), the transferred amounts are disregarded for purposes of determining whether the HRA is offered on the same terms, provided that if the HRA makes available transferred amounts, it does so on the same terms for all participants in the class of employees.
(iii) Permitted variation. An HRA does not fail to be provided on the same terms solely because the maximum dollar amount made available to participants in a class of employees to reimburse medical care expenses for any plan year increases in accordance with paragraph (c)(3)(iii)(A) or (B) of this section.
(A) Variation due to number of dependents. An HRA does not fail to be provided on the same terms to participants in a class of employees solely because the maximum dollar amount made available to those participants to reimburse medical care expenses for any plan year increases as the number of the participant's dependents who are covered under the HRA increases, so long as the same maximum dollar amount attributable to the increase in family size is made available to all participants in that class of employees with the same number of dependents covered by the HRA.
(B) Variation due to age. An HRA does not fail to be provided on the same terms to participants in a class of employees solely because the maximum dollar amount made available under the terms of the HRA to those participants to reimburse medical care expenses for any plan year increases as the age of the participant increases, so long as the requirements in paragraphs (c)(3)(iii)(B)(1) and (2) of this section are satisfied. For the purpose of this paragraph (c)(3)(iii)(B), the plan sponsor may determine the age of the participant using any reasonable method for a plan year, so long as the plan sponsor determines each participant's age for the purpose of this paragraph (c)(3)(iii)(B) using the same method for all participants in the class of employees for the plan year and the method is determined prior to the plan year.
(1) The same maximum dollar amount attributable to the increase in age is made available to all participants who are the same age.
(2) The maximum dollar amount made available to the oldest participant(s) is not more than three times the maximum dollar amount made available to the youngest participant(s).
(iv) Former employees. An HRA does not fail to be treated as provided on the same terms if the plan sponsor offers the HRA to some, but not all, former employees within a class of employees. However, if a plan sponsor offers the HRA to one or more former employees within a class of employees, the HRA must be offered to the former employee(s) on the same terms as to all other employees within the class, except as provided in paragraph (c)(3)(ii) of this section. For purposes of this section, a former employee is an employee who is no longer performing services for the employer.
(v) New employees or new dependents. For a participant whose coverage under the HRA becomes effective later than the first day of the plan year, the HRA does not fail to be treated as being provided on the same terms to the participant if the maximum dollar amount made available to the participant either is the same as the maximum dollar amount made available to participants in the participant's class of employees whose coverage became effective as of the first day of the plan year, or is pro-rated consistent with the portion of the plan year in which the participant is covered by the HRA. Similarly, if the HRA provides for variation in the maximum amount made available to participants in a class of employees based on the number of a participant's dependents covered by the HRA, and the number of a participant's dependents covered by the HRA changes during a plan year (either increasing or decreasing), the HRA does not fail to be treated as being provided on the same terms to the participant if the maximum dollar amount made available to the participant either is the same as the maximum dollar amount made available to participants in the participant's class of employees who had the same number of dependents covered by the HRA on the first day of the plan year or is pro-rated for the remainder of the plan year after the change in the number of the participant's dependents covered by the HRA consistent with the portion of the plan year in which that number of dependents are covered by the HRA. The method the HRA uses to determine amounts made available for participants whose coverage under the HRA is effective later than the first day of the plan year or who have changes in the number of dependents covered by the HRA during a plan year must be the same for all participants in the class of employees and the method must be determined prior to the beginning of the plan year.
(vi) HSA-compatible HRAs. An HRA does not fail to be treated as provided on the same terms if the plan sponsor offers participants in a class of employees a choice between an HSA-compatible individual coverage HRA and an individual coverage HRA that is not HSA compatible, provided both types of HRAs are offered to all participants in the class of employees on the same terms. For the purpose of this paragraph (c)(3)(vi), an HSA-compatible individual coverage HRA is an individual coverage HRA that is limited in accordance with applicable guidance under section 223 such that an individual covered by such an HRA is not disqualified from being an eligible individual under section 223.
(vii) Examples. The following examples illustrate the provisions of this paragraph (c)(3), without taking into account the provisions of paragraph (d) of this section. In each example, the HRA is an individual coverage HRA that has a calendar year plan year and may reimburse any medical care expenses, including premiums for individual health insurance coverage (except as provided in paragraph (c)(3)(vii)(E) of this section (Example 5)). Further, in each example, assume the HRA is offered on the same terms, except as otherwise specified in the example and that no participants or dependents are Medicare beneficiaries.
(A) Example 1: Carryover amounts permitted—(1) Facts. For 2020 and again for 2021, Plan Sponsor A offers all employees $7,000 each in an HRA, and the HRA provides that amounts that are unused at the end of a plan year may be carried over to the next plan year, with no restrictions on the use of the carryover amounts compared to the use of newly available amounts. At the end of 2020, some employees have used all of the funds in their HRAs, while other employees have balances remaining that range from $500 to $1,750 that are carried over to 2021 for those employees.
(2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(A) (Example 1) for 2020 because Plan Sponsor A offers all employees the same amount, $7,000, in an HRA for that year. The same terms requirement is also satisfied for 2021 because Plan Sponsor A again offers all employees the same amount for that year, and the carryover amounts that some employees have are disregarded in applying the same terms requirement because the amount of the carryover for each employee (that employee's balance) and each employee's access to the carryover amounts is based on the same terms.
(B) Example 2: Employees hired after the first day of the plan year—(1) Facts. For 2020, Plan Sponsor B offers all employees employed on January 1, 2020, $7,000 each in an HRA for the plan year. Employees hired after January 1, 2020, are eligible to enroll in the HRA with an effective date of the first day of the month following their date of hire, as long as they have enrolled in individual health insurance coverage effective on or before that date, and the amount offered to these employees is pro-rated based on the number of months remaining in the plan year, including the month which includes their coverage effective date.
(2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(B) (Example 2) for 2020 because Plan Sponsor B offers all employees employed on the first day of the plan year the same amount, $7,000, in an HRA for that plan year and all employees hired after January 1, 2020, a pro-rata amount based on the portion of the plan year during which they are enrolled in the HRA.
(C) Example 3: HRA amounts offered vary based on number of dependents—(1) Facts. For 2020, Plan Sponsor C offers its employees the following amounts in an HRA: $1,500, if the employee is the only individual covered by the HRA; $3,500, if the employee and one dependent are covered by the HRA; and $5,000, if the employee and more than one dependent are covered by the HRA.
(2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(C) (Example 3) because paragraph (c)(3)(iii)(A) of this section allows the maximum dollar amount made available in an HRA to increase as the number of the participant's dependents covered by the HRA increases and Plan Sponsor C makes the same amount available to each employee with the same number of dependents covered by the HRA.
(D) Example 4: HRA amounts offered vary based on increases in employees' ages—(1) Facts. For 2020, Plan Sponsor D offers its employees the following amounts in an HRA: $1,000 each for employees age 25 to 35; $2,000 each for employees age 36 to 45; $2,500 each for employees age 46 to 55; and $4,000 each for employees over age 55.
(2) Conclusion. The same terms requirement of this paragraph (c)(3) is not satisfied in this paragraph (c)(3)(vii)(D) (Example 4) because the terms of the HRA provide the oldest participants (those over age 55) with more than three times the amount made available to the youngest participants (those ages 25 to 35), in violation of paragraph (c)(3)(iii)(B)(2) of this section.
(E) Example 5: Application of same terms requirement to premium only HRA—(1) Facts. For 2020, Plan Sponsor E offers its employees an HRA that reimburses only premiums for individual health insurance coverage, up to $10,000 for the year. Employee A enrolls in individual health insurance coverage with a $5,000 premium for the year and is reimbursed $5,000 from the HRA. Employee B enrolls in individual health insurance coverage with an $8,000 premium for the year and is reimbursed $8,000 from the HRA.
(2) Conclusion. The same terms requirement of this paragraph (c)(3) is satisfied in this paragraph (c)(3)(vii)(E) (Example 5) because Plan Sponsor E offers the HRA on the same terms to all employees, notwithstanding that some employees receive a greater amount of reimbursement than others based on the cost of the individual health insurance coverage selected by the employee.
(4) Opt out. Under the terms of the HRA, a participant who is otherwise eligible for coverage must be permitted to opt out of and waive future reimbursements on behalf of the participant and all dependents eligible for the HRA from the HRA once, and only once, with respect to each plan year. The HRA may establish timeframes for enrollment in (and opting out of) the HRA but, in general, the opportunity to opt out must be provided in advance of the first day of the plan year. For participants who become eligible to participate in the HRA on a date other than the first day of the plan year (or who become eligible fewer than 90 days prior to the plan year or for whom the notice under paragraph (c)(6) of this section is required to be provided as set forth in paragraph (c)(6)(i)(C) of this section), or for a dependent who newly becomes eligible during the plan year, this opportunity must be provided during the applicable HRA enrollment period(s) established by the HRA for these individuals. Further, under the terms of the HRA, upon termination of employment, for a participant who is covered by the HRA, either the remaining amounts in the HRA must be forfeited or the participant must be permitted to permanently opt out of and waive future reimbursements from the HRA on behalf of the participant and all dependents covered by the HRA.
(5) Reasonable procedures for coverage substantiation—(i) Substantiation of individual health insurance coverage for the plan year. The HRA must implement, and comply with, reasonable procedures to substantiate that participants and each dependent covered by the HRA are, or will be, enrolled in individual health insurance coverage for the plan year (or for the portion of the plan year the individual is covered by the HRA, if applicable). The HRA may establish the date by which this substantiation must be provided, but, in general, the date may be no later than the first day of the plan year. However, for a participant who is not eligible to participate in the HRA on the first day of the plan year (or who becomes eligible fewer than 90 days prior to the plan year or for whom the notice under paragraph (c)(6) of this section is required to be provided as set forth in paragraph (c)(6)(i)(C) of this section), the HRA may establish the date by which this substantiation must be provided, but that date may be no later than the date the HRA coverage begins. Similarly, for a participant who adds a new dependent during the plan year, the HRA may establish the date by which this substantiation must be provided, but the date may be no later than the date the HRA coverage for the new dependent begins; however, to the extent the dependent's coverage under the HRA is effective retroactively, the HRA may establish a reasonable time by which this substantiation is required, but must require it be provided before the HRA will reimburse any medical care expense for the newly added dependent. The reasonable procedures an HRA may use to implement the substantiation requirement set forth in this paragraph (c)(5)(i) may include a requirement that a participant substantiate enrollment by providing either:
(A) A document from a third party (for example, the issuer or an Exchange) showing that the participant and any dependents covered by the HRA are, or will be, enrolled in individual health insurance coverage (for example, an insurance card or an explanation of benefits document pertaining to the relevant time period or documentation from the Exchange showing that the individual has completed the application and plan selection); or
(B) An attestation by the participant stating that the participant and dependent(s) covered by the HRA are, or will be, enrolled in individual health insurance coverage, the date coverage began or will begin, and the name of the provider of the coverage.
(ii) Coverage substantiation with each request for reimbursement of medical care expenses. Following the initial substantiation of coverage, with each new request for reimbursement of an incurred medical care expense for the same plan year, the HRA may not reimburse a participant for any medical care expenses unless, prior to each reimbursement, the participant substantiates that the individual on whose behalf medical care expenses are requested to be reimbursed continues to be enrolled in individual health insurance coverage for the month during which the medical care expenses were incurred. The HRA must implement, and comply with, reasonable procedures to satisfy this requirement. This substantiation may be in the form of a written attestation by the participant, which may be part of the form used to request reimbursement, or a document from a third party (for example, a health insurance issuer) showing that the participant or the dependent, if applicable, are or were enrolled in individual health insurance coverage for the applicable month.
(iii) Reliance on substantiation. For purposes of this paragraph (c)(5), an HRA may rely on the participant's documentation or attestation unless the HRA, its plan sponsor, or any other entity acting in an official capacity on behalf of the HRA has actual knowledge that any individual covered by the HRA is not, or will not be, enrolled in individual health insurance coverage for the plan year (or applicable portion of the plan year) or the month, as applicable.
(6) Notice requirement—(i) Timing. The HRA must provide a written notice to each participant:
(A) At least 90 calendar days before the beginning of each plan year for any participant who is not described in either paragraph (c)(6)(i)(B) or (C) of this section;
(B) No later than the date on which the HRA may first take effect for the participant, for any participant who is not eligible to participate at the beginning of the plan year (or is not eligible to participate at the time the notice is provided at least 90 calendar days before the beginning of the plan year pursuant to paragraph (c)(6)(i)(A) of this section); or
(C) No later than the date on which the HRA may first take effect for the participant, for any participant who is employed by an employer that is first established less than 120 days before the beginning of the first plan year of the HRA; this paragraph (c)(6)(i)(C) applies only with respect to the first plan year of the HRA.
(ii) Content. The notice must include all the information described in this paragraph (c)(6)(ii) (and may include any additional information that does not conflict with that information). To the extent that the Departments of the Treasury, Labor and Health and Human Services provide model notice language for certain elements of this required notice, HRAs are permitted, but not required, to use the model language.
(A) A description of the terms of the HRA, including the maximum dollar amount available for each participant (including the self-only HRA amount available for the plan year (or the maximum dollar amount available for the plan year if the HRA provides for reimbursements up to a single dollar amount regardless of whether a participant has self-only or other than self-only coverage)), any rules regarding the proration of the maximum dollar amount applicable to any participant (or dependent, if applicable) who is not eligible to participate in the HRA for the entire plan year, whether (and which of) the participant's dependents are eligible for the HRA, a statement that there are different kinds of HRAs (including a qualified small employer health reimbursement arrangement) and the HRA being offered is an individual coverage HRA, a statement that the HRA requires the participant and any covered dependents to be enrolled in individual health insurance coverage (or Medicare Part A and B or Medicare Part C, if applicable), a statement that the coverage in which the participant and any covered dependents must be enrolled cannot be short-term, limited-duration insurance or consist solely of excepted benefits, if the HRA is subject to the Employee Retirement Income Security Act (ERISA), a statement that individual health insurance coverage in which the participant and any covered dependents are enrolled is not subject to ERISA, if the conditions under 29 CFR 2510.3-1(l) are satisfied, the date as of which coverage under the HRA may first become effective (both for participants whose coverage will become effective on the first day of the plan year and for participants whose HRA coverage may become effective at a later date), the dates on which the HRA plan year begins and ends, and the dates on which the amounts newly made available under the HRA will be made available.
(B) A statement of the right of the participant to opt out of and waive future reimbursements from the HRA, as set forth under paragraph (c)(4) of this section.
(C) A description of the potential availability of the premium tax credit if the participant opts out of and waives future reimbursements from the HRA and the HRA is not affordable for one or more months under § 1.36B-2(c)(5) of this chapter, a statement that even if the participant opts out of and waives future reimbursements from an HRA, the offer will prohibit the participant (and, potentially, the participant's dependents) from receiving a premium tax credit for the participant's coverage (or the dependent's coverage, if applicable) on an Exchange for any month that the HRA is affordable under § 1.36B-2(c)(5) of this chapter, a statement describing how the participant may find assistance with determining affordability, a statement that, if the participant is a former employee, the offer of the HRA does not render the participant (or the participant's dependents, if applicable) ineligible for the premium tax credit regardless of whether it is affordable under § 1.36B-2(c)(5) of this chapter, and a statement that if the participant or dependent is enrolled in Medicare, he or she is ineligible for the premium tax credit without regard to the offer or acceptance of the HRA;
(D) A statement that if the participant accepts the HRA, the participant may not claim a premium tax credit for the participant's Exchange coverage for any month the HRA may be used to reimburse medical care expenses of the participant, and a premium tax credit may not be claimed for the Exchange coverage of the participant's dependents for any month the HRA may be used to reimburse medical care expenses of the dependents.
(E) A statement that the participant must inform any Exchange to which the participant applies for advance payments of the premium tax credit of the availability of the HRA; the self-only HRA amount available for the HRA plan year (or the maximum dollar amount available for the plan year if the HRA provides for reimbursements up to a single dollar amount regardless of whether a participant has self-only or other than self-only coverage) as set forth in the written notice in accordance with paragraph (c)(6)(ii)(A) of this section; whether the HRA is also available to the participant's dependents and if so, which ones; the date as of which coverage under the HRA may first become effective; the date on which the plan year begins and the date on which it ends; and whether the participant is a current employee or former employee.
(F) A statement that the participant should retain the written notice because it may be needed to determine whether the participant is allowed a premium tax credit on the participant's individual income tax return.
(G) A statement that the HRA may not reimburse any medical care expense unless the substantiation requirement set forth in paragraph (c)(5)(ii) of this section is satisfied and a statement that the participant must also provide the substantiation required by paragraph (c)(5)(i) of this section.
(H) A statement that if the individual health insurance coverage (or coverage under Medicare Part A and B or Medicare Part C) of a participant or dependent ceases, the HRA will not reimburse any medical care expenses that are incurred by the participant or dependent, as applicable, after the coverage ceases, and a statement that the participant must inform the HRA if the participant's or dependent's individual health insurance coverage (or coverage under Medicare Part A and B or Medicare Part C) is cancelled or terminated retroactively and the date on which the cancellation or termination is effective.
(I) The contact information (including a phone number) for an individual or a group of individuals who participants may contact in order to receive additional information regarding the HRA. The plan sponsor may determine which individual or group of individuals is best suited to be the specified contact.
(J) A statement of availability of a special enrollment period to enroll in or change individual health insurance coverage, through or outside of an Exchange, for the participant and any dependents who newly gain access to the HRA and are not already covered by the HRA.
(d) Classes of employees—(1) In general. This paragraph (d) sets forth the rules for determining classes of employees. Paragraph (d)(2) of this section sets forth the specific classes of employees; paragraph (d)(3) of this section sets forth a minimum class size requirement that applies in certain circumstances; paragraph (d)(4) of this section sets forth rules regarding the definition of “full-time employees,” “part-time employees,” and “seasonal employees”; paragraph (d)(5) of this section sets forth a special rule for new hires; and paragraph (d)(6) of this section addresses student premium reduction arrangements. For purposes of this section, including determining classes under this paragraph (d), the employer is the common law employer and is determined without regard to the rules under sections 414(b), (c), (m), and (o) that would treat the common law employer as a single employer with certain other entities.
(2) List of classes. Participants may be treated as belonging to a class of employees based on whether they are, or are not, included in the classes described in this paragraph (d)(2). If the individual coverage HRA is offered to former employees, former employees are considered to be in the same class in which they were included immediately before separation from service. Before each plan year, a plan sponsor must determine for the plan year which classes of employees it intends to treat separately and the definition of the relevant class(es) it will apply, to the extent these regulations permit a choice. After the classes and the definitions of the classes are established for a plan year, a plan sponsor may not make changes to the classes of employees or the definitions of those relevant classes with respect to that plan year.
(i) Full-time employees, defined at the election of the plan sponsor to mean either full-time employees under section 4980H (and § 54.4980H-1(a)(21) of this chapter) or employees who are not part-time employees (as described in § 1.105-11(c)(2)(iii)(C) of this chapter);
(ii) Part-time employees, defined at the election of the plan sponsor to mean either employees who are not full-time employees under section 4980H (and under § 54.4980H-1(a)(21) of this chapter (which defines full-time employee)) or employees who are part-time employees as described in § 1.105-11(c)(2)(iii)(C) of this chapter;
(iii) Employees who are paid on a salary basis;
(iv) Non-salaried employees (such as, for example, hourly employees);
(v) Employees whose primary site of employment is in the same rating area as defined in 45 CFR 147.102(b);
(vi) Seasonal employees, defined at the election of the plan sponsor to mean seasonal employees as described in either § 54.4980H-1(a)(38) or § 1.105-11(c)(2)(iii)(C) of this chapter;
(vii) Employees included in a unit of employees covered by a particular collective bargaining agreement (or an appropriate related participation agreement) in which the plan sponsor participates (as described in § 1.105-11(c)(2)(iii)(D) of this chapter);
(viii) Employees who have not satisfied a waiting period for coverage (if the waiting period complies with § 54.9815-2708 of this chapter);
(ix) Non-resident aliens with no U.S.-based income (as described in § 1.105-11(c)(2)(iii)(E) of this chapter);
(x) Employees who, under all the facts and circumstances, are employees of an entity that hired the employees for temporary placement at an entity that is not the common law employer of the employees and that is not treated as a single employer with the entity that hired the employees for temporary placement under section 414(b), (c), (m), or (o); or
(xi) A group of participants described as a combination of two or more of the classes of employees set forth in paragraphs (d)(2)(i) through (x) of this section.
(3) Minimum class size requirement—(i) In general. If a class of employees is subject to the minimum class size requirement as set forth in this paragraph (d)(3), the class must consist of at least a minimum number of employees (as described in paragraphs (d)(3)(iii) and (iv) of this section), otherwise, the plan sponsor may not treat that class as a separate class of employees. Paragraph (d)(3)(ii) of this section sets forth the circumstances in which the minimum class size requirement applies to a class of employees, paragraph (d)(3)(iii) of this section sets forth the rules for determining the applicable class size minimum, and paragraph (d)(3)(iv) of this section sets forth the rules for a plan sponsor to determine if it satisfies the minimum class size requirement with respect to a class of employees.
(ii) Circumstances in which minimum class size requirement applies—(A) The minimum class size requirement applies only if a plan sponsor offers a traditional group health plan to one or more classes of employees and offers an individual coverage HRA to one or more other classes of employees.
(B) The minimum class size requirement does not apply to a class of employees offered a traditional group health plan or a class of employees offered no coverage.
(C) The minimum class size requirement applies to a class of employees offered an individual coverage HRA if the class is full-time employees, part-time employees, salaried employees, non-salaried employees, or employees whose primary site of employment is in the same rating area (described in paragraph (d)(2)(i), (ii), (iii), (iv), or (v) of this section, respectively, and referred to collectively as the applicable classes or individually as an applicable class), except that:
(1) In the case of the class of employees whose primary site of employment is in the same rating area (as described in paragraph (d)(2)(v) of this section), the minimum class size requirement does not apply if the geographic area defining the class is a State or a combination of two or more entire States; and
(2) In the case of the classes of employees that are full-time employees and part-time employees (as described in paragraphs (d)(2)(i) and (ii) of this section, respectively), the minimum class size requirement applies only to those classes (and the classes are only applicable classes) if the employees in one such class are offered a traditional group health plan while the employees in the other such class are offered an individual coverage HRA. In such a case, the minimum class size requirement applies only to the class offered an individual coverage HRA.
(D) A class of employees offered an individual coverage HRA is also subject to the minimum class size requirement if the class is a class of employees created by combining at least one of the applicable classes (as defined in paragraph (d)(3)(ii)(C) of this section) with any other class, except that the minimum class size requirement shall not apply to a class that is the result of a combination of one of the applicable classes and a class of employees who have not satisfied a waiting period (as described in paragraph (d)(2)(viii) of this section).
(iii) Determination of the applicable class size minimum—(A) In general. The minimum number of employees that must be in a class of employees that is subject to the minimum class size requirement (the applicable class size minimum) is determined prior to the beginning of the plan year for each plan year of the individual coverage HRA and is:
(1) 10, for an employer with fewer than 100 employees;
(2) A number, rounded down to a whole number, equal to 10 percent of the total number of employees, for an employer with 100 to 200 employees; and
(3) 20, for an employer with more than 200 employees.
(B) Determining employer size. For purposes of this paragraph (d)(3), the number of employees of an employer is determined in advance of the plan year of the HRA based on the number of employees that the employer reasonably expects to employ on the first day of the plan year.
(iv) Determining if a class satisfies the applicable class size minimum. For purposes of this paragraph (d)(3), whether a class of employees satisfies the applicable class size minimum for a plan year of the individual coverage HRA is based on the number of employees in the class offered the individual coverage HRA as of the first day of the plan year. Therefore, this determination is not based on the number of employees that actually enroll in the individual coverage HRA, and this determination is not affected by changes in the number of employees in the class during the plan year.
(4) Consistency requirement. For any plan year, a plan sponsor may define “full-time employee,” “part-time employee,” and “seasonal employee” in accordance with the relevant provisions of sections 105(h) or 4980H, as set forth in paragraphs (d)(2)(i), (ii), and (vi) of this section, if:
(i) To the extent applicable under the HRA for the plan year, each of the three classes of employees are defined in accordance with section 105(h) or each of the three classes of employees are defined in accordance with section 4980H for the plan year; and
(ii) The HRA plan document sets forth the applicable definitions prior to the beginning of the plan year to which the definitions will apply.
(5) Special rule for new hires—(i) In general. Notwithstanding paragraphs (c)(2) and (3) of this section, a plan sponsor that offers a traditional group health plan to a class of employees may prospectively offer the employees in that class of employees who are hired on or after a certain future date (the new hire date) an individual coverage HRA (with this group of employees referred to as the new hire subclass), while continuing to offer employees in that class of employees who are hired before the new hire date a traditional group health plan (with the rule set forth in this sentence referred to as the special rule for new hires). For the new hire subclass, the individual coverage HRA must be offered on the same terms to all participants within the subclass, in accordance with paragraph (c)(3) of this section. In accordance with paragraph (c)(2) of this section, a plan sponsor may not offer a choice between an individual coverage HRA or a traditional group health plan to any employee in the new hire subclass or to any employee in the class who is not a member of the new hire subclass.
(ii) New hire date. A plan sponsor may set the new hire date for a class of employees prospectively as any date on or after January 1, 2020. A plan sponsor may set different new hire dates prospectively for separate classes of employees.
(iii) Discontinuation of use of special rule for new hires and multiple applications of the special rule for new hires. A plan sponsor may discontinue use of the special rule for new hires at any time for any class of employees. In that case, the new hire subclass is no longer treated as a separate subclass of employees. In the event a plan sponsor applies the special rule for new hires to a class of employees and later discontinues use of the rule to the class of employees, the plan sponsor may later apply the rule if the application of the rule would be permitted under the rules for initial application of the special rule for new hires. If a plan sponsor, in accordance with the requirements for the special rule for new hires, applies the rule to a class of employees subsequent to any prior application and discontinuance of the rule to that class, the new hire date must be prospective.
(iv) Application of the minimum class size requirement under the special rule for new hires. The minimum class size requirement set forth in paragraph (d)(3) of this section does not apply to the new hire subclass. However, if a plan sponsor subdivides the new hire subclass subsequent to creating the new hire subclass, the minimum class size requirement set forth in paragraph (d)(3) of this section applies to any class of employees created by subdividing the new hire subclass, if the minimum class size requirement otherwise applies.
(6) Student employees offered student premium reduction arrangements. For purposes of this section, if an institution of higher education (as defined in the Higher Education Act of 1965) offers a student employee a student premium reduction arrangement, the employee is not considered to be part of the class of employees to which the employee would otherwise belong. For the purpose of this paragraph (d)(6) and paragraph (f)(1) of this section, a student premium reduction arrangement is defined as any program offered by an institution of higher education under which the cost of insured or self-insured student health coverage is reduced for certain students through a credit, offset, reimbursement, stipend or similar arrangement. A student employee offered a student premium reduction arrangement is also not counted for purposes of determining the applicable class size minimum under paragraph (d)(3)(iii) of this section. If a student employee is not offered a student premium reduction arrangement (including if the student employee is offered an individual coverage HRA instead), the student employee is considered to be part of the class of employees to which the employee otherwise belongs and is counted for purposes of determining the applicable class size minimum under paragraph (d)(3)(iii) of this section.
(e) Integration of Individual Coverage HRAs with Medicare—(1) General rule. An individual coverage HRA will be considered to be integrated with Medicare (and deemed to comply with PHS Act sections 2711 and 2713 and § 54.9815-2711(d)(4) of this chapter), provided that the conditions of paragraph (c) of this section are satisfied, subject to paragraph (e)(2) of this section. Nothing in this section requires that a participant and his or her dependents all have the same type of coverage; therefore, an individual coverage HRA may be integrated with Medicare for some individuals and with individual health insurance coverage for others, including, for example, a participant enrolled in Medicare Part A and B or Part C and his or her dependents enrolled in individual health insurance coverage.
(2) Application of conditions in paragraph (c) of this section—(i) In general. Except as provided in paragraph (e)(2)(ii) of this section, in applying the conditions of paragraph (c) of this section with respect to integration with Medicare, a reference to “individual health insurance coverage” is deemed to refer to coverage under Medicare Part A and B or Part C. References in this section to integration of an HRA with Medicare refer to integration of an individual coverage HRA with Medicare Part A and B or Part C.
(ii) Exceptions. For purposes of the statement regarding ERISA under the notice content element under paragraph (c)(6)(ii)(A) of this section and the statement regarding the availability of a special enrollment period under the notice content element under paragraph (c)(6)(ii)(J) of this section, the term individual health insurance coverage means only individual health insurance coverage and does not also mean coverage under Medicare Part A and B or Part C.
(f) Examples—(1) Examples regarding classes and the minimum class size requirement. The following examples illustrate the provisions of paragraph (c)(3) of this section, taking into account the provisions of paragraphs (d)(1) through (4) and (d)(6) of this section. In each example, the HRA is an individual coverage HRA that may reimburse any medical care expenses, including premiums for individual health insurance coverage and it is assumed that no participants or dependents are Medicare beneficiaries.
(i) Example 1: Collectively bargained employees offered traditional group health plan; non-collectively bargained employees offered HRA—(A) Facts. For 2020, Plan Sponsor A offers its employees covered by a collective bargaining agreement a traditional group health plan (as required by the collective bargaining agreement) and all other employees (non-collectively bargained employees) each an HRA on the same terms.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(i) (Example 1) because collectively bargained and non-collectively bargained employees may be treated as different classes of employees, one of which may be offered a traditional group health plan and the other of which may be offered an individual coverage HRA, and Plan Sponsor A offers the HRA on the same terms to all participants who are non-collectively bargained employees. The minimum class size requirement does not apply to this paragraph (f)(1)(i) (Example 1) even though Plan Sponsor A offers one class a traditional group health plan and one class the HRA because collectively bargained and non-collectively bargained employees are not applicable classes that are subject to the minimum class size requirement.
(ii) Example 2: Collectively bargained employees in one unit offered traditional group health plan and in another unit offered HRA—(A) Facts. For 2020, Plan Sponsor B offers its employees covered by a collective bargaining agreement with Local 100 a traditional group health plan (as required by the collective bargaining agreement), and its employees covered by a collective bargaining agreement with Local 200 each an HRA on the same terms (as required by the collective bargaining agreement).
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(ii) (Example 2) because the employees covered by the collective bargaining agreements with the two separate bargaining units (Local 100 and Local 200) may be treated as two different classes of employees and Plan Sponsor B offers an HRA on the same terms to the participants covered by the agreement with Local 200. The minimum class size requirement does not apply to this paragraph (f)(1)(ii) (Example 2) even though Plan Sponsor B offers the Local 100 employees a traditional group health plan and the Local 200 employees an HRA because collectively bargained employees are not applicable classes that are subject to the minimum class size requirement.
(iii) Example 3: Employees in a waiting period offered no coverage; other employees offered an HRA—(A) Facts. For 2020, Plan Sponsor C offers its employees who have completed a waiting period that complies with the requirements for waiting periods in § 54.9815-2708 of this chapter each an HRA on the same terms and does not offer coverage to its employees who have not completed the waiting period.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(iii) (Example 3) because employees who have completed a waiting period and employees who have not completed a waiting period may be treated as different classes and Plan Sponsor C offers the HRA on the same terms to all participants who have completed the waiting period. The minimum class size requirement does not apply to this paragraph (f)(1)(iii) (Example 3) because Plan Sponsor C does not offer at least one class of employees a traditional group health plan and because the class of employees who have not completed a waiting period and the class of employees who have completed a waiting period are not applicable classes that are subject to the minimum class size requirement.
(iv) Example 4: Employees in a waiting period offered an HRA; other employees offered a traditional group health plan—(A) Facts. For 2020, Plan Sponsor D offers its employees who have completed a waiting period that complies with the requirements for waiting periods in § 54.9815-2708 of this chapter a traditional group health plan and offers its employees who have not completed the waiting period each an HRA on the same terms.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(iv) (Example 4) because employees who have completed a waiting period and employees who have not completed a waiting period may be treated as different classes and Plan Sponsor D offers an HRA on the same terms to all participants who have not completed the waiting period. The minimum class size requirement does not apply to this paragraph (f)(1)(iv) (Example 4) even though Plan Sponsor D offers employees who have completed a waiting period a traditional group health plan and employees who have not completed a waiting period an HRA because the class of employees who have not completed a waiting period is not an applicable class that is subject to the minimum class size requirement (nor is the class made up of employees who have completed the waiting period).
(v) Example 5: Staffing firm employees temporarily placed with customers offered an HRA; other employees offered a traditional group health plan—(A) Facts. Plan Sponsor E is a staffing firm that places certain of its employees on temporary assignments with customers that are not the common law employers of Plan Sponsor E's employees or treated as a single employer with Plan Sponsor E under section 414(b), (c), (m), or (o) (unrelated entities); other employees work in Plan Sponsor E's office managing the staffing business (non-temporary employees). For 2020, Plan Sponsor E offers its employees who are on temporary assignments with customers each an HRA on the same terms. All other employees are offered a traditional group health plan.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(v) (Example 5) because the employees who are hired for temporary placement at an unrelated entity and non-temporary employees of Plan Sponsor E may be treated as different classes of employees and Plan Sponsor E offers an HRA on the same terms to all participants temporarily placed with customers. The minimum class size requirement does not apply to this paragraph (f)(1)(v) (Example 5) even though Plan Sponsor E offers one class a traditional group health plan and one class the HRA because the class of employees hired for temporary placement is not an applicable class that is subject to the minimum class size requirement (nor is the class made up of non-temporary employees).
(vi) Example 6: Staffing firm employees temporarily placed with customers in rating area 1 offered an HRA; other employees offered a traditional group health plan—(A) Facts. The facts are the same as in paragraph (f)(1)(v) of this section (Example 5), except that Plan Sponsor E has work sites in rating area 1 and rating area 2, and it offers its 10 employees on temporary assignments with a work site in rating area 1 an HRA on the same terms. Plan Sponsor E has 200 other employees in rating areas 1 and 2, including its non-temporary employees in rating areas 1 and 2 and its employees on temporary assignments with a work site in rating area 2, all of whom are offered a traditional group health plan.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(vi) (Example 6) because, even though the employees who are temporarily placed with customers generally may be treated as employees of a different class, because Plan Sponsor E is also using a rating area to identify the class offered the HRA (which is an applicable class for the minimum class size requirement) and is offering one class the HRA and another class the traditional group health plan, the minimum class size requirement applies to the class offered the HRA, and the class offered the HRA fails to satisfy the minimum class size requirement. Because Plan Sponsor E employs 210 employees, the applicable class size minimum is 20, and the HRA is offered to only 10 employees.
(vii) Example 7: Employees in State 1 offered traditional group health plan; employees in State 2 offered HRA—(A) Facts. Plan Sponsor F employs 45 employees whose work site is in State 1 and 7 employees whose primary site of employment is in State 2. For 2020, Plan Sponsor F offers its 45 employees in State 1 a traditional group health plan, and each of its 7 employees in State 2 an HRA on the same terms.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(vii) (Example 7) because Plan Sponsor F offers the HRA on the same terms to all employees with a work site in State 2 and that class is a permissible class under paragraph (d) of this section. This is because employees whose work sites are in different rating areas may be considered different classes and a plan sponsor may create a class of employees by combining classes of employees, including by combining employees whose work site is in one rating area with employees whose work site is in a different rating area, or by combining all employees whose work site is in a state. The minimum class size requirement does not apply to this paragraph (f)(1)(vii) (Example 7) because the minimum class size requirement does not apply if the geographic area defining a class of employees is a state or a combination of two or more entire states.
(viii) Example 8: Full-time seasonal employees offered HRA; all other full-time employees offered traditional group health plan; part-time employees offered no coverage—(A) Facts. Plan Sponsor G employs 6 full-time seasonal employees, 75 full-time employees who are not seasonal employees, and 5 part-time employees. For 2020, Plan Sponsor G offers each of its 6 full-time seasonal employees an HRA on the same terms, its 75 full-time employees who are not seasonal employees a traditional group health plan, and offers no coverage to its 5 part-time employees.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(viii) (Example 8) because full-time seasonal employees and full-time employees who are not seasonal employees may be considered different classes and Plan Sponsor G offers the HRA on the same terms to all full-time seasonal employees. The minimum class size requirement does not apply to the class offered the HRA in this paragraph (f)(1)(viii) (Example 8) because part-time employees are not offered coverage and full-time employees are not an applicable class subject to the minimum class size requirement if part-time employees are not offered coverage.
(ix) Example 9: Full-time employees in rating area 1 offered traditional group health plan; full-time employees in rating area 2 offered HRA; part-time employees offered no coverage—(A) Facts. Plan Sponsor H employs 17 full-time employees and 10 part-time employees whose work site is in rating area 1 and 552 full-time employees whose work site is in rating area 2. For 2020, Plan Sponsor H offers its 17 full-time employees in rating area 1 a traditional group health plan and each of its 552 full-time employees in rating area 2 an HRA on the same terms. Plan Sponsor H offers no coverage to its 10 part-time employees in rating area 1. Plan Sponsor H reasonably expects to employ 569 employees on the first day of the HRA plan year.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(ix) (Example 9) because employees whose work sites are in different rating areas may be considered different classes and Plan Sponsor H offers the HRA on the same terms to all full-time employees in rating area 2. The minimum class size requirement applies to the class offered the HRA in this paragraph (f)(1)(ix) (Example 9) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. However, the minimum class size requirement applies only to the class offered the HRA, and Plan Sponsor H offers the HRA to the 552 full-time employees in rating area 2 on the first day of the plan year, satisfying the minimum class size requirement (because the applicable class size minimum for Plan Sponsor H is 20).
(x) Example 10: Employees in rating area 1 offered HRA; employees in rating area 2 offered traditional group health plan—(A) Facts. The facts are the same as in paragraph (f)(1)(ix) of this section (Example 9) except that Plan Sponsor H offers its 17 full-time employees in rating area 1 the HRA and offers its 552 full-time employees in rating area 2 the traditional group health plan.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(x) (Example 10) because, even though employees whose work sites are in different rating areas generally may be considered different classes and Plan Sponsor H offers the HRA on the same terms to all participants in rating area 1, the HRA fails to satisfy the minimum class size requirement. Specifically, the minimum class size requirement applies to this paragraph (f)(1)(x) (Example 10) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. Further, the applicable class size minimum for Plan Sponsor H is 20 employees, and the HRA is only offered to the 17 full-time employees in rating area 1 on the first day of the HRA plan year.
(xi) Example 11: Employees in State 1 and rating area 1 of State 2 offered HRA; employees in all other rating areas of State 2 offered traditional group health plan—(A) Facts. For 2020, Plan Sponsor I offers an HRA on the same terms to a total of 200 employees it employs with work sites in State 1 and in rating area 1 of State 2. Plan Sponsor I offers a traditional group health plan to its 150 employees with work sites in other rating areas in State 2. Plan Sponsor I reasonably expects to employ 350 employees on the first day of the HRA plan year.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xi) (Example 11). Plan Sponsor I may treat all of the employees with a work site in State 1 and rating area 1 of State 2 as a class of employees because employees whose work sites are in different rating areas may be considered different classes and a plan sponsor may create a class of employees by combining classes of employees, including by combining employees whose work site is in one rating area with a class of employees whose work site is in a different rating area. The minimum class size requirement applies to the class of employees offered the HRA (made up of employees in State 1 and in rating area 1 of State 2) because the minimum class size requirement applies to a class based on a geographic area unless the geographic area is a state or a combination of two or more entire states. In this case, the class is made up of a state plus a rating area which is not the entire state. However, this class satisfies the minimum class size requirement because the applicable class size minimum for Plan Sponsor I is 20, and Plan Sponsor I offered the HRA to 200 employees on the first day of the plan year.
(xii) Example 12: Salaried employees offered a traditional group health plan; hourly employees offered an HRA—(A) Facts. Plan Sponsor J has 163 salaried employees and 14 hourly employees. For 2020, Plan Sponsor J offers its 163 salaried employees a traditional group health plan and each of its 14 hourly employees an HRA on the same terms. Plan Sponsor J reasonably expects to employ 177 employees on the first day of the HRA plan year.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xii) (Example 12) because, even though salaried and hourly employees generally may be considered different classes and Plan Sponsor J offers the HRA on the same terms to all hourly employees, the HRA fails to satisfy the minimum class size requirement. Specifically, the minimum class size requirement applies in this paragraph (f)(1)(xii) (Example 12) because employees who are paid on a salaried basis and employees who are not paid on a salaried basis are applicable classes subject to the minimum class size requirement. Because Plan Sponsor J reasonably expects to employ between 100 and 200 employees on the first day of the plan year, the applicable class size minimum is 10 percent, rounded down to a whole number. Ten percent of 177 total employees, rounded down to a whole number is 17, and the HRA is offered to only 14 hourly employees.
(xiii) Example 13: Part-time employees and full-time employees offered different HRAs; no traditional group health plan offered—(A) Facts. Plan Sponsor K has 50 full-time employees and 7 part-time employees. For 2020, Plan Sponsor K offers its 50 full-time employees $2,000 each in an HRA otherwise provided on the same terms and each of its 7 part-time employees $500 in an HRA otherwise provided on the same terms. Plan Sponsor K reasonably expects to employ 57 employees on the first day of the HRA plan year.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xiii) (Example 13) because full-time employees and part-time employees may be treated as different classes and Plan Sponsor K offers an HRA on the same terms to all the participants in each class. The minimum class size requirement does not apply to either the full-time class or the part-time class because (although in certain circumstances the minimum class size requirement applies to a class of full-time employees and a class of part-time employees) Plan Sponsor K does not offer any class of employees a traditional group health plan, and the minimum class size requirement applies only when, among other things, at least one class of employees is offered a traditional group health plan while another class is offered an HRA.
(xiv) Example 14: No employees offered an HRA—(A) Facts. The facts are the same facts as in paragraph (f)(1)(xiii) of this section (Example 13), except that Plan Sponsor K offers its full-time employees a traditional group health plan and does not offer any group health plan (either a traditional group health plan or an HRA) to its part-time employees.
(B) Conclusion. The regulations set forth under this section do not apply to Plan Sponsor K because Plan Sponsor K does not offer an individual coverage HRA to any employee.
(xv) Example 15: Full-time employees offered traditional group health plan; part-time employees offered HRA—(A) Facts. The facts are the same as in paragraph (f)(1)(xiii) of this section (Example 13), except that Plan Sponsor K offers its full-time employees a traditional group health plan and offers each of its part-time employees $500 in an HRA and otherwise on the same terms.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xv) (Example 15) because, even though the full-time employees and the part-time employees generally may be treated as different classes, in this paragraph (f)(1)(xv) (Example 15), the minimum class size requirement applies to the part-time employees, and it is not satisfied. Specifically, the minimum class size requirement applies to the part-time employees because that requirement applies to an applicable class offered an HRA when one class is offered a traditional group health plan while another class is offered an HRA, and to the part-time and full-time employee classes when one of those classes is offered a traditional group health plan while the other is offered an HRA. Because Plan Sponsor K reasonably expects to employ fewer than 100 employees on the first day of the HRA plan year, the applicable class size minimum for Plan Sponsor K is 10 employees, but Plan Sponsor K offered the HRA only to its 7 part-time employees.
(xvi) Example 16: Satisfying minimum class size requirement based on employees offered HRA—(A) Facts. Plan Sponsor L employs 78 full-time employees and 12 part-time employees. For 2020, Plan Sponsor L offers its 78 full-time employees a traditional group health plan and each of its 12 part-times employees an HRA on the same terms. Only 6 part-time employees enroll in the HRA. Plan Sponsor L reasonably expects to employ fewer than 100 employees on the first day of the HRA plan year.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xvi) (Example 16) because full-time employees and part-time employees may be treated as different classes, Plan Sponsor L offers an HRA on the same terms to all the participants in the part-time class, and the minimum class size requirement is satisfied. Specifically, whether a class of employees satisfies the applicable class size minimum is determined as of the first day of the plan year based on the number of employees in a class that is offered an HRA, not on the number of employees who enroll in the HRA. The applicable class size minimum for Plan Sponsor L is 10 employees, and Plan Sponsor L offered the HRA to its 12 part-time employees.
(xvii) Example 17: Student employees offered student premium reduction arrangements and same terms requirement—(A) Facts. Plan Sponsor M is an institution of higher education that offers each of its part-time employees an HRA on the same terms, except that it offers its part-time employees who are student employees a student premium reduction arrangement, and the student premium reduction arrangement provides different amounts to different part-time student employees.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(1)(xvii) (Example 17) because Plan Sponsor M offers the HRA on the same terms to its part-time employees who are not students and because the part-time student employees offered a student premium reduction arrangement (and their varying HRAs) are not taken into account as part-time employees for purposes of determining whether a class of employees is offered an HRA on the same terms.
(xiii) Example 18: Student employees offered student premium reduction arrangements and minimum class size requirement—(A) Facts. Plan Sponsor N is an institution of higher education with 25 hourly employees. Plan Sponsor N offers 15 of its hourly employees, who are student employees, a student premium reduction arrangement and it wants to offer its other 10 hourly employees an HRA for 2022. Plan Sponsor N offers its salaried employees a traditional group health plan. Plan Sponsor N reasonably expects to have 250 employees on the first day of the 2022 HRA plan year, 15 of which will have offers of student premium reduction arrangements.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(1)(xviii) (Example 18). The minimum class size requirement will apply to the class of hourly employees to which Plan Sponsor N wants to offer the HRA because Plan Sponsor N offers a class of employees a traditional group health plan and another class the HRA, and the minimum class size requirement generally applies to a class of hourly employees offered an HRA. Plan Sponsor N's applicable class size minimum is 20 because Plan Sponsor N reasonably expects to employ 235 employees on the first day of the plan year (250 employees minus 15 employees receiving a student premium reduction arrangement). Plan Sponsor N may not offer the HRA to its hourly employees because the 10 employees offered the HRA as of the first day of the plan year does not satisfy the applicable class size minimum.
(2) Examples regarding special rule for new hires. The following examples illustrate the provisions of paragraph (c)(3) of this section, taking into account the provisions of paragraph (d) of this section, in particular the special rule for new hires under paragraph (d)(5) of this section. In each example, the HRA is an individual coverage HRA that has a calendar year plan year and may reimburse any medical care expenses, including premiums for individual health insurance coverage. The examples also assume that no participants or dependents are Medicare beneficiaries.
(i) Example 1: Application of special rule for new hires to all employees—(A) Facts. For 2021, Plan Sponsor A offers all employees a traditional group health plan. For 2022, Plan Sponsor A offers all employees hired on or after January 1, 2022, an HRA on the same terms and continues to offer the traditional group health plan to employees hired before that date. On the first day of the 2022 plan year, Plan Sponsor A has 2 new hires who are offered the HRA.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(i) (Example 1) because, under the special rule for new hires in paragraph (d)(5) of this section, the employees newly hired on and after January 1, 2022, may be treated as a new hire subclass, Plan Sponsor A offers the HRA on the same terms to all participants in the new hire subclass, and the minimum class size requirement does not apply to the new hire subclass.
(ii) Example 2: Application of special rule for new hires to full-time employees—(A) Facts. For 2021, Plan Sponsor B offers a traditional group health plan to its full-time employees and does not offer any coverage to its part-time employees. For 2022, Plan Sponsor B offers full-time employees hired on or after January 1, 2022, an HRA on the same terms, continues to offer its full-time employees hired before that date a traditional group health plan, and continues to offer no coverage to its part-time employees. On the first day of the 2022 plan year, Plan Sponsor B has 2 new hire, full-time employees who are offered the HRA.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(ii) (Example 2) because, under the special rule for new hires in paragraph (d)(5) of this section, the full-time employees newly hired on and after January 1, 2022, may be treated as a new hire subclass and Plan Sponsor B offers the HRA on the same terms to all participants in the new hire subclass. The minimum class size requirement does not apply to the new hire subclass.
(iii) Example 3: Special rule for new hires impermissibly applied retroactively—(A) Facts. For 2025, Plan Sponsor C offers a traditional group health plan to its full-time employees. For 2026, Plan Sponsor C wants to offer an HRA to its full-time employees hired on and after January 1, 2023, while continuing to offer a traditional group health plan to its full-time employees hired before January 1, 2023.
(B) Conclusion. The special rule for new hires under paragraph (d)(5) of this section does not apply in this paragraph (f)(2)(iii) (Example 3) because the rule must be applied prospectively. That is, Plan Sponsor C may not, in 2026, choose to apply the special rule for new hires retroactive to 2023. If Plan Sponsor C were to offer an HRA in this way, it would fail to satisfy the conditions under paragraphs (c)(2) and (3) of this section because the new hire subclass would not be treated as a subclass for purposes of applying those rules and, therefore, all full-time employees would be treated as one class to which either a traditional group health plan or an HRA could be offered, but not both.
(iv) Example 4: Permissible second application of the special rule for new hires to the same class of employees—(A) Facts. For 2021, Plan Sponsor D offers all of its full-time employees a traditional group health plan. For 2022, Plan Sponsor D applies the special rule for new hires and offers an HRA on the same terms to all employees hired on and after January 1, 2022, and continues to offer a traditional group health plan to full-time employees hired before that date. For 2025, Plan Sponsor D discontinues use of the special rule for new hires, and again offers all full-time employees a traditional group health plan. In 2030, Plan Sponsor D decides to apply the special rule for new hires to the full-time employee class again, offering an HRA to all full-time employees hired on and after January 1, 2030, on the same terms, while continuing to offer employees hired before that date a traditional group health plan.
(B) Conclusion. Plan Sponsor D has permissibly applied the special rule for new hires and is in compliance with the requirements of paragraphs (c)(2) and (3) of this section.
(v) Example 5: Impermissible second application of the special rule for new hires to the same class of employees—(A) Facts. The facts are the same as in paragraph (f)(2)(iv) of this section (Example 4), except that for 2025, Plan Sponsor D discontinues use of the special rule for new hires by offering all full-time employees an HRA on the same terms. Further, for 2030, Plan Sponsor D wants to continue to offer an HRA on the same terms to all full-time employees hired before January 1, 2030, and to offer all full-time employees hired on or after January 1, 2030, an HRA in a different amount.
(B) Conclusion. Plan Sponsor D may not apply the special rule for new hires for 2030 to the class of full-time employees being offered an HRA because the special rule for new hires may only be applied to a class that is being offered a traditional group health plan.
(vi) Example 6: New full-time employees offered different HRAs in different rating areas—(A) Facts. Plan Sponsor E has work sites in rating area 1, rating area 2, and rating area 3. For 2021, Plan Sponsor E offers its full-time employees a traditional group health plan. For 2022, Plan Sponsor E offers its full-time employees hired on or after January 1, 2022, in rating area 1 an HRA of $3,000, its full-time employees hired on or after January 1, 2022, in rating area 2 an HRA of $5,000, and its full-time employees hired on or after January 1, 2022, in rating area 3 an HRA of $7,000. Within each class offered an HRA, Plan Sponsor E offers the HRA on the same terms. Plan Sponsor E offers its full-time employees hired prior to January 1, 2022, in each of those classes a traditional group health plan. On the first day of the 2022 plan year, there is one new hire, full-time employee in rating area 1, three new hire, full-time employees in rating area 2, and 10 new hire-full-time employees in rating area 3.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(vi) (Example 6) because, under the special rule for new hires in paragraph (d)(5) of this section, the full-time employees in each of the three rating areas newly hired on and after January 1, 2022, may be treated as three new hire subclasses and Plan Sponsor E offers the HRA on the same terms to all participants in the new hire subclasses. Further, the minimum class size requirement does not apply to the new hire subclasses.
(vii) Example 7: New full-time employee class subdivided based on rating area—(A) Facts. Plan Sponsor F offers its full-time employees hired on or after January 1, 2022, an HRA on the same terms and it continues to offer its full-time employees hired before that date a traditional group health plan. Plan Sponsor F offers no coverage to its part-time employees. For the 2025 plan year, Plan Sponsor F wants to subdivide the full-time new hire subclass so that those whose work site is in rating area 1 will be offered the traditional group health plan and those whose work site is in rating area 2 will continue to receive the HRA. Plan Sponsor F reasonably expects to employ 219 employees on January 1, 2025. As of January 1, 2025, Plan Sponsor F has 15 full-time employees whose work site in in rating area 2 and who were hired between January 1, 2022, and January 1, 2025.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is not satisfied in this paragraph (f)(2)(vii) (Example 7) because the new hire subclass has been subdivided in a manner that is subject to the minimum class size requirement, and the class offered the HRA fails to satisfy the minimum class size requirement. Specifically, once the new hire subclass is subdivided the general rules for applying the minimum class size requirement apply to the employees offered the HRA in the new hire subclass. In this case, because the subdivision of the new hire full-time subclass is based on rating areas; a class based on rating areas is an applicable class subject to the minimum class size requirement; and the employees in one rating area are to be offered the HRA, while the employees in the other rating area are offered the traditional group health plan, the minimum class size requirement would apply on and after the date of the subdivision. Further, the minimum class size requirement would not be satisfied, because the applicable class size minimum for Plan Sponsor F would be 20, and only 15 employees in rating area 2 would be offered the HRA.
(viii) Example 8: New full-time employee class subdivided based on state—(A) Facts. The facts are the same as in paragraph (f)(2)(vii) of this section (Example 7), except that for the 2025 plan year, Plan Sponsor F intends to subdivide the new hire, full-time class so that those in State 1 will be offered the traditional group health plan and those in State 2 will each be offered an HRA on the same terms.
(B) Conclusion. The same terms requirement of paragraph (c)(3) of this section is satisfied in this paragraph (f)(2)(viii) (Example 8) because even though the new hire subclass has been subdivided, it has been subdivided in a manner that is not subject to the minimum class size requirement as the subdivision is based on the entire state.
(ix) Example 9: New full-time employees and part-time employees offered HRA—(A) Facts. In 2021, Plan Sponsor G offers its full-time employees a traditional group health plan and does not offer coverage to its part-time employees. For the 2022 plan year, Plan Sponsor G offers its full-time employees hired on or after January 1, 2022, and all of its part-time employees, including those hired before January 1, 2022, and those hired on and after January 1, 2022, an HRA on the same terms, and it continues to offer its full-time employees hired before January 1, 2022, a traditional group health plan.
(B) Conclusion. The minimum class size requirement applies to the part-time employees offered the HRA in 2022 because the class is being offered an HRA; the special rule for new hires does not apply (because this class was not previously offered a traditional group health plan) and so it is not a new hire subclass exempt from the minimum class size requirement; another class of employees (that is, full-time hired before January 1, 2022) are being offered a traditional group health plan; and the part-time employee class is generally an applicable classes that is subject to the minimum class size requirement. However, because the full-time, new hire subclass is based on the special rule for new hires, the minimum class size requirement does not apply to full-time new hires offered an HRA in 2022.
(g) Applicability date. This section applies to plan years beginning on or after January 1, 2020.
[T.D. 9867, 84 FR 28987, June 20, 2019]
§ 54.9811-1 Standards relating to benefits for mothers and newborns.
(a) Hospital length of stay—(1) General rule. Except as provided in paragraph (a)(5) of this section, a group health plan that provides benefits for a hospital length of stay in connection with childbirth for a mother or her newborn may not restrict benefits for the stay to less than—
(i) 48 hours following a vaginal delivery; or
(ii) 96 hours following a delivery by cesarean section.
(2) When stay begins—(i) Delivery in a hospital. If delivery occurs in a hospital, the hospital length of stay for the mother or newborn child begins at the time of delivery (or in the case of multiple births, at the time of the last delivery).
(ii) Delivery outside a hospital. If delivery occurs outside a hospital, the hospital length of stay begins at the time the mother or newborn is admitted as a hospital inpatient in connection with childbirth. The determination of whether an admission is in connection with childbirth is a medical decision to be made by the attending provider.
(3) Examples. The rules of paragraphs (a)(1) and (2) of this section are illustrated by the following examples. In each example, the group health plan provides benefits for hospital lengths of stay in connection with childbirth and is subject to the requirements of this section, as follows:
Example 1. (i) Facts. A pregnant woman covered under a group health plan goes into labor and is admitted to the hospital at 10 p.m. on June 11. She gives birth by vaginal delivery at 6 a.m. on June 12.
(ii) Conclusion. In this Example 1, the 48-hour period described in paragraph (a)(1)(i) of this section ends at 6 a.m. on June 14.
Example 2. (i) Facts. A woman covered under a group health plan gives birth at home by vaginal delivery. After the delivery, the woman begins bleeding excessively in connection with the childbirth and is admitted to the hospital for treatment of the excessive bleeding at 7 p.m. on October 1.
(ii) Conclusion. In this Example 2, the 48-hour period described in paragraph (a)(1)(i) of this section ends at 7 p.m. on October 3.
Example 3. (i) Facts. A woman covered under a group health plan gives birth by vaginal delivery at home. The child later develops pneumonia and is admitted to the hospital. The attending provider determines that the admission is not in connection with childbirth.
(ii) Conclusion. In this Example 3, the hospital length-of-stay requirements of this section do not apply to the child's admission to the hospital because the admission is not in connection with childbirth.
(4) Authorization not required—(i) In general. A plan may not require that a physician or other health care provider obtain authorization from the plan, or from a health insurance issuer offering health insurance coverage under the plan, for prescribing the hospital length of stay specified in paragraph (a)(1) of this section. (See also paragraphs (b)(2) and (c)(3) of this section for rules and examples regarding other authorization and certain notice requirements.)
(ii) Example. The rule of this paragraph (a)(4) is illustrated by the following example:
Example. (i) Facts. In the case of a delivery by cesarean section, a group health plan subject to the requirements of this section automatically provides benefits for any hospital length of stay of up to 72 hours. For any longer stay, the plan requires an attending provider to complete a certificate of medical necessity. The plan then makes a determination, based on the certificate of medical necessity, whether a longer stay is medically necessary.
(ii) Conclusion. In this Example, the requirement that an attending provider complete a certificate of medical necessity to obtain authorization for the period between 72 hours and 96 hours following a delivery by cesarean section is prohibited by this paragraph (a)(4).
(5) Exceptions—(i) Discharge of mother. If a decision to discharge a mother earlier than the period specified in paragraph (a)(1) of this section is made by an attending provider, in consultation with the mother, the requirements of paragraph (a)(1) of this section do not apply for any period after the discharge.
(ii) Discharge of newborn. If a decision to discharge a newborn child earlier than the period specified in paragraph (a)(1) of this section is made by an attending provider, in consultation with the mother (or the newborn's authorized representative), the requirements of paragraph (a)(1) of this section do not apply for any period after the discharge.
(iii) Attending provider defined. For purposes of this section, attending provider means an individual who is licensed under applicable state law to provide maternity or pediatric care and who is directly responsible for providing maternity or pediatric care to a mother or newborn child. Therefore, a plan, hospital, managed care organization, or other issuer is not an attending provider.
(iv) Example. The rules of this paragraph (a)(5) are illustrated by the following example:
Example. (i) Facts. A pregnant woman covered under a group health plan subject to the requirements of this section goes into labor and is admitted to a hospital. She gives birth by cesarean section. On the third day after the delivery, the attending provider for the mother consults with the mother, and the attending provider for the newborn consults with the mother regarding the newborn. The attending providers authorize the early discharge of both the mother and the newborn. Both are discharged approximately 72 hours after the delivery. The plan pays for the 72-hour hospital stays.
(ii) Conclusion. In this Example, the requirements of this paragraph (a) have been satisfied with respect to the mother and the newborn. If either is readmitted, the hospital stay for the readmission is not subject to this section.
(b) Prohibitions—(1) With respect to mothers—(i) In general. A group health plan may not—
(A) Deny a mother or her newborn child eligibility or continued eligibility to enroll or renew coverage under the terms of the plan solely to avoid the requirements of this section; or
(B) Provide payments (including payments-in-kind) or rebates to a mother to encourage her to accept less than the minimum protections available under this section.
(ii) Examples. The rules of this paragraph (b)(1) are illustrated by the following examples. In each example, the group health plan is subject to the requirements of this section, as follows:
Example 1. (i) Facts. A group health plan provides benefits for at least a 48-hour hospital length of stay following a vaginal delivery. If a mother and newborn covered under the plan are discharged within 24 hours after the delivery, the plan will waive the copayment and deductible.
(ii) Conclusion. In this Example 1, because waiver of the copayment and deductible is in the nature of a rebate that the mother would not receive if she and her newborn remained in the hospital, it is prohibited by this paragraph (b)(1). (In addition, the plan violates paragraph (b)(2) of this section because, in effect, no copayment or deductible is required for the first portion of the stay and a double copayment and a deductible are required for the second portion of the stay.)
Example 2. (i) Facts. A group health plan provides benefits for at least a 48-hour hospital length of stay following a vaginal delivery. In the event that a mother and her newborn are discharged earlier than 48 hours and the discharges occur after consultation with the mother in accordance with the requirements of paragraph (a)(5) of this section, the plan provides for a follow-up visit by a nurse within 48 hours after the discharges to provide certain services that the mother and her newborn would otherwise receive in the hospital.
(ii) Conclusion. In this Example 2, because the follow-up visit does not provide any services beyond what the mother and her newborn would receive in the hospital, coverage for the follow-up visit is not prohibited by this paragraph (b)(1).
(2) With respect to benefit restrictions—(i) In general. Subject to paragraph (c)(3) of this section, a group health plan may not restrict the benefits for any portion of a hospital length of stay specified in paragraph (a) of this section in a manner that is less favorable than the benefits provided for any preceding portion of the stay.
(ii) Example. The rules of this paragraph (b)(2) are illustrated by the following example:
Example. (i) Facts. A group health plan subject to the requirements of this section provides benefits for hospital lengths of stay in connection with childbirth. In the case of a delivery by cesarean section, the plan automatically pays for the first 48 hours. With respect to each succeeding 24-hour period, the participant or beneficiary must call the plan to obtain precertification from a utilization reviewer, who determines if an additional 24-hour period is medically necessary. If this approval is not obtained, the plan will not provide benefits for any succeeding 24-hour period.
(ii) Conclusion. In this Example, the requirement to obtain precertification for the two 24-hour periods immediately following the initial 48-hour stay is prohibited by this paragraph (b)(2) because benefits for the latter part of the stay are restricted in a manner that is less favorable than benefits for a preceding portion of the stay. (However, this section does not prohibit a plan from requiring precertification for any period after the first 96 hours.) In addition, the requirement to obtain precertification from the plan based on medical necessity for a hospital length of stay within the 96-hour period would also violate paragraph (a) of this section.
(3) With respect to attending providers. A group health plan may not directly or indirectly—
(i) Penalize (for example, take disciplinary action against or retaliate against), or otherwise reduce or limit the compensation of, an attending provider because the provider furnished care to a participant or beneficiary in accordance with this section; or
(ii) Provide monetary or other incentives to an attending provider to induce the provider to furnish care to a participant or beneficiary in a manner inconsistent with this section, including providing any incentive that could induce an attending provider to discharge a mother or newborn earlier than 48 hours (or 96 hours) after delivery.
(c) Construction. With respect to this section, the following rules of construction apply:
(1) Hospital stays not mandatory. This section does not require a mother to—
(i) Give birth in a hospital; or
(ii) Stay in the hospital for a fixed period of time following the birth of her child.
(2) Hospital stay benefits not mandated. This section does not apply to any group health plan that does not provide benefits for hospital lengths of stay in connection with childbirth for a mother or her newborn child.
(3) Cost-sharing rules—(i) In general. This section does not prevent a group health plan from imposing deductibles, coinsurance, or other cost-sharing in relation to benefits for hospital lengths of stay in connection with childbirth for a mother or a newborn under the plan or coverage, except that the coinsurance or other cost-sharing for any portion of the hospital length of stay specified in paragraph (a) of this section may not be greater than that for any preceding portion of the stay.
(ii) Examples. The rules of this paragraph (c)(3) are illustrated by the following examples. In each example, the group health plan is subject to the requirements of this section, as follows:
Example 1. (i) Facts. A group health plan provides benefits for at least a 48-hour hospital length of stay in connection with vaginal deliveries. The plan covers 80 percent of the cost of the stay for the first 24-hour period and 50 percent of the cost of the stay for the second 24-hour period. Thus, the coinsurance paid by the patient increases from 20 percent to 50 percent after 24 hours.
(ii) Conclusion. In this Example 1, the plan violates the rules of this paragraph (c)(3) because coinsurance for the second 24-hour period of the 48-hour stay is greater than that for the preceding portion of the stay. (In addition, the plan also violates the similar rule in paragraph (b)(2) of this section.)
Example 2. (i) Facts. A group health plan generally covers 70 percent of the cost of a hospital length of stay in connection with childbirth. However, the plan will cover 80 percent of the cost of the stay if the participant or beneficiary notifies the plan of the pregnancy in advance of admission and uses whatever hospital the plan may designate.
(ii) Conclusion. In this Example 2, the plan does not violate the rules of this paragraph (c)(3) because the level of benefits provided (70 percent or 80 percent) is consistent throughout the 48-hour (or 96-hour) hospital length of stay required under paragraph (a) of this section. (In addition, the plan does not violate the rules in paragraph (a)(4) or (b)(2) of this section.)
(4) Compensation of attending provider. This section does not prevent a group health plan from negotiating with an attending provider the level and type of compensation for care furnished in accordance with this section (including paragraph (b) of this section).
(d) Notice requirement. See 29 CFR 2520.102-3(u) for rules relating to a disclosure requirement imposed under section 711(d) of ERISA (29 U.S.C. 1181) on certain group health plans that provide benefits for hospital lengths of stay in connection with childbirth.
(e) Applicability in certain states—(1) Health insurance coverage. The requirements of section 9811 and this section do not apply with respect to health insurance coverage offered in connection with a group health plan if there is a state law regulating the coverage that meets any of the following criteria:
(i) The state law requires the coverage to provide for at least a 48-hour hospital length of stay following a vaginal delivery and at least a 96-hour hospital length of stay following a delivery by cesarean section.
(ii) The state law requires the coverage to provide for maternity and pediatric care in accordance with guidelines that relate to care following childbirth established by the American College of Obstetricians and Gynecologists, the American Academy of Pediatrics, or any other established professional medical association.
(iii) The state law requires, in connection with the coverage for maternity care, that the hospital length of stay for such care is left to the decision of (or is required to be made by) the attending provider in consultation with the mother. State laws that require the decision to be made by the attending provider with the consent of the mother satisfy the criterion of this paragraph (e)(1)(iii).
(2) Group health plans—(i) Fully-insured plans. For a group health plan that provides benefits solely through health insurance coverage, if the state law regulating the health insurance coverage meets any of the criteria in paragraph (e)(1) of this section, then the requirements of section 9811 and this section do not apply.
(ii) Self-insured plans. For a group health plan that provides all benefits for hospital lengths of stay in connection with childbirth other than through health insurance coverage, the requirements of section 9811 and this section apply.
(iii) Partially-insured plans. For a group health plan that provides some benefits through health insurance coverage, if the state law regulating the health insurance coverage meets any of the criteria in paragraph (e)(1) of this section, then the requirements of section 9811 and this section apply only to the extent the plan provides benefits for hospital lengths of stay in connection with childbirth other than through health insurance coverage.
(3) Preemption provisions under section 731(a) of ERISA. See 29 CFR 2590.711(e)(3) for a rule providing that the preemption provisions contained in section 731(a)(1) of ERISA and 29 CFR 2590.731(a) do not supersede a state law if the state law is described in paragraph (e)(1) of 29 CFR 2590.711 (which is substantially similar to paragraph (e)(1) of this section).
(4) Examples. The rules of this paragraph (e) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan buys group health insurance coverage in a state that requires that the coverage provide for at least a 48-hour hospital length of stay following a vaginal delivery and at least a 96-hour hospital length of stay following a delivery by cesarean section.
(ii) Conclusion. In this Example 1, the coverage is subject to state law, and the requirements of section 9811 and this section do not apply.
Example 2. (i) Facts. A self-insured group health plan covers hospital lengths of stay in connection with childbirth in a state that requires health insurance coverage to provide for maternity and pediatric care in accordance with guidelines that relate to care following childbirth established by the American College of Obstetricians and Gynecologists and the American Academy of Pediatrics.
(ii) Conclusion. In this Example 2, even though the state law satisfies the criterion of paragraph (e)(1)(ii) of this section, because the plan provides benefits for hospital lengths of stay in connection with childbirth other than through health insurance coverage, the plan is subject to the requirements of section 9811 and this section.
(f) Effective/applicability date. This section applies to group health plans for plan years beginning on or after January 1, 2009.
[T.D. 9427, 73 FR 62420, Oct. 20, 2008]
§ 54.9812-1 Parity in mental health and substance use disorder benefits.
(a) Purpose and meaning of terms—(1) Purpose. This section and § 54.9812-2 set forth rules to ensure parity in aggregate lifetime and annual dollar limits, financial requirements, and quantitative and nonquantitative treatment limitations between mental health and substance use disorder benefits and medical/surgical benefits, as required under Code section 9812. A fundamental purpose of Code section 9812, this section, and § 54.9812-2 is to ensure that participants and beneficiaries in a group health plan that offers mental health or substance use disorder benefits are not subject to more restrictive aggregate lifetime or annual dollar limits, financial requirements, or treatment limitations with respect to those benefits than the predominant dollar limits, financial requirements, or treatment limitations that are applied to substantially all medical/surgical benefits covered by the plan in the same classification, as further provided in this section and § 54.9812-2. Accordingly, in complying with the provisions of Code section 9812, this section, and § 54.9812-2, plans must not design or apply financial requirements and treatment limitations that impose a greater burden on access (that is, are more restrictive) to mental health or substance use disorder benefits under the plan than they impose on access to medical/surgical benefits in the same classification of benefits. The provisions of Code section 9812, this section, and § 54.9812-2 should be interpreted in a manner that is consistent with the purpose described in this paragraph (a)(1).
(2) Meaning of terms. For purposes of this section and § 54.9812-2, except where the context clearly indicates otherwise, the following terms have the meanings indicated:
Aggregate lifetime dollar limit means a dollar limitation on the total amount of specified benefits that may be paid under a group health plan (or health insurance coverage offered in connection with such a plan) for any coverage unit.
Annual dollar limit means a dollar limitation on the total amount of specified benefits that may be paid in a 12-month period under a group health plan (or health insurance coverage offered in connection with such a plan) for any coverage unit.
Coverage unit means coverage unit as described in paragraph (c)(1)(iv) of this section.
Cumulative financial requirements are financial requirements that determine whether or to what extent benefits are provided based on accumulated amounts and include deductibles and out-of-pocket maximums. (However, cumulative financial requirements do not include aggregate lifetime or annual dollar limits because these two terms are excluded from the meaning of financial requirements.)
Cumulative quantitative treatment limitations are treatment limitations that determine whether or to what extent benefits are provided based on accumulated amounts, such as annual or lifetime day or visit limits.
DSM means the American Psychiatric Association's Diagnostic and Statistical Manual of Mental Disorders. For the purpose of this definition, the most current version of the DSM as of November 22, 2024, is the Diagnostic and Statistical Manual of Mental Disorders, Fifth Edition, Text Revision published in March 2022. A subsequent version of the DSM published after November 22, 2024, will be considered the most current version beginning on the first day of the plan year that is one year after the date the subsequent version is published.
Evidentiary standards are any evidence, sources, or standards that a group health plan considered or relied upon in designing or applying a factor with respect to a nonquantitative treatment limitation, including specific benchmarks or thresholds. Evidentiary standards may be empirical, statistical, or clinical in nature, and include: sources acquired or originating from an objective third party, such as recognized medical literature, professional standards and protocols (which may include comparative effectiveness studies and clinical trials), published research studies, payment rates for items and services (such as publicly available databases of the “usual, customary and reasonable” rates paid for items and services), and clinical treatment guidelines; internal plan data, such as claims or utilization data or criteria for assuring a sufficient mix and number of network providers; and benchmarks or thresholds, such as measures of excessive utilization, cost levels, time or distance standards, or network participation percentage thresholds.
Factors are all information, including processes and strategies (but not evidentiary standards), that a group health plan considered or relied upon to design a nonquantitative treatment limitation, or to determine whether or how the nonquantitative treatment limitation applies to benefits under the plan. Examples of factors include, but are not limited to: provider discretion in determining a diagnosis or type or length of treatment; clinical efficacy of any proposed treatment or service; licensing and accreditation of providers; claim types with a high percentage of fraud; quality measures; treatment outcomes; severity or chronicity of condition; variability in the cost of an episode of treatment; high cost growth; variability in cost and quality; elasticity of demand; and geographic location.
Financial requirements include deductibles, copayments, coinsurance, or out-of-pocket maximums. Financial requirements do not include aggregate lifetime or annual dollar limits.
ICD means the World Health Organization's International Classification of Diseases adopted by the Department of Health and Human Services through 45 CFR 162.1002. For the purpose of this definition, the most current version of the ICD as of November 22, 2024, is the International Classification of Diseases, 10th Revision, Clinical Modification adopted for the period beginning on October 1, 2015. Any subsequent version of the ICD adopted through 45 CFR 162.1002 after November 22, 2024, will be considered the most current version beginning on the first day of the plan year that is one year after the date the subsequent version is adopted.
Medical/surgical benefits means benefits with respect to items or services for medical conditions or surgical procedures, as defined under the terms of the group health plan and in accordance with applicable Federal and State law, but does not include mental health benefits or substance use disorder benefits. Notwithstanding the preceding sentence, any condition or procedure defined by the plan as being or as not being a medical condition or surgical procedure must be defined consistent with generally recognized independent standards of current medical practice (for example, the most current version of the ICD). To the extent generally recognized independent standards of current medical practice do not address whether a condition or procedure is a medical condition or surgical procedure, plans may define the condition or procedure in accordance with applicable Federal and State law.
Mental health benefits means benefits with respect to items or services for mental health conditions, as defined under the terms of the group health plan and in accordance with applicable Federal and State law, but does not include medical/surgical benefits or substance use disorder benefits. Notwithstanding the preceding sentence, any condition defined by the plan as being or as not being a mental health condition must be defined consistent with generally recognized independent standards of current medical practice. For the purpose of this definition, to be consistent with generally recognized independent standards of current medical practice, the definition must include all conditions covered under the plan, except for substance use disorders, that fall under any of the diagnostic categories listed in the mental, behavioral, and neurodevelopmental disorders chapter (or equivalent chapter) of the most current version of the ICD or that are listed in the most current version of the DSM. To the extent generally recognized independent standards of current medical practice do not address whether a condition is a mental health condition, plans may define the condition in accordance with applicable Federal and State law.
Processes are actions, steps, or procedures that a group health plan uses to apply a nonquantitative treatment limitation, including actions, steps, or procedures established by the plan as requirements in order for a participant or beneficiary to access benefits, including through actions by a participant's or beneficiary's authorized representative or a provider or facility. Examples of processes include, but are not limited to: procedures to submit information to authorize coverage for an item or service prior to receiving the benefit or while treatment is ongoing (including requirements for peer or expert clinical review of that information); provider referral requirements that are used to determine when and how a participant or beneficiary may access certain services; and the development and approval of a treatment plan used in a concurrent review process to determine whether a specific request should be granted or denied. Processes also include the specific procedures used by staff or other representatives of a plan (or the service provider of a plan) to administer the application of nonquantitative treatment limitations, such as how a panel of staff members applies the nonquantitative treatment limitation (including the qualifications of staff involved, number of staff members allocated, and time allocated), consultations with panels of experts in applying the nonquantitative treatment limitation, and the degree of reviewer discretion in adhering to criteria hierarchy when applying a nonquantitative treatment limitation.
Strategies are practices, methods, or internal metrics that a plan considers, reviews, or uses to design a nonquantitative treatment limitation. Examples of strategies include, but are not limited to: the development of the clinical rationale used in approving or denying benefits; the method of determining whether and how to deviate from generally accepted standards of care in concurrent reviews; the selection of information deemed reasonably necessary to make medical necessity determinations; reliance on treatment guidelines or guidelines provided by third-party organizations in the design of a nonquantitative treatment limitation; and rationales used in selecting and adopting certain threshold amounts to apply a nonquantitative treatment limitation, professional standards and protocols to determine utilization management standards, and fee schedules used to determine provider reimbursement rates, used as part of a nonquantitative treatment limitation. Strategies also include the method of creating and determining the composition of the staff or other representatives of a plan (or the service provider of a plan) that deliberates, or otherwise makes decisions, on the design of nonquantitative treatment limitations, including the plan's methods for making decisions related to the qualifications of staff involved, number of staff members allocated, and time allocated; breadth of sources and evidence considered; consultations with panels of experts in designing the nonquantitative treatment limitation; and the composition of the panels used to design a nonquantitative treatment limitation.
Substance use disorder benefits means benefits with respect to items or services for substance use disorders, as defined under the terms of the group health plan and in accordance with applicable Federal and State law, but does not include medical/surgical benefits or mental health benefits. Notwithstanding the preceding sentence, any disorder defined by the plan as being or as not being a substance use disorder must be defined consistent with generally recognized independent standards of current medical practice. For the purpose of this definition, to be consistent with generally recognized independent standards of current medical practice, the definition must include all disorders covered under the plan that fall under any of the diagnostic categories listed as a mental or behavioral disorder due to psychoactive substance use (or equivalent category) in the mental, behavioral, and neurodevelopmental disorders chapter (or equivalent chapter) of the most current version of the ICD or that are listed as a Substance-Related and Addictive Disorder (or equivalent category) in the most current version of the DSM. To the extent generally recognized independent standards of current medical practice do not address whether a disorder is a substance use disorder, plans may define the disorder in accordance with applicable Federal and State law.
Treatment limitations include limits on benefits based on the frequency of treatment, number of visits, days of coverage, days in a waiting period, or other similar limits on the scope or duration of treatment. Treatment limitations include both quantitative treatment limitations, which are expressed numerically (such as 50 outpatient visits per year), and nonquantitative treatment limitations (such as standards related to network composition), which otherwise limit the scope or duration of benefits for treatment under a plan. (See paragraph (c)(4)(ii) of this section for an illustrative, non-exhaustive list of nonquantitative treatment limitations.) A complete exclusion of all benefits for a particular condition or disorder, however, is not a treatment limitation for purposes of this definition.
(b) Parity requirements with respect to aggregate lifetime and annual dollar limits. This paragraph (b) details the application of the parity requirements with respect to aggregate lifetime and annual dollar limits. This paragraph (b) does not address the provisions of PHS Act section 2711, as incorporated in ERISA section 715 and Code section 9815, which prohibit imposing lifetime and annual limits on the dollar value of essential health benefits.
(1) General—(i) General parity requirement. A group health plan (or health insurance coverage offered by an issuer in connection with a group health plan) that provides both medical/surgical benefits and mental health or substance use disorder benefits must comply with paragraph (b)(2), (b)(3), or (b)(5) of this section.
(ii) Exception. The rule in paragraph (b)(1)(i) of this section does not apply if a plan (or health insurance coverage) satisfies the requirements of paragraph (f) or (g) of this section (relating to exemptions for small employers and for increased cost).
(2) Plan with no limit or limits on less than one-third of all medical/surgical benefits. If a plan (or health insurance coverage) does not include an aggregate lifetime or annual dollar limit on any medical/surgical benefits or includes an aggregate lifetime or annual dollar limit that applies to less than one-third of all medical/surgical benefits, it may not impose an aggregate lifetime or annual dollar limit, respectively, on mental health or substance use disorder benefits.
(3) Plan with a limit on at least two-thirds of all medical/surgical benefits. If a plan (or health insurance coverage) includes an aggregate lifetime or annual dollar limit on at least two-thirds of all medical/surgical benefits, it must either—
(i) Apply the aggregate lifetime or annual dollar limit both to the medical/surgical benefits to which the limit would otherwise apply and to mental health or substance use disorder benefits in a manner that does not distinguish between the medical/surgical benefits and mental health or substance use disorder benefits; or
(ii) Not include an aggregate lifetime or annual dollar limit on mental health or substance use disorder benefits that is less than the aggregate lifetime or annual dollar limit, respectively, on medical/surgical benefits. (For cumulative limits other than aggregate lifetime or annual dollar limits, see paragraph (c)(3)(v) of this section prohibiting separately accumulating cumulative financial requirements or cumulative quantitative treatment limitations.)
(4) Determining one-third and two-thirds of all medical/surgical benefits. For purposes of this paragraph (b), the determination of whether the portion of medical/surgical benefits subject to an aggregate lifetime or annual dollar limit represents one-third or two-thirds of all medical/surgical benefits is based on the dollar amount of all plan payments for medical/surgical benefits expected to be paid under the plan for the plan year (or for the portion of the plan year after a change in plan benefits that affects the applicability of the aggregate lifetime or annual dollar limits). Any reasonable method may be used to determine whether the dollar amount expected to be paid under the plan will constitute one-third or two-thirds of the dollar amount of all plan payments for medical/surgical benefits.
(5) Plan not described in paragraph (b)(2) or (b)(3) of this section—(i) In general. A group health plan (or health insurance coverage) that is not described in paragraph (b)(2) or (b)(3) of this section with respect to aggregate lifetime or annual dollar limits on medical/surgical benefits, must either—
(A) Impose no aggregate lifetime or annual dollar limit, as appropriate, on mental health or substance use disorder benefits; or
(B) Impose an aggregate lifetime or annual dollar limit on mental health or substance use disorder benefits that is no less than an average limit calculated for medical/surgical benefits in the following manner. The average limit is calculated by taking into account the weighted average of the aggregate lifetime or annual dollar limits, as appropriate, that are applicable to the categories of medical/surgical benefits. Limits based on delivery systems, such as inpatient/outpatient treatment or normal treatment of common, low-cost conditions (such as treatment of normal births), do not constitute categories for purposes of this paragraph (b)(5)(i)(B). In addition, for purposes of determining weighted averages, any benefits that are not within a category that is subject to a separately-designated dollar limit under the plan are taken into account as a single separate category by using an estimate of the upper limit on the dollar amount that a plan may reasonably be expected to incur with respect to such benefits, taking into account any other applicable restrictions under the plan.
(ii) Weighting. For purposes of this paragraph (b)(5), the weighting applicable to any category of medical/surgical benefits is determined in the manner set forth in paragraph (b)(4) of this section for determining one-third or two-thirds of all medical/surgical benefits.
(c) Parity requirements with respect to financial requirements and treatment limitations—(1) Clarification of terms—(i) Classification of benefits. When reference is made in this paragraph (c) to a classification of benefits, the term “classification” means a classification as described in paragraph (c)(2)(ii) of this section.
(ii) Type of financial requirement or treatment limitation. When reference is made in this paragraph (c) to a type of financial requirement or treatment limitation, the reference to type means its nature. Different types of financial requirements include deductibles, copayments, coinsurance, and out-of-pocket maximums. Different types of quantitative treatment limitations include annual, episode, and lifetime day and visit limits. See paragraph (c)(4)(ii) of this section for an illustrative, non-exhaustive list of nonquantitative treatment limitations.
(iii) Level of a type of financial requirement or treatment limitation. When reference is made in this paragraph (c) to a level of a type of financial requirement or treatment limitation, level refers to the magnitude of the type of financial requirement or treatment limitation. For example, different levels of coinsurance include 20 percent and 30 percent; different levels of a copayment include $15 and $20; different levels of a deductible include $250 and $500; and different levels of an episode limit include 21 inpatient days per episode and 30 inpatient days per episode.
(iv) Coverage unit. When reference is made in this paragraph (c) to a coverage unit, coverage unit refers to the way in which a plan (or health insurance coverage) groups individuals for purposes of determining benefits, or premiums or contributions. For example, different coverage units include self-only, family, and employee-plus-spouse.
(2) General parity requirement—(i) General rule. A group health plan that provides both medical/surgical benefits and mental health or substance use disorder benefits may not apply any financial requirement or treatment limitation to mental health or substance use disorder benefits in any classification that is more restrictive than the predominant financial requirement or treatment limitation of that type applied to substantially all medical/surgical benefits in the same classification. Whether a financial requirement or treatment limitation is a predominant financial requirement or treatment limitation that applies to substantially all medical/surgical benefits in a classification is determined separately for each type of financial requirement or treatment limitation. A plan may not impose any financial requirement or treatment limitation that is applicable only with respect to mental health or substance use disorder benefits and not to any medical/surgical benefits in the same benefit classification. The application of the rules of this paragraph (c)(2) to financial requirements and quantitative treatment limitations is addressed in paragraph (c)(3) of this section; the application of the rules of this paragraph (c)(2) to nonquantitative treatment limitations is addressed in paragraph (c)(4) of this section.
(ii) Classifications of benefits used for applying rules—(A) In general. If a plan provides any benefits for a mental health condition or substance use disorder in any classification of benefits described in this paragraph (c)(2)(ii), it must provide meaningful benefits for that mental health condition or substance use disorder in every classification in which medical/surgical benefits are provided. For purposes of this paragraph (c)(2)(ii)(A), whether the benefits provided are meaningful benefits is determined in comparison to the benefits provided for medical conditions and surgical procedures in the classification and requires, at a minimum, coverage of benefits for that condition or disorder in each classification in which the plan provides benefits for one or more medical conditions or surgical procedures. A plan does not provide meaningful benefits under this paragraph (c)(2)(ii)(A) unless it provides benefits for a core treatment for that condition or disorder in each classification in which the plan provides benefits for a core treatment for one or more medical conditions or surgical procedures. For purposes of this paragraph (c)(2)(ii)(A), a core treatment for a condition or disorder is a standard treatment or course of treatment, therapy, service, or intervention indicated by generally recognized independent standards of current medical practice. If there is no core treatment for a covered mental health condition or substance use disorder with respect to a classification, the plan is not required to provide benefits for a core treatment for such condition or disorder in that classification (but must provide benefits for such condition or disorder in every classification in which medical/surgical benefits are provided). In determining the classification in which a particular benefit belongs, a plan must apply the same standards to medical/surgical benefits and to mental health or substance use disorder benefits. To the extent that a plan provides benefits in a classification and imposes any separate financial requirement or treatment limitation (or separate level of a financial requirement or treatment limitation) for benefits in the classification, the rules of this paragraph (c) apply separately with respect to that classification for all financial requirements or treatment limitations (illustrated in examples in paragraph (c)(2)(ii)(C) of this section). The following classifications of benefits are the only classifications used in applying the rules of this paragraph (c), in addition to the permissible sub-classifications described in paragraph (c)(3)(iii) of this section:
(1) Inpatient, in-network. Benefits furnished on an inpatient basis and within a network of providers established or recognized under a plan or health insurance coverage. See special rules for plans with multiple network tiers in paragraph (c)(3)(iii) of this section.
(2) Inpatient, out-of-network. Benefits furnished on an inpatient basis and outside any network of providers established or recognized under a plan or health insurance coverage. This classification includes inpatient benefits under a plan (or health insurance coverage) that has no network of providers.
(3) Outpatient, in-network. Benefits furnished on an outpatient basis and within a network of providers established or recognized under a plan or health insurance coverage. See special rules for office visits and plans with multiple network tiers in paragraph (c)(3)(iii) of this section.
(4) Outpatient, out-of-network. Benefits furnished on an outpatient basis and outside any network of providers established or recognized under a plan or health insurance coverage. This classification includes outpatient benefits under a plan (or health insurance coverage) that has no network of providers. See special rules for office visits in paragraph (c)(3)(iii) of this section.
(5) Emergency care. Benefits for emergency care.
(6) Prescription drugs. Benefits for prescription drugs. See special rules for multi-tiered prescription drug benefits in paragraph (c)(3)(iii) of this section.
(B) Application to out-of-network providers. See paragraph (c)(2)(ii)(A) of this section, under which a plan (or health insurance coverage) that provides mental health or substance use disorder benefits in any classification of benefits must provide mental health or substance use disorder benefits in every classification in which medical/surgical benefits are provided, including out-of-network classifications.
(C) Examples. The rules of this paragraph (c)(2)(ii) are illustrated by the following examples. In each example, the group health plan is subject to the requirements of this section and provides both medical/surgical benefits and mental health and substance use disorder benefits. With regard to the examples in this paragraph (c)(2)(ii)(C), references to any particular core treatment are included for illustrative purposes only. Plans must consult generally recognized independent standards of current medical practice to determine the applicable core treatment, therapy, service, or intervention for any covered condition or disorder.
(1) Example 1—(i) Facts. A group health plan offers inpatient and outpatient benefits and does not contract with a network of providers. The plan imposes a $500 deductible on all benefits. For inpatient medical/surgical benefits, the plan imposes a coinsurance requirement. For outpatient medical/surgical benefits, the plan imposes copayments. The plan imposes no other financial requirements or treatment limitations.
(ii) Conclusion. In this paragraph (c)(2)(ii)(C)(1) (Example 1), because the plan has no network of providers, all benefits provided are out-of-network. Because inpatient, out-of-network medical/surgical benefits are subject to separate financial requirements from outpatient, out-of-network medical/surgical benefits, the rules of this paragraph (c) apply separately with respect to any financial requirements and treatment limitations, including the deductible, in each classification.
(2) Example 2—(i) Facts. A plan imposes a $500 deductible on all benefits. The plan has no network of providers. The plan generally imposes a 20 percent coinsurance requirement with respect to all benefits, without distinguishing among inpatient, outpatient, emergency care, or prescription drug benefits. The plan imposes no other financial requirements or treatment limitations.
(ii) Conclusion. In this paragraph (c)(2)(ii)(C)(2) (Example 2), because the plan does not impose separate financial requirements (or treatment limitations) based on classification, the rules of this paragraph (c) apply with respect to the deductible and the coinsurance across all benefits.
(3) Example 3—(i) Facts. Same facts as in paragraph (c)(2)(ii)(C)(2)(i) of this section (Example 2), except the plan exempts emergency care benefits from the 20 percent coinsurance requirement. The plan imposes no other financial requirements or treatment limitations.
(ii) Conclusion. In this paragraph (c)(2)(ii)(C)(3) (Example 3), because the plan imposes separate financial requirements based on classifications, the rules of this paragraph (c) apply with respect to the deductible and the coinsurance separately for benefits in the emergency care classification and all other benefits.
(4) Example 4—(i) Facts. Same facts as in paragraph (c)(2)(ii)(C)(2)(i) of this section (Example 2), except the plan also imposes a preauthorization requirement for all inpatient treatment in order for benefits to be paid. No such requirement applies to outpatient treatment.
(ii) Conclusion. In this paragraph (c)(2)(ii)(C)(4) (Example 4), because the plan has no network of providers, all benefits provided are out-of-network. Because the plan imposes a separate treatment limitation based on classifications, the rules of this paragraph (c) apply with respect to the deductible and coinsurance separately for inpatient, out-of-network benefits and all other benefits.
(5) Example 5—(i) Facts. A plan covers treatment for autism spectrum disorder (ASD), a mental health condition, and covers outpatient, out-of-network developmental screenings for ASD but excludes all other benefits for outpatient treatment for ASD, including applied behavior analysis (ABA) therapy, when provided on an out-of-network basis. The plan generally covers the full range of outpatient treatments (including core treatments) and treatment settings for medical conditions and surgical procedures when provided on an out-of-network basis. Under the generally recognized independent standards of current medical practice consulted by the plan, developmental screenings alone do not constitute a core treatment for ASD.
(ii) Conclusion. In this paragraph (c)(2)(ii)(C)(5) (Example 5), the plan violates the rules of this paragraph (c)(2)(ii). Although the plan covers benefits for ASD, in the outpatient, out-of-network classification, it only covers developmental screenings, so it does not cover a core treatment for ASD in the classification. Because the plan generally covers the full range of medical/surgical benefits including a core treatment for one or more medical conditions or surgical procedures in the classification, it fails to provide meaningful benefits for treatment of ASD in the classification.
(6) Example 6—(i) Facts. Same facts as in paragraph (c)(2)(ii)(C)(5) of this section (Example 5), except that the plan is an HMO that does not cover the full range of medical/surgical benefits, including a core treatment for any medical conditions or surgical procedures in the outpatient, out-of-network classification (except as required under Code sections 9816 and 9817), but covers benefits for medical conditions and surgical procedures in the inpatient, in-network; outpatient, in-network; emergency care; and prescription drug classifications.
(ii) Conclusion. In this paragraph (c)(2)(ii)(C)(6) (Example 6), the plan does not violate the rules of this paragraph (c)(2)(ii). Because the plan does not provide meaningful benefits, including for a core treatment for any medical condition or surgical procedure in the outpatient, out-of-network classification (except as required under Code sections 9816 and 9817), the plan is not required to provide meaningful benefits for any mental health conditions or substance use disorders in that classification. Nevertheless, the plan must provide meaningful benefits for each mental health condition and substance use disorder for which the plan provides benefits in every classification in which meaningful medical/surgical benefits are provided, as required under paragraph (c)(2)(ii)(A) of this section. This example does not address whether the plan has complied with other applicable requirements of this section in excluding coverage of ABA therapy in the outpatient, out-of-network classification.
(7) Example 7—(i) Facts. A plan provides extensive benefits, including for core treatments for many medical conditions and surgical procedures in the outpatient, in-network classification, including nutrition counseling for diabetes and obesity. The plan also generally covers diagnosis and treatment for eating disorders, which are mental health conditions, including coverage for nutrition counseling to treat eating disorders in the outpatient, in-network classification. Nutrition counseling is a core treatment for eating disorders, in accordance with generally recognized independent standards of current medical practice consulted by the plan.
(ii) Conclusion. In this paragraph (c)(2)(ii)(C)(7) (Example 7), the plan does not violate the rules of this paragraph (c)(2)(ii). The coverage of diagnosis and treatment for eating disorders, including nutrition counseling, in the outpatient, in-network classification results in the plan providing meaningful benefits for the treatment of eating disorders in the classification, as determined in comparison to the benefits provided for medical conditions or surgical procedures in the classification.
(8) Example 8—(i) Facts. A plan provides extensive benefits for the core treatments for many medical conditions and surgical procedures in the outpatient, in-network and prescription drug classifications. The plan provides coverage for diagnosis and treatment for opioid use disorder, a substance use disorder, in the outpatient, in-network classification, by covering counseling and behavioral therapies and, in the prescription drug classification, by covering medications to treat opioid use disorder (MOUD). Counseling and behavioral therapies and MOUD, in combination, are one of the core treatments for opioid use disorder, in accordance with generally recognized independent standards of current medical practice consulted by the plan.
(ii) Conclusion. In this paragraph (c)(2)(ii)(C)(8) (Example 8), the plan does not violate the rules of this paragraph (c)(2)(ii). The coverage of counseling and behavioral therapies and MOUD, in combination, in the outpatient, in-network classification and prescription drug classification, respectively, results in the plan providing meaningful benefits for the treatment of opioid use disorder in the outpatient, in-network and prescription drug classifications.
(3) Financial requirements and quantitative treatment limitations—(i) Determining “substantially all” and “predominant”—(A) Substantially all. For purposes of this paragraph (c)(3), a type of financial requirement or quantitative treatment limitation is considered to apply to substantially all medical/surgical benefits in a classification of benefits if it applies to at least two-thirds of all medical/surgical benefits in that classification. (For purposes of this paragraph (c)(3)(i)(A), benefits expressed as subject to a zero level of a type of financial requirement are treated as benefits not subject to that type of financial requirement, and benefits expressed as subject to a quantitative treatment limitation that is unlimited are treated as benefits not subject to that type of quantitative treatment limitation.) If a type of financial requirement or quantitative treatment limitation does not apply to at least two-thirds of all medical/surgical benefits in a classification, then that type cannot be applied to mental health or substance use disorder benefits in that classification.
(B) Predominant—(1) If a type of financial requirement or quantitative treatment limitation applies to at least two-thirds of all medical/surgical benefits in a classification as determined under paragraph (c)(3)(i)(A) of this section, the level of the financial requirement or quantitative treatment limitation that is considered the predominant level of that type in a classification of benefits is the level that applies to more than one-half of medical/surgical benefits in that classification subject to the financial requirement or quantitative treatment limitation.
(2) If, with respect to a type of financial requirement or quantitative treatment limitation that applies to at least two-thirds of all medical/surgical benefits in a classification, there is no single level that applies to more than one-half of medical/surgical benefits in the classification subject to the financial requirement or quantitative treatment limitation, the plan (or health insurance issuer) may combine levels until the combination of levels applies to more than one-half of medical/surgical benefits subject to the financial requirement or quantitative treatment limitation in the classification. The least restrictive level within the combination is considered the predominant level of that type in the classification. (For this purpose, a plan may combine the most restrictive levels first, with each less restrictive level added to the combination until the combination applies to more than one-half of the benefits subject to the financial requirement or treatment limitation.)
(C) Portion based on plan payments. For purposes of this paragraph (c)(3), the determination of the portion of medical/surgical benefits in a classification of benefits subject to a financial requirement or quantitative treatment limitation (or subject to any level of a financial requirement or quantitative treatment limitation) is based on the dollar amount of all plan payments for medical/surgical benefits in the classification expected to be paid under the plan for the plan year (or for the portion of the plan year after a change in plan benefits that affects the applicability of the financial requirement or quantitative treatment limitation).
(D) Clarifications for certain threshold requirements. For any deductible, the dollar amount of plan payments includes all plan payments with respect to claims that would be subject to the deductible if it had not been satisfied. For any out-of-pocket maximum, the dollar amount of plan payments includes all plan payments associated with out-of-pocket payments that are taken into account towards the out-of-pocket maximum as well as all plan payments associated with out-of-pocket payments that would have been made towards the out-of-pocket maximum if it had not been satisfied. The rules of this paragraph (c)(3)(i)(D) apply for any other thresholds at which the rate of plan payment changes. (See also PHS Act section 2707 and Affordable Care Act section 1302(c), which establish annual limitations on out-of-pocket maximums for all non-grandfathered health plans.)
(E) Determining the dollar amount of plan payments. Subject to paragraph (c)(3)(i)(D) of this section, any reasonable method may be used to determine the dollar amount expected to be paid under a plan for medical/surgical benefits subject to a financial requirement or quantitative treatment limitation (or subject to any level of a financial requirement or quantitative treatment limitation).
(ii) Application to different coverage units. If a plan (or health insurance coverage) applies different levels of a financial requirement or quantitative treatment limitation to different coverage units in a classification of medical/surgical benefits, the predominant level that applies to substantially all medical/surgical benefits in the classification is determined separately for each coverage unit.
(iii) Special rules. Unless specifically permitted under this paragraph (c)(3)(iii), sub-classifications are not permitted when applying the rules of paragraph (c)(3) of this section.
(A) Multi-tiered prescription drug benefits. If a plan applies different levels of financial requirements to different tiers of prescription drug benefits based on reasonable factors determined in accordance with the rules in paragraph (c)(4) of this section (relating to requirements for nonquantitative treatment limitations) and without regard to whether a drug is generally prescribed with respect to medical/surgical benefits or with respect to mental health or substance use disorder benefits, the plan satisfies the parity requirements of this paragraph (c) with respect to prescription drug benefits. Reasonable factors include cost, efficacy, generic versus brand name, and mail order versus pharmacy pick-up.
(B) Multiple network tiers. If a plan provides benefits through multiple tiers of in-network providers (such as an in-network tier of preferred providers with more generous cost-sharing to participants than a separate in-network tier of participating providers), the plan may divide its benefits furnished on an in-network basis into sub-classifications that reflect network tiers, if the tiering is based on reasonable factors determined in accordance with the rules in paragraph (c)(4) of this section (such as quality, performance, and market standards) and without regard to whether a provider provides services with respect to medical/surgical benefits or mental health or substance use disorder benefits. After the sub-classifications are established, the plan may not impose any financial requirement or treatment limitation on mental health or substance use disorder benefits in any sub-classification that is more restrictive than the predominant financial requirement or treatment limitation that applies to substantially all medical/surgical benefits in the sub-classification using the methodology set forth in paragraph (c)(3)(i) of this section.
(C) Sub-classifications permitted for office visits, separate from other outpatient services. For purposes of applying the financial requirement and treatment limitation rules of this paragraph (c), a plan or issuer may divide its benefits furnished on an outpatient basis into the two sub-classifications described in this paragraph (c)(3)(iii)(C). After the sub-classifications are established, the plan or issuer may not impose any financial requirement or quantitative treatment limitation on mental health or substance use disorder benefits in any sub-classification that is more restrictive than the predominant financial requirement or quantitative treatment limitation that applies to substantially all medical/surgical benefits in the sub-classification using the methodology set forth in paragraph (c)(3)(i) of this section. Sub-classifications other than these special rules, such as separate sub-classifications for generalists and specialists, are not permitted. The two sub-classifications permitted under this paragraph (c)(3)(iii)(C) are:
(1) Office visits (such as physician visits), and
(2) All other outpatient items and services (such as outpatient surgery, facility charges for day treatment centers, laboratory charges, or other medical items).
(iv) Examples. The rules of paragraphs (c)(3)(i) through (iii) of this section are illustrated by the following examples. In each example, the group health plan is subject to the requirements of this section and provides both medical/surgical benefits and mental health and substance use disorder benefits.
(A) Example 1—(1) Facts. (i) For inpatient, out-of-network medical/surgical benefits, a group health plan imposes five levels of coinsurance. Using a reasonable method, the plan projects its payments for the upcoming year as follows:
Table 1 to Paragraph (c)(3)(iv)(A)(1)(i)
Coinsurance rate | 0% | 10% | 15% | 20% | 30% | Total
Projected payments | $200x | $100x | $450x | $100x | $150x | $1,000x
Percent of total plan costs | 20% | 10% | 45% | 10% | 15%
Percent subject to coinsurance level | N/A | 12.5% (100x/800x) | 56.25% (450x/800x) | 12.5% (100x/800x) | 18.75% (150x/800x)
(ii) The plan projects plan costs of $800x to be subject to coinsurance ($100x + $450x + $100x + $150x = $800x). Thus, 80 percent ($800x/$1,000x) of the benefits are projected to be subject to coinsurance, and 56.25 percent of the benefits subject to coinsurance are projected to be subject to the 15 percent coinsurance level.
(2) Conclusion. In this paragraph (c)(3)(iv)(A) (Example 1), the two-thirds threshold of the substantially all standard is met for coinsurance because 80 percent of all inpatient, out-of-network medical/surgical benefits are subject to coinsurance. Moreover, the 15 percent coinsurance is the predominant level because it is applicable to more than one-half of inpatient, out-of-network medical/surgical benefits subject to the coinsurance requirement. The plan may not impose any level of coinsurance with respect to inpatient, out-of-network mental health or substance use disorder benefits that is more restrictive than the 15 percent level of coinsurance.
(B) Example 2—(1) Facts. (i) For outpatient, in-network medical/surgical benefits, a plan imposes five different copayment levels. Using a reasonable method, the plan projects payments for the upcoming year as follows:
Table 2 to Paragraph (c)(3)(iv)(B)(1)(i)
Copayment amount | $0 | $10 | $15 | $20 | $50 | Total
Projected payments | $200x | $200x | $200x | $300x | $100x | $1,000x
Percent of total plan costs | 20% | 20% | 20% | 30% | 10%
Percent subject to copayments | N/A | 25% (200x/800x) | 25% (200x/800x) | 37.5% (300x/800x) | 12.5% (100x/800x)
(ii) The plan projects plan costs of $800x to be subject to copayments ($200x + $200x +$300x + $100x = $800x). Thus, 80 percent ($800x/$1,000x) of the benefits are projected to be subject to a copayment.
(2) Conclusion. In this paragraph (c)(3)(iv)(B) (Example 2), the two-thirds threshold of the substantially all standard is met for copayments because 80 percent of all outpatient, in-network medical/surgical benefits are subject to a copayment. Moreover, there is no single level that applies to more than one-half of medical/surgical benefits in the classification subject to a copayment (for the $10 copayment, 25%; for the $15 copayment, 25%; for the $20 copayment, 37.5%; and for the $50 copayment, 12.5%). The plan can combine any levels of copayment, including the highest levels, to determine the predominant level that can be applied to mental health or substance use disorder benefits. If the plan combines the highest levels of copayment, the combined projected payments for the two highest copayment levels, the $50 copayment and the $20 copayment, are not more than one-half of the outpatient, in-network medical/surgical benefits subject to a copayment because they are exactly one-half ($300x + $100x = $400x; $400x/$800x = 50%). The combined projected payments for the three highest copayment levels—the $50 copayment, the $20 copayment, and the $15 copayment—are more than one-half of the outpatient, in-network medical/surgical benefits subject to the copayments ($100x + $300x + $200x = $600x; $600x/$800x = 75%). Thus, the plan may not impose any copayment on outpatient, in-network mental health or substance use disorder benefits that is more restrictive than the least restrictive copayment in the combination, the $15 copayment.
(C) Example 3—(1) Facts. A plan imposes a $250 deductible on all medical/surgical benefits for self-only coverage and a $500 deductible on all medical/surgical benefits for family coverage. The plan has no network of providers. For all medical/surgical benefits, the plan imposes a coinsurance requirement. The plan imposes no other financial requirements or treatment limitations.
(2) Conclusion. In this paragraph (c)(3)(iv)(C) (Example 3), because the plan has no network of providers, all benefits are provided out-of-network. Because self-only and family coverage are subject to different deductibles, whether the deductible applies to substantially all medical/surgical benefits is determined separately for self-only medical/surgical benefits and family medical/surgical benefits. Because the coinsurance is applied without regard to coverage units, the predominant coinsurance that applies to substantially all medical/surgical benefits is determined without regard to coverage units.
(D) Example 4—(1) Facts. A plan applies the following financial requirements for prescription drug benefits. The requirements are applied without regard to whether a drug is generally prescribed with respect to medical/surgical benefits or with respect to mental health or substance use disorder benefits. Moreover, the process for certifying a particular drug as “generic”, “preferred brand name”, “non-preferred brand name”, or “specialty” complies with the rules of paragraph (c)(4) of this section (relating to requirements for nonquantitative treatment limitations).
Table 3 to Paragraph (c)(3)(iv)(D)(1)
Tier 1 | Tier 2 | Tier 3 | Tier 4
Tier description | Generic drugs | Preferred brand name drugs | Non-preferred brand name drugs (which may have Tier 1 or Tier 2 alternatives) | Specialty drugs.
Percent paid by plan | 90% | 80% | 60% | 50%.
(2) Conclusion. In this paragraph (c)(3)(iv)(D) (Example 4), the financial requirements that apply to prescription drug benefits are applied without regard to whether a drug is generally prescribed with respect to medical/surgical benefits or with respect to mental health or substance use disorder benefits; the process for certifying drugs in different tiers complies with paragraph (c)(4) of this section; and the bases for establishing different levels or types of financial requirements are reasonable. The financial requirements applied to prescription drug benefits do not violate the parity requirements of this paragraph (c)(3).
(E) Example 5—(1) Facts. A plan has two-tiers of network of providers: a preferred provider tier and a participating provider tier. Providers are placed in either the preferred tier or participating tier based on reasonable factors determined in accordance with the rules in paragraph (c)(4) of this section, such as accreditation, quality and performance measures (including customer feedback), and relative reimbursement rates. Furthermore, provider tier placement is determined without regard to whether a provider specializes in the treatment of mental health conditions or substance use disorders, or medical/surgical conditions. The plan divides the in-network classifications into two sub-classifications (in-network/preferred and in-network/participating). The plan does not impose any financial requirement or treatment limitation on mental health or substance use disorder benefits in either of these sub-classifications that is more restrictive than the predominant financial requirement or treatment limitation that applies to substantially all medical/surgical benefits in each sub-classification.
(2) Conclusion. In this paragraph (c)(3)(iv)(E) (Example 5), the division of in-network benefits into sub-classifications that reflect the preferred and participating provider tiers does not violate the parity requirements of this paragraph (c)(3).
(F) Example 6—(1) Facts. With respect to outpatient, in-network benefits, a plan imposes a $25 copayment for office visits and a 20 percent coinsurance requirement for outpatient surgery. The plan divides the outpatient, in-network classification into two sub-classifications (in-network office visits and all other outpatient, in-network items and services).The plan does not impose any financial requirement or quantitative treatment limitation on mental health or substance use disorder benefits in either of these sub-classifications that is more restrictive than the predominant financial requirement or quantitative treatment limitation that applies to substantially all medical/surgical benefits in each sub-classification.
(2) Conclusion. In this paragraph (c)(3)(iv)(F) (Example 6), the division of outpatient, in-network benefits into sub-classifications for office visits and all other outpatient, in-network items and services does not violate the parity requirements of this paragraph (c)(3).
(G) Example 7—(1) Facts. Same facts as in paragraph (c)(3)(iv)(F)(1) of this section (Example 6), but for purposes of determining parity, the plan divides the outpatient, in-network classification into outpatient, in-network generalists and outpatient, in-network specialists.
(2) Conclusion. In this paragraph (c)(3)(iv)(G) (Example 7), the division of outpatient, in-network benefits into any sub-classifications other than office visits and all other outpatient items and services violates the requirements of paragraph (c)(3)(iii)(C) of this section.
(v) No separate cumulative financial requirements or cumulative quantitative treatment limitations—(A) A group health plan (or health insurance coverage offered in connection with a group health plan) may not apply any cumulative financial requirement or cumulative quantitative treatment limitation for mental health or substance use disorder benefits in a classification that accumulates separately from any established for medical/surgical benefits in the same classification.
(B) The rules of this paragraph (c)(3)(v) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan imposes a combined annual $500 deductible on all medical/surgical, mental health, and substance use disorder benefits.
(ii) Conclusion. In this Example 1, the combined annual deductible complies with the requirements of this paragraph (c)(3)(v).
Example 2. (i) Facts. A plan imposes an annual $250 deductible on all medical/surgical benefits and a separate annual $250 deductible on all mental health and substance use disorder benefits.
(ii) Conclusion. In this Example 2, the separate annual deductible on mental health and substance use disorder benefits violates the requirements of this paragraph (c)(3)(v).
Example 3. (i) Facts. A plan imposes an annual $300 deductible on all medical/surgical benefits and a separate annual $100 deductible on all mental health or substance use disorder benefits.
(ii) Conclusion. In this Example 3, the separate annual deductible on mental health and substance use disorder benefits violates the requirements of this paragraph (c)(3)(v).
Example 4. (i) Facts. A plan generally imposes a combined annual $500 deductible on all benefits (both medical/surgical benefits and mental health and substance use disorder benefits) except prescription drugs. Certain benefits, such as preventive care, are provided without regard to the deductible. The imposition of other types of financial requirements or treatment limitations varies with each classification. Using reasonable methods, the plan projects its payments for medical/surgical benefits in each classification for the upcoming year as follows:
Classification | Benefits subject to deductible | Total benefits | Percent subject to deductible
Inpatient, in-network | $1,800x | $2,000x | 90
Inpatient, out-of-network | 1,000x | 1,000x | 100
Outpatient, in-network | 1,400x | 2,000x | 70
Outpatient, out-of-network | 1,880x | 2,000x | 94
Emergency care | 300x | 500x | 60
(ii) Conclusion. In this Example 4, the two-thirds threshold of the substantially all standard is met with respect to each classification except emergency care because in each of those other classifications at least two-thirds of medical/surgical benefits are subject to the $500 deductible. Moreover, the $500 deductible is the predominant level in each of those other classifications because it is the only level. However, emergency care mental health and substance use disorder benefits cannot be subject to the $500 deductible because it does not apply to substantially all emergency care medical/surgical benefits.
(4) Nonquantitative treatment limitations. Consistent with paragraph (a)(1) of this section, a group health plan may not impose any nonquantitative treatment limitation with respect to mental health or substance use disorder benefits in any classification that is more restrictive, as written or in operation, than the predominant nonquantitative treatment limitation that applies to substantially all medical/surgical benefits in the same classification. For purposes of this paragraph (c)(4), a nonquantitative treatment limitation is more restrictive than the predominant nonquantitative treatment limitation that applies to substantially all medical/surgical benefits in the same classification if the plan fails to meet the requirements of paragraph (c)(4)(i) or (iii) of this section. In such a case, the plan will be considered to violate Code section 9812(a)(3)(A)(ii), and the nonquantitative treatment limitation may not be imposed by the plan with respect to mental health or substance use disorder benefits in the classification.
(i) Requirements related to design and application of a nonquantitative treatment limitation—(A) In general. A plan may not impose a nonquantitative treatment limitation with respect to mental health or substance use disorder benefits in any classification unless, under the terms of the plan, as written and in operation, any processes, strategies, evidentiary standards, or other factors used in designing and applying the nonquantitative treatment limitation to mental health or substance use disorder benefits in the classification are comparable to, and are applied no more stringently than, the processes, strategies, evidentiary standards, or other factors used in designing and applying the limitation with respect to medical/surgical benefits in the classification.
(B) Prohibition on discriminatory factors and evidentiary standards. For purposes of determining comparability and stringency under paragraph (c)(4)(i)(A) of this section, a plan may not rely upon discriminatory factors or evidentiary standards to design a nonquantitative treatment limitation to be imposed on mental health or substance use disorder benefits. A factor or evidentiary standard is discriminatory if the information, evidence, sources, or standards on which the factor or evidentiary standard are based are biased or not objective in a manner that discriminates against mental health or substance use disorder benefits as compared to medical/surgical benefits.
(1) Information, evidence, sources, or standards are considered to be biased or not objective in a manner that discriminates against mental health or substance use disorder benefits as compared to medical/surgical benefits if, based on all the relevant facts and circumstances, the information, evidence, sources, or standards systematically disfavor access or are specifically designed to disfavor access to mental health or substance use disorder benefits as compared to medical/surgical benefits. For purposes of this paragraph (c)(4)(i)(B)(1), relevant facts and circumstances may include, but are not limited to, the reliability of the source of the information, evidence, sources, or standards, including any underlying data; the independence of the information, evidence, sources, and standards relied upon; the analyses and methodologies employed to select the information and the consistency of their application; and any known safeguards deployed to prevent reliance on skewed data or metrics. Information, evidence, sources, or standards are not considered biased or not objective for this purpose if the plan has taken the steps necessary to correct, cure, or supplement any information, evidence, sources, or standards that would have been biased or not objective in the absence of such steps.
(2) For purposes of this paragraph (c)(4)(i)(B), historical plan data or other historical information from a time when the plan was not subject to Code section 9812 or was not in compliance with Code section 9812 are considered to be biased or not objective in a manner that discriminates against mental health or substance use disorder benefits as compared to medical/surgical benefits, if the historical plan data or other historical information systematically disfavor access or are specifically designed to disfavor access to mental health or substance use disorder benefits as compared to medical/surgical benefits, and the plan has not taken the steps necessary to correct, cure, or supplement the data or information.
(3) For purposes of this paragraph (c)(4)(i)(B), generally recognized independent professional medical or clinical standards and carefully circumscribed measures reasonably and appropriately designed to detect or prevent and prove fraud and abuse that minimize the negative impact on access to appropriate mental health and substance use disorder benefits are not information, evidence, sources, or standards that are biased or not objective in a manner that discriminates against mental health or substance use disorder benefits as compared to medical/surgical benefits. However, plans must comply with the other requirements in this paragraph (c)(4), as applicable, with respect to such standards or measures that are used as the basis for a factor or evidentiary standard used to design or apply a nonquantitative treatment limitation.
(ii) Illustrative, non-exhaustive list of nonquantitative treatment limitations. Nonquantitative treatment limitations include—
(A) Medical management standards (such as prior authorization) limiting or excluding benefits based on medical necessity or medical appropriateness, or based on whether the treatment is experimental or investigative;
(B) Formulary design for prescription drugs;
(C) For plans with multiple network tiers (such as preferred providers and participating providers), network tier design;
(D) Standards related to network composition, including but not limited to, standards for provider and facility admission to participate in a network or for continued network participation, including methods for determining reimbursement rates, credentialing standards, and procedures for ensuring the network includes an adequate number of each category of provider and facility to provide services under the plan;
(E) Plan methods for determining out-of-network rates, such as allowed amounts; usual, customary, and reasonable charges; or application of other external benchmarks for out-of-network rates;
(F) Refusal to pay for higher-cost therapies until it can be shown that a lower-cost therapy is not effective (also known as fail-first policies or step therapy protocols);
(G) Exclusions based on failure to complete a course of treatment; and
(H) Restrictions based on geographic location, facility type, provider specialty, and other criteria that limit the scope or duration of benefits for services provided under the plan.
(iii) Required use of outcomes data—(A) In general. To ensure that a nonquantitative treatment limitation applicable to mental health or substance use disorder benefits in a classification, in operation, is no more restrictive than the predominant nonquantitative treatment limitation applied to substantially all medical/surgical benefits in the classification, a plan must collect and evaluate relevant data in a manner reasonably designed to assess the impact of the nonquantitative treatment limitation on relevant outcomes related to access to mental health and substance use disorder benefits and medical/surgical benefits and carefully consider the impact as part of the plan's evaluation. As part of its evaluation, the plan may not disregard relevant outcomes data that it knows or reasonably should know suggest that a nonquantitative treatment limitation is associated with material differences in access to mental health or substance use disorder benefits as compared to medical/surgical benefits. The Secretary, jointly with the Secretary of Labor and the Secretary of Health and Human Services, may specify in guidance the type, form, and manner of collection and evaluation for the data required under this paragraph (c)(4)(iii)(A).
(1) Relevant data generally. For purposes of this paragraph (c)(4)(iii)(A), relevant data could include, as appropriate, but are not limited to, the number and percentage of claims denials and any other data relevant to the nonquantitative treatment limitation required by State law or private accreditation standards.
(2) Relevant data for nonquantitative treatment limitations related to network composition. In addition to the relevant data set forth in paragraph (c)(4)(iii)(A)(1) of this section, relevant data for nonquantitative treatment limitations related to network composition could include, as appropriate, but are not limited to, in-network and out-of-network utilization rates (including data related to provider claim submissions), network adequacy metrics (including time and distance data, and data on providers accepting new patients), and provider reimbursement rates (for comparable services and as benchmarked to a reference standard).
(3) Unavailability of data. (i) If a plan newly imposes a nonquantitative treatment limitation for which relevant data is initially temporarily unavailable and the plan therefore cannot comply with this paragraph (c)(4)(iii)(A), the plan must include in its comparative analysis, as required under § 54.9812-2(c)(5)(i)(C), a detailed explanation of the lack of relevant data, the basis for the plan's conclusion that there is a lack of relevant data, and when and how the data will become available and be collected and analyzed. Such a plan also must comply with this paragraph (c)(4)(iii)(A) as soon as practicable once relevant data becomes available.
(ii) If a plan imposes a nonquantitative treatment limitation for which no data exist that can reasonably assess any relevant impact of the nonquantitative treatment limitation on relevant outcomes related to access to mental health and substance use disorder benefits and medical/surgical benefits, the plan must include in its comparative analysis, as required under § 54.9812-2(c)(5)(i)(D), a reasoned justification as to the basis for the conclusion that there are no data that can reasonably assess the nonquantitative treatment limitation's impact, why the nature of the nonquantitative treatment limitation prevents the plan from reasonably measuring its impact, an explanation of what data was considered and rejected, and documentation of any additional safeguards or protocols used to ensure the nonquantitative treatment limitation complies with this section. If a plan becomes aware of data that can reasonably assess any relevant impact of the nonquantitative treatment limitation, the plan must comply with this paragraph (c)(4)(iii)(A) as soon as practicable.
(iii) Consistent with paragraph (a)(1) of this section, paragraphs (c)(4)(iii)(A)(3)(i) and (ii) of this section shall only apply in very limited circumstances and, where applicable, shall be construed narrowly.
(B) Material differences. To the extent the relevant data evaluated under paragraph (c)(4)(iii)(A) of this section suggest that the nonquantitative treatment limitation contributes to material differences in access to mental health and substance use disorder benefits as compared to medical/surgical benefits in a classification, such differences will be considered a strong indicator that the plan violates this paragraph (c)(4).
(1) Where the relevant data suggest that the nonquantitative treatment limitation contributes to material differences in access to mental health and substance use disorder benefits as compared to medical/surgical benefits in a classification, the plan must take reasonable action, as necessary, to address the material differences to ensure compliance, in operation, with this paragraph (c)(4) and must document the actions that have been or are being taken by the plan to address material differences in access to mental health or substance use disorder benefits, as compared to medical/surgical benefits, as required by § 54.9812-2(c)(5)(iv).
(2) For purposes of this paragraph (c)(4)(iii)(B), relevant data are considered to suggest that the nonquantitative treatment limitation contributes to material differences in access to mental health or substance use disorder benefits as compared to medical/surgical benefits if, based on all relevant facts and circumstances, and taking into account the considerations outlined in this paragraph (c)(4)(iii)(B)(2), the difference in the data suggests that the nonquantitative treatment limitation is likely to have a negative impact on access to mental health or substance use disorder benefits as compared to medical/surgical benefits.
(i) Relevant facts and circumstances, for purposes of this paragraph (c)(4)(iii)(B)(2), may include, but are not limited to, the terms of the nonquantitative treatment limitation at issue, the quality or limitations of the data, causal explanations and analyses, evidence as to the recurring or non-recurring nature of the results, and the magnitude of any disparities.
(ii) Differences in access to mental health or substance use disorder benefits attributable to generally recognized independent professional medical or clinical standards or carefully circumscribed measures reasonably and appropriately designed to detect or prevent and prove fraud and abuse that minimize the negative impact on access to appropriate mental health and substance use disorder benefits, which are used as the basis for a factor or evidentiary standard used to design or apply a nonquantitative treatment limitation, are not considered to be material for purposes of this paragraph (c)(4)(iii)(B). To the extent a plan attributes any differences in access to the application of such standards or measures, the plan must explain the bases for that conclusion in the documentation prepared under § 54.9812-2(c)(5)(iv)(A).
(C) Nonquantitative treatment limitations related to network composition. For purposes of applying paragraph (c)(4)(iii)(A) of this section with respect to nonquantitative treatment limitations related to network composition, a plan must collect and evaluate relevant data in a manner reasonably designed to assess the aggregate impact of all such nonquantitative treatment limitations on access to mental health and substance use disorder benefits and medical/surgical benefits. Examples of possible actions that a plan could take to comply with the requirement under paragraph (c)(4)(iii)(B)(1) of this section to take reasonable action, as necessary, to address any material differences in access with respect to nonquantitative treatment limitations related to network composition, to ensure compliance with this paragraph (c)(4), include, but are not limited to:
(1) Strengthening efforts to recruit and encourage a broad range of available mental health and substance use disorder providers and facilities to join the plan's network of providers, including taking actions to increase compensation or other inducements, streamline credentialing processes, or contact providers reimbursed for items and services provided on an out-of-network basis to offer participation in the network;
(2) Expanding the availability of telehealth arrangements to mitigate any overall mental health and substance use disorder provider shortages in a geographic area;
(3) Providing additional outreach and assistance to participants and beneficiaries enrolled in the plan to assist them in finding available in-network mental health and substance use disorder providers and facilities; and
(4) Ensuring that provider directories are accurate and reliable.
(iv) Prohibition on separate nonquantitative treatment limitations applicable only to mental health or substance use disorder benefits. Consistent with paragraph (c)(2)(i) of this section, a group health plan may not apply any nonquantitative treatment limitation that is applicable only with respect to mental health or substance use disorder benefits and does not apply with respect to any medical/surgical benefits in the same benefit classification.
(v) Effect of final determination of noncompliance under § 54.9812-2. (A) If a group health plan receives a final determination from the Secretary that the plan is not in compliance with the requirements of Code section 9812(a)(8) or § 54.9812-2 with respect to a nonquantitative treatment limitation, the nonquantitative treatment limitation violates this paragraph (c)(4) and the Secretary may direct the plan not to impose the nonquantitative treatment limitation with respect to mental health or substance use disorder benefits in the relevant classification, unless and until the plan demonstrates to the Secretary compliance with the requirements of this section or takes appropriate action to remedy the violation.
(B) A determination by the Secretary of whether to require cessation of a nonquantitative treatment limitation under this paragraph (c)(4)(v) will be based on an evaluation of the relevant facts and circumstances involved in the specific final determination and the nature of the underlying nonquantitative treatment limitation and will take into account the interest of plan participants and beneficiaries and feedback from the plan.
(vi) Examples. The rules of this paragraph (c)(4) are illustrated by the following examples. In each example, the group health plan is subject to the requirements of this section and provides both medical/surgical benefits and mental health and substance use disorder benefits.
(A) Example 1 (not comparable and more stringent factors for reimbursement rate methodology, in operation)—(1) Facts. A plan's reimbursement rate methodology for outpatient, in-network providers is based on a variety of factors. As written, for mental health, substance use disorder, and medical/surgical benefits, all reimbursement rates for physicians and non-physician practitioners for the same Current Procedural Terminology (CPT) code are based on a combination of factors, such as the nature of the service, duration of the service, intensity and specialization of training, provider licensure and type, number of providers qualified to provide the service in a given geographic area, and market need (demand). In operation, the plan utilizes an additional strategy to further reduce reimbursement rates for mental health and substance use disorder non-physician providers from those paid to mental health and substance use disorder physicians by the same percentage for every CPT code, but does not apply the same reductions for non-physician medical/surgical providers.
(2) Conclusion. In this paragraph (c)(4)(vi)(A) (Example 1), the plan violates the rules of this paragraph (c)(4). Because the plan reimburses non-physician providers of mental health and substance use disorder services by reducing their reimbursement rate from the rate for physician providers of mental health and substance use disorder services by the same percentage for every CPT code but does not apply the same reductions to non-physician providers of medical/surgical services from the rate for physician providers of medical/surgical services, in operation, the factors used in designing and applying the nonquantitative treatment limitation to mental health and substance use disorder benefits in the outpatient, in-network classification are not comparable to, and are applied more stringently than, the factors used in designing and applying the limitation with respect to medical/surgical benefits in the same classification. As a result, the nonquantitative treatment limitation with respect to mental health or substance use disorder benefits in the outpatient, in-network classification is more restrictive than the predominant nonquantitative treatment limitation that applies to substantially all medical/surgical benefits in the same classification.
(B) Example 2 (strategy for exclusion for experimental or investigative treatment more stringently applied to ABA therapy in operation)—(1) Facts. A plan, as written, generally excludes coverage for all treatments that are experimental or investigative for both medical/surgical benefits and mental health and substance use disorder benefits in the outpatient, in-network classification. As a result, the plan generally excludes, as experimental, a treatment or procedure when no professionally recognized treatment guidelines include the treatment or procedure as a clinically appropriate standard of care for the condition or disorder and fewer than two randomized controlled trials are available to support the treatment's use with respect to the given condition or disorder. The plan provides benefits for the treatment of ASD, which is a mental health condition, but, in operation, the plan excludes coverage for ABA therapy to treat children with ASD, deeming it experimental. More than one professionally recognized treatment guideline defines clinically appropriate standards of care for ASD and more than two randomized controlled trials are available to support the use of ABA therapy as one intervention to treat certain children with ASD.
(2) Conclusion. In this paragraph (c)(4)(vi)(B) (Example 2), the plan violates the rules of this paragraph (c)(4). As written, the plan excludes coverage of experimental treatment of medical conditions and surgical procedures, mental health conditions, and substance use disorders when no professionally recognized treatment guidelines define clinically appropriate standards of care for the condition or disorder as including the treatment or procedure at issue, and fewer than two randomized controlled trials are available to support the treatment's use with respect to the given condition or procedure. However, in operation, the plan deviates from this strategy with respect to ABA therapy because more than one professionally recognized treatment guideline defines clinically appropriate standards of care for ASD as including ABA therapy to treat certain children with ASD and more than two randomized controlled trials are available to support the use of ABA therapy to treat certain children with ASD. Therefore, in operation, the strategy used to design the nonquantitative treatment limitation for benefits for the treatment of ASD, which is a mental health condition, in the outpatient, in-network classification is not comparable to, and is applied more stringently than, the strategy used to design the nonquantitative treatment limitation for medical/surgical benefits in the same classification. As a result, the nonquantitative treatment limitation with respect to mental health or substance use disorder benefits in the outpatient, in-network classification is more restrictive than the predominant nonquantitative treatment limitation that applies to substantially all medical/surgical benefits in the same classification.
(C) Example 3 (step therapy protocol with exception for severe or irreversible consequences, discriminatory factor)—(1) Facts. A plan's written terms include a step therapy protocol that requires participants and beneficiaries who are prescribed certain drugs to try and fail a generic or preferred brand name drug before the plan will cover the drug originally prescribed by a participant's or beneficiary's attending provider. The plan provides an exception to this protocol that was developed solely based on a methodology developed by an external third-party organization. The third-party organization's methodology, which is not based on a generally recognized independent professional medical or clinical standard, identifies instances in which a delay in treatment with a drug prescribed for a medical condition or surgical procedure could result in either severe or irreversible consequences. However, with respect to a drug prescribed for a mental health condition or a substance use disorder, the third-party organization's methodology only identifies instances in which a delay in treatment could result in both severe and irreversible consequences, and the plan does not take any steps to correct, cure, or supplement the methodology.
(2) Conclusion. In this paragraph (c)(4)(vi)(C) (Example 3), the plan violates the rules of paragraph (c)(4)(i)(B) of this section. The source upon which the factor used to apply the step therapy protocol is based is biased or not objective in a manner that discriminates against mental health or substance use disorder benefits as compared to medical/surgical benefits because it addresses instances in which a delay in treatment with a drug prescribed for a medical condition or surgical procedure could result in either severe or irreversible consequences, but only addresses instances in which a delay in treatment with a drug prescribed for a mental health condition or substance use disorder could result in both severe and irreversible consequences, and the plan fails to take the steps necessary to correct, cure, or supplement the methodology so that it is not biased and is objective. Based on the relevant facts and circumstances, this source systematically disfavors access or is specifically designed to disfavor access to mental health or substance use disorder benefits as compared to medical/surgical benefits. Therefore, the factor used to apply the step therapy protocol is discriminatory for purposes of determining comparability and stringency under paragraph (c)(4)(i)(A) of this section, and may not be relied upon by the plan.
(D) Example 4 (use of historical plan data and plan steps to correct, cure, or supplement)—(1) Facts. A plan's methodology for calculating provider reimbursement rates relies only on historical plan data on total plan spending for each specialty, divided between mental health and substance use disorder providers and medical/surgical providers, from a time when the plan was not subject to Code section 9812. The plan has used these historical plan data for many years to establish base reimbursement rates in all provider specialties for which it provides medical/surgical, mental health, and substance use disorder benefits in the inpatient, in-network classification. In evaluating the use of these historical plan data in the design of the methodology for calculating provider reimbursement rates, the plan determined, based on all the relevant facts and circumstances, that the historical plan data systematically disfavor access or are specifically designed to disfavor access to mental health or substance use disorder benefits as compared to medical/surgical benefits. To ensure this information about historical reimbursement rates is not biased and is objective, the plan supplements its methodology to develop the base reimbursement rates for mental health and substance use disorder providers in accordance with additional information, evidence, sources, and standards that reflect the increased demand for mental health and substance use disorder benefits in the inpatient, in-network classification and to attract sufficient mental health and substance use disorder providers to the network, so that the relevant facts and circumstances indicate the supplemented information, evidence, sources, or standards do not systematically disfavor access and are not specifically designed to disfavor access to mental health and substance use disorder benefits as compared to medical/surgical benefits.
(2) Conclusion. In this paragraph (c)(4)(vi)(D) (Example 4), the plan does not violate the rules of paragraph (c)(4)(i)(B) of this section with respect to the plan's methodology for calculating provider reimbursement rates in the inpatient, in-network classification. The relevant facts and circumstances indicate that the plan's use of only historical plan data to design its methodology for calculating provider reimbursement rates in the inpatient, in-network classification would otherwise be considered to be biased or not objective in a manner that discriminates against mental health or substance use disorder benefits as compared to medical/surgical benefits under paragraph (c)(4)(i)(B)(2) of this section, since the historical data systematically disfavor access or are specifically designed to disfavor access to mental health or substance use disorder benefits as compared to medical/surgical benefits. However, the plan took the steps necessary to supplement the information, evidence, sources, and standards to reasonably reflect the increased demand for mental health and substance use disorder benefits in the inpatient, in-network classification, and adjust the methodology to increase reimbursement rates for those benefits, thereby ensuring that the information, evidence, sources, and standards relied upon by the plan for this purpose are not biased and are objective. Therefore, the factors and evidentiary standards used to design the plan's methodology for calculating provider reimbursement rates in the inpatient, in-network classification are not discriminatory.
(E) Example 5 (generally recognized independent professional medical or clinical standards and more stringent prior authorization requirement in operation)—(1) Facts. The provisions of a plan state that it relies on, and does not deviate from, generally recognized independent professional medical or clinical standards to inform the factor used to design prior authorization requirements for both medical/surgical and mental health and substance use disorder benefits in the prescription drug classification. The generally recognized independent professional medical standard for treatment of opioid use disorder that the plan utilizes—in this case, the American Society of Addiction Medicine national practice guidelines—does not support prior authorization every 30 days for buprenorphine/naloxone. However, in operation, the plan requires prior authorization for buprenorphine/naloxone combination for treatment of opioid use disorder, every 30 days, which is inconsistent with the generally recognized independent professional medical standard on which the factor used to design the limitation is based. The plan's factor used to design prior authorization requirements for medical/surgical benefits in the prescription drug classification relies on, and does not deviate from, generally recognized independent professional medical or clinical standards.
(2) Conclusion. In this paragraph (c)(4)(vi)(E) (Example 5), the plan violates the rules of this paragraph (c)(4). The American Society of Addiction Medicine national practice guidelines on which the factor used to design prior authorization requirements for substance use disorder benefits is based are generally recognized independent professional medical or clinical standards that are not considered to be biased or not objective in a manner that discriminates against mental health and substance use disorder benefits under paragraph (c)(4)(i)(B)(3) of this section. However, the plan must comply with other requirements in this paragraph (c)(4), as applicable, with respect to such standards or measures that are used as the basis for a factor or evidentiary standard used to design or apply a nonquantitative treatment limitation. In operation, the plan's factor used to design and apply prior authorization requirements with respect to substance use disorder benefits is not comparable to, and is applied more stringently than, the same factor used to design and apply prior authorization requirements for medical/surgical benefits, because the factor relies on, and does not deviate from, generally recognized independent professional medical or clinical standards for medical/surgical benefits, but deviates from the relevant guidelines for substance use disorder benefits. As a result, the nonquantitative treatment limitation with respect to substance use disorder benefits in the prescription drug classification is more restrictive than the predominant nonquantitative treatment limitation that applies to substantially all medical/surgical benefits in the same classification.
(F) Example 6 (plan claims no data exist to reasonably assess impact of nonquantitative treatment limitation on access; medical necessity criteria)—(1) Facts. A plan approves or denies claims for mental health and substance use disorder benefits and for medical/surgical benefits in the inpatient, in-network and outpatient, in-network classifications based on medical necessity criteria. The plan states in its comparative analysis that no data exist that can reasonably assess any relevant impact of the medical necessity criteria nonquantitative treatment limitation on relevant outcomes related to access to mental health or substance use disorder benefits as compared to the plan's medical necessity criteria nonquantitative treatment limitation's impact on relevant outcomes related to access to medical/surgical benefits in the relevant classifications, without further explanation.
(2) Conclusion. In this paragraph (c)(4)(vi)(F) (Example 6), the plan violates this paragraph (c)(4). The plan does not comply with paragraph (c)(4)(iii)(A)(3)(ii) of this section because the plan did not include in its comparative analysis, as required under § 54.9812-2(c)(5)(i)(D), a reasoned justification as to the basis for its conclusion that there are no data that can reasonably assess the nonquantitative treatment limitation's impact, an explanation of why the nature of the nonquantitative treatment limitation prevents the plan from reasonably measuring its impact, an explanation of what data was considered and rejected, and documentation of any additional safeguards or protocols used to ensure the nonquantitative treatment limitation complies with this paragraph (c)(4). Data that could reasonably assess the medical necessity criteria nonquantitative treatment limitation's impact might include, for example, the number and percentage of claims denials, or the number and percentage of claims that were approved for a lower level of care than the level requested on the initial claim. Therefore, because the plan has not collected and evaluated relevant data in a manner reasonably designed to assess the impact of the nonquantitative treatment limitation on relevant outcomes related to access to mental health and substance use disorder benefits and medical/surgical benefits in the relevant classifications, the plan violates the requirements of paragraph (c)(4)(iii) of this section, and violates the requirements under § 54.9812-2(c)(5)(i)(D) because it did not include sufficient information in its comparative analysis with respect to the lack of relevant data.
(G) Example 7 (concurrent review data collection; no material difference in access)—(1) Facts. A plan follows a written process to apply a concurrent review nonquantitative treatment limitation to all medical/surgical benefits and mental health and substance use disorder benefits within the inpatient, in-network classification. Under this process, a first-level review is conducted in every instance in which concurrent review applies and an authorization request is approved by the first-level reviewer only if the clinical information submitted by the facility meets the plan's criteria for a continued stay. If the first-level reviewer is unable to approve the authorization request because the clinical information submitted by the facility does not meet the plan's criteria for a continued stay, it is sent to a second-level reviewer who will either approve or deny the request. The plan collects relevant data, including the number of referrals to second-level review, and the number of denials of claims for medical/surgical benefits and mental health and substance use disorder benefits subject to concurrent review as compared to the total number of claims subject to concurrent review, in the inpatient, in-network classification. The plan also collects and evaluates the number of denied claims for medical/surgical benefits and mental health and substance use disorder benefits that are overturned on appeal in the inpatient, in-network classification. The plan evaluates the relevant data and determines that, based on the relevant facts and circumstances, the data do not suggest that the concurrent review nonquantitative treatment limitation contributes to material differences in access to mental health or substance use disorder benefits as compared to medical/surgical benefits in the classification Upon requesting the plan's comparative analysis for the concurrent review nonquantitative treatment limitation and reviewing the relevant data, the Secretary does not request additional data and agrees that the data do not suggest material differences in access.
(2) Conclusion. In this paragraph (c)(4)(vi)(G) (Example 7), the plan does not violate the rules of paragraph (c)(4)(iii) of this section. The plan collected and evaluated relevant data in a manner reasonably designed to assess the impact of the nonquantitative treatment limitation on relevant outcomes related to access to mental health and substance use disorder benefits and medical/surgical benefits and considered the impact as part of its evaluation. Because the relevant data evaluated do not suggest that the nonquantitative treatment limitation contributes to material differences in access to mental health and substance use disorder benefits as compared to medical/surgical benefits in the inpatient, in-network classification, under paragraph (c)(4)(iii)(B) of this section, there is no strong indicator that the plan violates this paragraph (c)(4).
(H) Example 8 (material difference in access for prior authorization requirement with reasonable action)—(1) Facts. A plan requires prior authorization that a treatment is medically necessary for all inpatient, in-network medical/surgical benefits and for all inpatient, in-network mental health and substance use disorder benefits. The plan collects and evaluates relevant data in a manner reasonably designed to assess the impact of the prior authorization requirement on relevant outcomes related to access to mental health and substance use disorder benefits and medical/surgical benefits in the inpatient, in-network classification. The plan's written process for prior authorization states that the plan approves inpatient, in-network benefits for medical conditions and surgical procedures and mental health and substance use disorder benefits for periods of 1, 3, and 7 days, after which a treatment plan must be submitted by the patient's attending provider and approved by the plan. Approvals for mental health and substance use disorder benefits are most commonly given only for 1 day, after which a treatment plan must be submitted by the patient's attending provider and approved by the plan. The relevant data show that approvals for 7 days are most common for medical conditions and surgical procedures under this plan. Based on all the relevant facts and circumstances, the difference in the relevant data suggests that the nonquantitative treatment limitation is likely to have a negative impact on access to mental health and substance use disorder benefits as compared to medical/surgical benefits. Therefore, the data suggest that the nonquantitative treatment limitation contributes to material differences in access. To address these material differences in access, the plan consults more recent medical guidelines to update the factors that inform its medical necessity nonquantitative treatment limitations. Based on this review, the plan modifies the limitation so that inpatient, in-network prior authorization requests for mental health or substance use disorder benefits are approved for similar periods to what is approved for medical/surgical benefits. The plan includes documentation of this action as part of its comparative analysis.
(2) Conclusion. In this paragraph (c)(4)(vi)(H) (Example 8), the plan does not violate the rules of paragraph (c)(4)(iii) of this section. While relevant data for the plan's prior authorization requirements suggested that the nonquantitative treatment limitation contributes to material differences in access to mental health and substance use disorder benefits as compared to inpatient, in-network medical/surgical benefits under paragraph (c)(4)(iii)(B) of this section, the plan has taken reasonable action, as necessary, to ensure compliance, in operation, with this paragraph (c)(4) by updating the factors that inform its prior authorization nonquantitative treatment limitation for inpatient, in-network mental health and substance use disorder benefits so that these benefits are approved for similar periods to what is approved for medical/surgical benefits. The plan also documents its action taken to address material differences in access to inpatient, in-network benefits as required by paragraph (c)(4)(iii)(B)(1) of this section.
(I) Example 9 (differences attributable to generally recognized independent professional medical or clinical standards)—(1) Facts. A group health plan develops a medical management requirement for all inpatient, out-of-network benefits for both medical/surgical benefits and mental health and substance use disorder benefits to ensure treatment is medically necessary. The factors and evidentiary standards used to design and apply the medical management requirement rely on independent professional medical or clinical standards that are generally recognized by health care providers and facilities in relevant clinical specialties. The processes, strategies, evidentiary standards, and other factors used in designing and applying the medical management requirement to mental health and substance use disorder benefits are comparable to, and are applied no more stringently than, the processes, strategies, evidentiary standards, and other factors used in designing and applying the requirement with respect to medical/surgical benefits. The plan collects and evaluates relevant data in a manner reasonably designed to assess the impact of the medical management nonquantitative treatment limitation on relevant outcomes related to access to mental health and substance use disorder benefits and medical/surgical benefits, and considers the impact as part of the plan's evaluation, as required by paragraph (c)(4)(iii)(A) of this section. Within the inpatient, out-of-network classification, the application of the medical management requirement results in a higher percentage of denials for mental health and substance use disorder claims than medical/surgical claims, because the benefits were found to be medically necessary for a lower percentage of mental health and substance use disorder claims. The plan correctly determines that these differences in access are attributable to the generally recognized independent professional medical or clinical standards used as the basis for the factors and evidentiary standards used to design or apply the limitation and adequately explains the bases for that conclusion as part of its comparative analysis.
(2) Conclusion. In this paragraph (c)(4)(vi)(I) (Example 9), the plan does not violate the rules of this paragraph (c)(4). Generally recognized independent professional medical or clinical standards of care are not considered to be information, evidence, sources, or standards that are biased and not objective in a manner that discriminates against mental health or substance use disorder benefits as compared to medical/surgical benefits, and the plan otherwise complies with the requirements in paragraph (c)(4)(i) of this section. Additionally, the plan does not violate paragraph (c)(4)(iii) of this section because it has collected and evaluated relevant data, the differences in access are attributable to the generally recognized independent professional medical or clinical standards that are used as the basis for the factors and evidentiary standards used to design or apply the medical management nonquantitative treatment limitation, and the plan explains the bases for this conclusion in its comparative analysis. As a result, the nonquantitative treatment limitation with respect to mental health or substance use disorder benefits in the inpatient, out-of-network classification is no more restrictive than the predominant nonquantitative treatment limitation that applies to substantially all medical/surgical benefits in the same classification.
(J) Example 10 (material differences in access for standards for provider admission to a network with reasonable action)—(1) Facts. A plan applies nonquantitative treatment limitations related to network composition in the inpatient, in-network and outpatient, in-network classifications. The plan's networks are constructed by separate service providers for medical/surgical benefits and mental health and substance use disorder benefits. The processes, strategies, evidentiary standards, and other factors used in designing and applying the nonquantitative treatment limitations related to network composition for mental health or substance use disorder benefits in the outpatient, in-network and inpatient, in-network classifications are comparable to, and are applied no more stringently than, the processes, strategies, evidentiary standards, and other factors used in designing and applying the nonquantitative treatment limitations with respect to medical/surgical benefits in the classifications, as required under paragraph (c)(4)(i) of this section. In order to ensure, in operation, that the nonquantitative treatment limitations are no more restrictive than the predominant nonquantitative treatment limitations applied to substantially all medical/surgical benefits in the classification, the plan collects and evaluates relevant data in a manner reasonably designed to assess the aggregate impact of all the nonquantitative treatment limitations related to network composition on relevant outcomes related to access to mental health and substance use disorder benefits as compared with access to medical/surgical benefits and considers the impact as part of the plan's evaluation. The plan considers relevant data that is known, or reasonably should be known, including metrics relating to the time and distance from plan participants and beneficiaries to network providers in rural and urban regions; the number of network providers accepting new patients; the proportions of mental health and substance use disorder and medical/surgical providers and facilities that provide services in rural and urban regions who are in the plan's network; provider reimbursement rates (for comparable services and benchmarked to a reference standard, as appropriate); and in-network and out-of-network utilization rates (including data related to the dollar value and number of provider claims submissions). The plan determines that the relevant data suggest that the nonquantitative treatment limitations in the aggregate contribute to material differences in access to mental health and substance use disorder benefits compared to medical/surgical benefits in the classifications because, based on all the relevant facts and circumstances, the differences in the data suggest that the nonquantitative treatment limitations related to network composition are likely to have a negative impact on access to mental health or substance use disorder benefits as compared to medical/surgical benefits. The plan takes reasonable actions, as necessary, to address the material differences in access, to ensure compliance, in operation, with this paragraph (c)(4), by strengthening its efforts to recruit and encourage a broad range of available providers and facilities to join the plan's network of providers, including by taking actions to increase compensation and other inducements, streamline credentialing processes, contact providers reimbursed for items and services provided on an out-of-network basis to offer participation in the network, and develop a process to monitor the effects of such efforts; expanding the availability of telehealth arrangements to mitigate overall provider shortages in certain geographic areas; providing additional outreach and assistance to participants and beneficiaries enrolled in the plan to assist them in finding available in-network providers and facilities; and ensuring that the plan's provider directories are accurate and reliable. The plan documents the efforts that it has taken to address the material differences in access that the data revealed, and the plan includes the documentation as part of its comparative analysis submission.
(2) Conclusion. In this paragraph (c)(4)(vi)(J) (Example 10), the plan does not violate the rules of this paragraph (c)(4). The plan's nonquantitative treatment limitations related to network composition comply with the rules of paragraph (c)(4)(i) of this section. Additionally, the plan collects and evaluates relevant data, as required under paragraph (c)(4)(iii)(A) of this section, in a manner reasonably designed to assess the aggregate impact of all such nonquantitative treatment limitations on relevant outcomes related to access to mental health and substance use disorder benefits and medical/surgical benefits, as required under paragraph (c)(4)(iii)(C) of this section. While the data suggest that the nonquantitative treatment limitations contribute to material differences in access to mental health and substance use disorder benefits as compared to medical/surgical benefits, the plan has taken reasonable action, as necessary, to ensure compliance with this paragraph (c)(4). The plan also documents the actions that have been and are being taken by the plan to address material differences as required by § 54.9812-21(c)(5)(iv). As a result, the network composition nonquantitative treatment limitations with respect to mental health or substance use disorder benefits in the inpatient, in-network and outpatient, in-network classifications are no more restrictive than the predominant nonquantitative treatment limitations that apply to substantially all medical/surgical benefits in the same classifications.
(K) Example 11 (separate EAP exhaustion treatment limitation applicable only to mental health or substance use disorder benefits)—(1) Facts. An employer maintains both a major medical plan and an employee assistance program (EAP). The EAP provides, among other benefits, a limited number of mental health or substance use disorder counseling sessions, which, together with other benefits provided by the EAP, are not significant benefits in the nature of medical care. Participants are eligible for mental health or substance use disorder benefits under the major medical plan only after exhausting the counseling sessions provided by the EAP. No similar exhaustion requirement applies with respect to medical/surgical benefits provided under the major medical plan.
(2) Conclusion. In this paragraph (c)(4)(vi)(K) (Example 11), the requirement that limits eligibility for mental health and substance use disorder benefits under the major medical plan until EAP benefits are exhausted is a nonquantitative treatment limitation subject to the parity requirements of this paragraph (c)(4). Because the limitation does not apply to medical/surgical benefits, it is a separate nonquantitative treatment limitation applicable only to mental health and substance use disorder benefits that violates paragraph (c)(4)(iv) of this section. Additionally, this EAP would not qualify as excepted benefits under § 54.9831-1(c)(3)(vi)(B)(1) because participants in the major medical plan are required to use and exhaust benefits under the EAP (making the EAP a gatekeeper) before an individual is eligible for benefits under the plan.
(L) Example 12 (separate exclusion for treatment in a residential facility applicable only to mental health and substance use disorder benefits)—(1) Facts. A plan generally covers inpatient, in-network and inpatient, out-of-network treatment without any limitations on setting, including skilled nursing facilities and rehabilitation hospitals, provided other medical necessity standards are satisfied. The plan has an exclusion for treatment at residential facilities, which the plan defines as an inpatient benefit for mental health and substance use disorder benefits. This exclusion was not generated through any broader nonquantitative treatment limitation (such as medical necessity or other clinical guideline).
(2) Conclusion. In this paragraph (c)(4)(vi)(L) (Example 12), the plan violates the rules of paragraph (c)(4)(iv) of this section. The exclusion of treatment at residential facilities is a separate nonquantitative treatment limitation applicable only to mental health and substance use disorder benefits in the inpatient, in-network and inpatient, out-of-network classifications because the plan does not apply a comparable exclusion with respect to any medical/surgical benefits in the same benefit classification.
(M) Example 13 (impermissible nonquantitative treatment limitation imposed following a final determination of noncompliance and direction by the Secretary)—(1) Facts. Following an initial request by the Secretary for a plan's comparative analysis of the plan's exclusion of mental health and substance use disorder benefits for failure to complete a course of treatment in the inpatient, in-network classification under § 54.9812-2(d), the plan submits a comparative analysis for the nonquantitative treatment limitation. After review of the comparative analysis, as well as additional information submitted by the plan after the Secretary determines that the plan has not submitted sufficient information to be responsive to the request, the Secretary makes an initial determination that the comparative analysis fails to demonstrate that the processes, strategies, evidentiary standards, and other factors used in designing and applying the nonquantitative treatment limitation to mental health or substance use disorder benefits in the inpatient, in-network classification are comparable to, and applied no more stringently than, those used in designing and applying the limitation to medical/surgical benefits in the classification. Under § 54.9812-2(d)(3), the plan submits a corrective action plan and additional comparative analyses within 45 calendar days after the initial determination. However, the corrective action plan does not alter or eliminate the exclusion or alter the processes, strategies, evidentiary standards, and other factors used in designing and applying the exclusion. Moreover, the additional comparative analysis still does not include sufficient information. The Secretary then determines that the additional comparative analyses do not demonstrate compliance with the requirements of this paragraph (c)(4). Accordingly, the plan receives a final determination of noncompliance with Code section 9812(a)(8) and § 54.9812-2 from the Secretary, which concludes that the plan did not demonstrate compliance through the comparative analysis process. After considering the relevant facts and circumstances, and considering the interests of plan participants and beneficiaries, as well as feedback from the plan, the Secretary directs the plan not to impose the nonquantitative treatment limitation by a certain date, unless and until the plan demonstrates compliance to the Secretary or takes appropriate action to remedy the violation. The plan makes no changes to its plan terms by that date and continues to impose the exclusion of benefits for failure to complete a course of treatment in the inpatient, in-network classification.
(2) Conclusion. In this paragraph (c)(4)(vi)(M) (Example 13), by continuing to impose the exclusion of mental health and substance use disorder benefits for failure to complete a course of treatment in the inpatient, in-network classification after the Secretary directs the plan not to impose this nonquantitative treatment limitation, the plan violates the requirements of paragraph (c)(4)(v) of this section.
(5) Exemptions. The rules of this paragraph (c) do not apply if a group health plan (or health insurance coverage) satisfies the requirements of paragraph (f) or (g) of this section (relating to exemptions for small employers and for increased cost).
(d) Availability of plan information—(1) Criteria for medical necessity determinations. The criteria for medical necessity determinations made under a group health plan with respect to mental health or substance use disorder benefits (or health insurance coverage offered in connection with the plan with respect to such benefits) must be made available by the plan administrator (or the health insurance issuer offering such coverage) to any current or potential participant, beneficiary, or contracting provider upon request.
(2) Reason for any denial. The reason for any denial under a group health plan (or health insurance coverage offered in connection with such plan) of reimbursement or payment for services with respect to mental health or substance use disorder benefits in the case of any participant or beneficiary must be made available by the plan administrator (or the health insurance issuer offering such coverage) to the participant or beneficiary in accordance with this paragraph (d)(2).
(i) Plans subject to ERISA. If a plan is subject to ERISA, it must provide the reason for the claim denial in a form and manner consistent with the requirements of 29 CFR 2560.503-1 for group health plans.
(ii) Plans not subject to ERISA. If a plan is not subject to ERISA, upon the request of a participant or beneficiary the reason for the claim denial must be provided within a reasonable time and in a reasonable manner. For this purpose, a plan that follows the requirements of 29 CFR 2560.503-1 for group health plans complies with the requirements of this paragraph (d)(2)(ii).
(3) Provisions of other law. Compliance with the disclosure requirements in paragraphs (d)(1) and (2) of this section is not determinative of compliance with any other provision of applicable Federal or State law. In particular, in addition to those disclosure requirements, provisions of other applicable law require disclosure of information relevant to medical/surgical, mental health, and substance use disorder benefits. For example, ERISA section 104 and 29 CFR 2520.104b-1 provide that, for plans subject to ERISA, instruments under which the plan is established or operated must generally be furnished to plan participants within 30 days of request. Instruments under which the plan is established or operated include documents with information on medical necessity criteria for both medical/surgical benefits and mental health and substance use disorder benefits; the processes, strategies, evidentiary standards, and other factors used to apply a nonquantitative treatment limitation with respect to medical/surgical benefits and mental health or substance use disorder benefits under the plan; and the comparative analyses and other applicable information required by § 54.9812-2. In addition, 29 CFR 2560.503-1 and § 54.9815-2719 set forth rules regarding claims and appeals, including the right of claimants (or their authorized representative) who have received an adverse benefit determination (or a final internal adverse benefit determination) to be provided, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the claimant's claim for benefits. This includes documents with information on medical necessity criteria for both medical/surgical benefits and mental health and substance use disorder benefits, as well as the processes, strategies, evidentiary standards, and other factors used to apply a nonquantitative treatment limitation with respect to medical/surgical benefits and mental health or substance use disorder benefits under the plan and the comparative analyses and other applicable information required by § 54.9812-2.
(e) Applicability—(1) Group health plans. The requirements of this section apply to a group health plan offering medical/surgical benefits and mental health or substance use disorder benefits. If, under an arrangement or arrangements to provide medical care benefits by an employer or employee organization (including for this purpose a joint board of trustees of a multiemployer trust affiliated with one or more multiemployer plans), any participant (or beneficiary) can simultaneously receive coverage for medical/surgical benefits and coverage for mental health or substance use disorder benefits, then the requirements of this section (including the exemption provisions in paragraph (g) of this section) apply separately with respect to each combination of medical/surgical benefits and of mental health or substance use disorder benefits that any participant (or beneficiary) can simultaneously receive from that employer's or employee organization's arrangement or arrangements to provide medical care benefits, and all such combinations are considered for purposes of this section to be a single group health plan.
(2) Health insurance issuers. The requirements of this section apply to a health insurance issuer offering health insurance coverage for mental health or substance use disorder benefits in connection with a group health plan subject to paragraph (e)(1) of this section.
(3) Scope. This section does not—
(i) Require a group health plan (or health insurance issuer offering coverage in connection with a group health plan) to provide any mental health benefits or substance use disorder benefits, and the provision of benefits by a plan (or health insurance coverage) for one or more mental health conditions or substance use disorders does not require the plan or health insurance coverage under this section to provide benefits for any other mental health condition or substance use disorder;
(ii) Require a group health plan (or health insurance issuer offering coverage in connection with a group health plan) that provides coverage for mental health or substance use disorder benefits only to the extent required under PHS Act section 2713 to provide additional mental health or substance use disorder benefits in any classification in accordance with this section; or
(iii) Affect the terms and conditions relating to the amount, duration, or scope of mental health or substance use disorder benefits under the plan (or health insurance coverage) except as specifically provided in paragraphs (b) and (c) of this section.
(4) Coordination with EHB requirements. Nothing in paragraph (f) or (g) of this section or § 54.9812-2(g) changes the requirements of 45 CFR 147.150 and 156.115 providing that a health insurance issuer offering non-grandfathered health insurance coverage in the individual or small group market that is required to provide mental health and substance use disorder services, including behavioral health treatment services, as part of essential health benefits required under 45 CFR 156.110(a)(5) and 156.115(a), must comply with the requirements under section 2726 of the Public Health Service Act and its implementing regulations at 45 CFR 146.136 and 146.137 to satisfy the requirement to provide coverage for mental health and substance use disorder services, including behavioral health treatment, as part of essential health benefits.
(f) Small employer exemption—(1) In general. The requirements of this section do not apply to a group health plan (or health insurance issuer offering coverage in connection with a group health plan) for a plan year of a small employer. For purposes of this paragraph (f), the term small employer means, in connection with a group health plan with respect to a calendar year and a plan year, an employer who employed an average of at least two (or one in the case of an employer residing in a State that permits small groups to include a single individual) but not more than 50 employees on business days during the preceding calendar year. See section 9831(a) and § 54.9831-1(b), which provide that this section (and certain other sections) does not apply to any group health plan for any plan year if, on the first day of the plan year, the plan has fewer than two participants who are current employees.
(2) Rules in determining employer size. For purposes of paragraph (f)(1) of this section—
(i) All persons treated as a single employer under subsections (b), (c), (m), and (o) of section 414 are treated as one employer;
(ii) If an employer was not in existence throughout the preceding calendar year, whether it is a small employer is determined based on the average number of employees the employer reasonably expects to employ on business days during the current calendar year; and
(iii) Any reference to an employer for purposes of the small employer exemption includes a reference to a predecessor of the employer.
(g) Increased cost exemption—(1) In general. If the application of this section to a group health plan (or health insurance coverage offered in connection with such plans) results in an increase for the plan year involved of the actual total cost of coverage with respect to medical/surgical benefits and mental health and substance use disorder benefits as determined and certified under paragraph (g)(3) of this section by an amount that exceeds the applicable percentage described in paragraph (g)(2) of this section of the actual total plan costs, the provisions of this section shall not apply to such plan (or coverage) during the following plan year, and such exemption shall apply to the plan (or coverage) for one plan year. An employer or issuer may elect to continue to provide mental health and substance use disorder benefits in compliance with this section with respect to the plan or coverage involved regardless of any increase in total costs.
(2) Applicable percentage. With respect to a plan or coverage, the applicable percentage described in this paragraph (g) is—
(i) 2 percent in the case of the first plan year in which this section is applied to the plan or coverage; and
(ii) 1 percent in the case of each subsequent plan year.
(3) Determinations by actuaries—(i) Determinations as to increases in actual costs under a plan or coverage that are attributable to implementation of the requirements of this section shall be made and certified by a qualified and licensed actuary who is a member in good standing of the American Academy of Actuaries. All such determinations must be based on the formula specified in paragraph (g)(4) of this section and shall be in a written report prepared by the actuary.
(ii) The written report described in paragraph (g)(3)(i) of this section shall be maintained by the group health plan or health insurance issuer, along with all supporting documentation relied upon by the actuary, for a period of six years following the notification made under paragraph (g)(6) of this section.
(4) Formula. The formula to be used to make the determination under paragraph (g)(3)(i) of this section is expressed mathematically as follows:
[(E1 − E0)/T0] − D > k
(i) E1 is the actual total cost of coverage with respect to mental health and substance use disorder benefits for the base period, including claims paid by the plan or issuer with respect to mental health and substance use disorder benefits and administrative costs (amortized over time) attributable to providing these benefits consistent with the requirements of this section.
(ii) E0 is the actual total cost of coverage with respect to mental health and substance use disorder benefits for the length of time immediately before the base period (and that is equal in length to the base period), including claims paid by the plan or issuer with respect to mental health and substance use disorder benefits and administrative costs (amortized over time) attributable to providing these benefits.
(iii) T0 is the actual total cost of coverage with respect to all benefits during the base period.
(iv) k is the applicable percentage of increased cost specified in paragraph (g)(2) of this section that will be expressed as a fraction for purposes of this formula.
(v) D is the average change in spending that is calculated by applying the formula (E1−E0)/T0 to mental health and substance use disorder spending in each of the five prior years and then calculating the average change in spending.
(5) Six month determination. If a group health plan or health insurance issuer seeks an exemption under this paragraph (g), determinations under paragraph (g)(3) of this section shall be made after such plan or coverage has complied with this section for at least the first 6 months of the plan year involved.
(6) Notification. A group health plan or health insurance issuer that, based on the certification described under paragraph (g)(3) of this section, qualifies for an exemption under this paragraph (g), and elects to implement the exemption, must notify participants and beneficiaries covered under the plan, the Secretary, and the appropriate State agencies of such election.
(i) Participants and beneficiaries—(A) Content of notice. The notice to participants and beneficiaries must include the following information:
(1) A statement that the plan or issuer is exempt from the requirements of this section and a description of the basis for the exemption.
(2) The name and telephone number of the individual to contact for further information.
(3) The plan or issuer name and plan number (PN).
(4) The plan administrator's name, address, and telephone number.
(5) For single-employer plans, the plan sponsor's name, address, and telephone number (if different from paragraph (g)(6)(i)(A)(3) of this section) and the plan sponsor's employer identification number (EIN).
(6) The effective date of such exemption.
(7) A statement regarding the ability of participants and beneficiaries to contact the plan administrator or health insurance issuer to see how benefits may be affected as a result of the plan's or issuer's election of the exemption.
(8) A statement regarding the availability, upon request and free of charge, of a summary of the information on which the exemption is based (as required under paragraph (g)(6)(i)(D) of this section).
(B) Use of summary of material reductions in covered services or benefits. A plan or issuer may satisfy the requirements of paragraph (g)(6)(i)(A) of this section by providing participants and beneficiaries (in accordance with paragraph (g)(6)(i)(C) of this section) with a summary of material reductions in covered services or benefits consistent with 29 CFR 2520.104b-3(d) that also includes the information specified in paragraph (g)(6)(i)(A) of this section. However, in all cases, the exemption is not effective until 30 days after notice has been sent.
(C) Delivery. The notice described in this paragraph (g)(6)(i) is required to be provided to all participants and beneficiaries. The notice may be furnished by any method of delivery that satisfies the requirements of section 104(b)(1) of ERISA (29 U.S.C. 1024(b)(1)) and its implementing regulations (for example, first-class mail). If the notice is provided to the participant and any beneficiaries at the participant's last known address, then the requirements of this paragraph (g)(6)(i) are satisfied with respect to the participant and all beneficiaries residing at that address. If a beneficiary's last known address is different from the participant's last known address, a separate notice is required to be provided to the beneficiary at the beneficiary's last known address.
(D) Availability of documentation. The plan or issuer must make available to participants and beneficiaries (or their representatives), on request and at no charge, a summary of the information on which the exemption was based. (For purposes of this paragraph (g), an individual who is not a participant or beneficiary and who presents a notice described in paragraph (g)(6)(i) of this section is considered to be a representative. A representative may request the summary of information by providing the plan a copy of the notice provided to the participant under paragraph (g)(6)(i) of this section with any personally identifiable information redacted.) The summary of information must include the incurred expenditures, the base period, the dollar amount of claims incurred during the base period that would have been denied under the terms of the plan or coverage absent amendments required to comply with paragraphs (b) and (c) of this section, the administrative costs related to those claims, and other administrative costs attributable to complying with the requirements of this section. In no event should the summary of information include any personally identifiable information.
(ii) Federal agencies—(A) Content of notice. The notice to the Secretary must include the following information:
(1) A description of the number of covered lives under the plan (or coverage) involved at the time of the notification, and as applicable, at the time of any prior election of the cost exemption under this paragraph (g) by such plan (or coverage);
(2) For both the plan year upon which a cost exemption is sought and the year prior, a description of the actual total costs of coverage with respect to medical/surgical benefits and mental health and substance use disorder benefits; and
(3) For both the plan year upon which a cost exemption is sought and the year prior, the actual total costs of coverage with respect to mental health and substance use disorder benefits under the plan.
(B) Reporting with respect to church plans. A church plan (as defined in section 414(e)) claiming the exemption of this paragraph (g) for any benefit package, must provide notice to the Department of the Treasury. This requirement is satisfied if the plan sends a copy, to the address designated by the Secretary in generally applicable guidance, of the notice described in paragraph (g)(6)(ii)(A) of this section identifying the benefit package to which the exemption applies.
(C) Reporting with respect to ERISA plans. See 29 CFR 2590.712(g)(6)(ii) for delivery with respect to ERISA plans.
(iii) Confidentiality. A notification to the Secretary under this paragraph (g)(6) shall be confidential. The Secretary shall make available, upon request and not more than on an annual basis, an anonymous itemization of each notification that includes—
(A) A breakdown of States by the size and type of employers submitting such notification; and
(B) A summary of the data received under paragraph (g)(6)(ii) of this section.
(iv) Audits. The Secretary may audit the books and records of a group health plan or a health insurance issuer relating to an exemption, including any actuarial reports, during the 6 year period following notification of such exemption under paragraph (g)(6) of this section. A State agency receiving a notification under paragraph (g)(6) of this section may also conduct such an audit with respect to an exemption covered by such notification.
(h) Sale of nonparity health insurance coverage. A health insurance issuer may not sell a policy, certificate, or contract of insurance that fails to comply with paragraph (b) or (c) of this section, except to a plan for a year for which the plan is exempt from the requirements of this section because the plan meets the requirements of paragraph (f) or (g) of this section.
(i) Applicability dates—(1) In general. Except as provided in paragraph (i)(2) of this section—
(i) This section applies to group health plans on the first day of the first plan year beginning on or after January 1, 2025, except that the requirements of paragraphs (c)(2)(ii)(A), (c)(4)(i)(B), and (c)(4)(iii) of this section apply on the first day of the first plan year beginning on or after January 1, 2026.
(ii) Until the applicability date in paragraph (i)(1)(i) of this section, plans are required to continue to comply with 26 CFR 54.9812-1, revised as of April 1, 2022.
(2) Special effective date for certain collectively-bargained plans. For a group health plan maintained pursuant to one or more collective bargaining agreements ratified before October 3, 2008, the requirements of this section do not apply to the plan (or health insurance coverage offered in connection with the plan) for plan years beginning before the date on which the last of the collective bargaining agreements terminates (determined without regard to any extension agreed to after October 3, 2008).
(j) Severability. If any provision of this section is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, unless such holding shall be one of invalidity or unenforceability, in which event the provision shall be severable from this section and shall not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.
[T.D. 9640, 78 FR 68266, Nov. 13, 2013, as amended by T.D. 10006, 89 FR 77703, Sept. 23, 2024]
§ 54.9812-2 Nonquantitative treatment limitation comparative analysis requirements.
(a) Meaning of terms. Unless otherwise stated in this section, the terms of this section have the meanings indicated in § 54.9812-1(a)(2).
(b) In general. In the case of a group health plan that provides both medical/surgical benefits and mental health or substance use disorder benefits and that imposes any nonquantitative treatment limitation on mental health or substance use disorder benefits, the plan must perform and document a comparative analysis of the design and application of each nonquantitative treatment limitation applicable to mental health or substance use disorder benefits. Each comparative analysis must comply with the content requirements of paragraph (c) of this section and be made available to the Secretary, upon request, in the manner required by paragraphs (d) and (e) of this section.
(c) Comparative analysis content requirements. With respect to each nonquantitative treatment limitation applicable to mental health or substance use disorder benefits under a group health plan, the comparative analysis performed by the plan must include, at minimum, the elements specified in this paragraph (c). In addition to the comparative analysis for each nonquantitative treatment limitation, each plan must prepare and make available to the Secretary, upon request, a written list of all nonquantitative treatment limitations imposed under the plan.
(1) Description of the nonquantitative treatment limitation. The comparative analysis must include, with respect to the nonquantitative treatment limitation that is the subject of the comparative analysis:
(i) Identification of the nonquantitative treatment limitation, including the specific terms of the plan or other relevant terms regarding the nonquantitative treatment limitation, the policies or guidelines (internal or external) in which the nonquantitative treatment limitation appears or is described, and the applicable sections of any other relevant documents, such as provider contracts, that describe the nonquantitative treatment limitation;
(ii) Identification of all mental health or substance use disorder benefits and medical/surgical benefits to which the nonquantitative treatment limitation applies, including a list of which benefits are considered mental health or substance use disorder benefits and which benefits are considered medical/surgical benefits; and
(iii) A description of which benefits are included in each classification set forth in § 54.9812-1(c)(2)(ii)(A).
(2) Identification and definition of the factors and evidentiary standards used to design or apply the nonquantitative treatment limitation. The comparative analysis must include, with respect to every factor considered or relied upon to design the nonquantitative treatment limitation or apply the nonquantitative treatment limitation to mental health or substance use disorder benefits and medical/surgical benefits:
(i) Identification of every factor considered or relied upon, as well as the evidentiary standards considered or relied upon to design or apply each factor and the sources from which each evidentiary standard was derived, in determining which mental health or substance use disorder benefits and which medical/surgical benefits are subject to the nonquantitative treatment limitation; and
(ii) A definition of each factor, including:
(A) A detailed description of the factor;
(B) A description of each evidentiary standard used to design or apply each factor (and the source of each evidentiary standard) identified under paragraph (c)(2)(i) of this section; and
(C) A description of any steps the plan has taken to correct, cure, or supplement any information, evidence, sources, or standards that would otherwise have been considered biased or not objective under § 54.9812-1(c)(4)(i)(B)(1) in the absence of such steps.
(3) Description of how factors are used in the design and application of the nonquantitative treatment limitation. The comparative analysis must include a description of how each factor identified and defined under paragraph (c)(2) of this section is used in the design or application of the nonquantitative treatment limitation to mental health and substance use disorder benefits and medical/surgical benefits in a classification, including:
(i) A detailed explanation of how each factor identified and defined in paragraph (c)(2) of this section is used to determine which mental health or substance use disorder benefits and which medical/surgical benefits are subject to the nonquantitative treatment limitation;
(ii) An explanation of the evidentiary standards or other information or sources (if any) considered or relied upon in designing or applying the factors or relied upon in designing and applying the nonquantitative treatment limitation, including in the determination of whether and how mental health or substance use disorder benefits or medical/surgical benefits are subject to the nonquantitative treatment limitation;
(iii) If the application of the factor depends on specific decisions made in the administration of benefits, the nature of the decisions, the timing of the decisions, and the professional designations and qualifications of each decision maker;
(iv) If more than one factor is identified and defined in paragraph (c)(2) of this section, an explanation of:
(A) How all of the factors relate to each other;
(B) The order in which all the factors are applied, including when they are applied;
(C) Whether and how any factors are given more weight than others; and
(D) The reasons for the ordering or weighting of the factors; and
(v) Any deviations or variations from a factor, its applicability, or its definition (including the evidentiary standards used to define the factor and the information or sources from which each evidentiary standard was derived), such as how the factor is used differently to apply the nonquantitative treatment limitation to mental health or substance use disorder benefits as compared to medical/surgical benefits, and a description of how the plan establishes such deviations or variations.
(4) Demonstration of comparability and stringency as written. The comparative analysis must evaluate whether, in any classification, under the terms of the plan as written, any processes, strategies, evidentiary standards, or other factors used in designing and applying the nonquantitative treatment limitation to mental health or substance use disorder benefits are comparable to, and are applied no more stringently than, the processes, strategies, evidentiary standards, or other factors used in designing and applying the nonquantitative treatment limitation with respect to medical/surgical benefits. The comparative analysis must include, with respect to the nonquantitative treatment limitation and the factors used in designing and applying the nonquantitative treatment limitation:
(i) Documentation of each factor identified and defined in paragraph (c)(2) of this section that was applied to determine whether the nonquantitative treatment limitation applies to mental health or substance use disorder benefits and medical/surgical benefits in a classification, including, as relevant:
(A) Quantitative data, calculations, or other analyses showing whether, in each classification in which the nonquantitative treatment limitation applies, mental health or substance use disorder benefits and medical/surgical benefits met or did not meet any applicable threshold identified in the relevant evidentiary standard to determine that the nonquantitative treatment limitation would or would not apply; and
(B) Records maintained by the plan documenting the consideration and application of all factors and evidentiary standards, as well as the results of their application;
(ii) In each classification in which the nonquantitative treatment limitation applies to mental health or substance use disorder benefits, a comparison of how the nonquantitative treatment limitation, as written, is designed and applied to mental health or substance use disorder benefits and to medical/surgical benefits, including the specific provisions of any forms, checklists, procedure manuals, or other documentation used in designing and applying the nonquantitative treatment limitation or that address the application of the nonquantitative treatment limitation;
(iii) Documentation demonstrating how the factors are comparably applied, as written, to mental health or substance use disorder benefits and medical/surgical benefits in each classification, to determine which benefits are subject to the nonquantitative treatment limitation; and
(iv) An explanation of the reasons for any deviations or variations in the application of a factor used to apply the nonquantitative treatment limitation, or the application of the nonquantitative treatment limitation, to mental health or substance use disorder benefits as compared to medical/surgical benefits, and how the plan establishes such deviations or variations, including:
(A) In the definition of the factors, the evidentiary standards used to define the factors, and the sources from which the evidentiary standards were derived;
(B) In the design of the factors or evidentiary standards; or
(C) In the application or design of the nonquantitative treatment limitation.
(5) Demonstration of comparability and stringency in operation. The comparative analysis must evaluate whether, in any classification, in operation, the processes, strategies, evidentiary standards, or other factors used in designing and applying the nonquantitative treatment limitation to mental health or substance use disorder benefits are comparable to, and are applied no more stringently than, the processes, strategies, evidentiary standards, or other factors used in designing and applying the limitation with respect to medical/surgical benefits. The comparative analysis must include, with respect to the nonquantitative treatment limitation and the factors used in designing and applying the nonquantitative treatment limitation:
(i) A comprehensive explanation of how the plan evaluates whether, in operation, the processes, strategies, evidentiary standards, or other factors used in designing and applying the nonquantitative treatment limitation to mental health or substance use disorder benefits in a classification are comparable to, and are applied no more stringently than, the processes, strategies, evidentiary standards, or other factors used in designing and applying the nonquantitative treatment limitation with respect to medical/surgical benefits, including:
(A) An explanation of any methodology and underlying data used to demonstrate the application of the nonquantitative treatment limitation, in operation;
(B) The sample period, inputs used in any calculations, definitions of terms used, and any criteria used to select the mental health or substance use disorder benefits and medical/surgical benefits to which the nonquantitative treatment limitation is applicable;
(C) With respect to a nonquantitative treatment limitation for which relevant data is temporarily unavailable as described in § 54.9812-1(c)(4)(iii)(A)(3)(i), a detailed explanation of the lack of relevant data, the basis for the plan's conclusion that there is a lack of relevant data, and when and how the data will become available and be collected and analyzed; and
(D) With respect to a nonquantitative treatment limitation for which no data exist that can reasonably assess any relevant impact of the nonquantitative treatment limitation on relevant outcomes related to access to mental health and substance use disorder benefits and medical/surgical benefits as described in § 54.9812-1(c)(4)(iii)(A)(3)(ii), a reasoned justification as to the basis for the conclusion that there are no data that can reasonably assess the nonquantitative treatment limitation's impact, an explanation of why the nature of the nonquantitative treatment limitation prevents the plan from reasonably measuring its impact, an explanation of what data was considered and rejected, and documentation of any additional safeguards or protocols used to ensure that the nonquantitative treatment limitation complies with § 54.9812-1(c)(4);
(ii) Identification of the relevant data collected and evaluated, as required under § 54.9812-1(c)(4)(iii)(A);
(iii) Documentation of the outcomes that resulted from the application of the nonquantitative treatment limitation to mental health or substance use disorder benefits and medical/surgical benefits, including:
(A) The evaluation of relevant data as required under § 54.9812-1(c)(4)(iii)(A); and
(B) A reasoned justification and analysis that explains why the plan concluded that any differences in the relevant data do or do not suggest the nonquantitative treatment limitation contributes to material differences in access to mental health or substance use disorder benefits as compared to medical/surgical benefits, in accordance with § 54.9812-1(c)(4)(iii)(B)(2);
(iv) A detailed explanation of any material differences in access demonstrated by the outcomes evaluated under paragraph (c)(5)(iii) of this section, including:
(A) A reasoned explanation of any material differences in access that are not attributable to differences in the comparability or relative stringency of the nonquantitative treatment limitation as applied to mental health or substance use disorder benefits and medical/surgical benefits (including any considerations beyond a plan's control that contribute to the existence of material differences) and a detailed explanation of the bases for concluding that material differences are not attributable to differences in the comparability or relative stringency of the nonquantitative treatment limitation; and
(B) To the extent differences in access to mental health or substance use disorder benefits are attributable to generally recognized independent professional medical or clinical standards or carefully circumscribed measures reasonably and appropriately designed to detect or prevent and prove fraud and abuse that minimize the negative impact on access to appropriate mental health and substance use disorder benefits, and such standards or measures are used as the basis for a factor or evidentiary standard used to design or apply a nonquantitative treatment limitation, documentation explaining how any such differences are attributable to those standards or measures, as required in § 54.9812-1(c)(4)(iii)(B)(2)(ii); and
(v) A discussion of the actions that have been or are being taken by the plan to address any material differences in access to mental health or substance use disorder benefits as compared to medical/surgical benefits, including the actions the plan has taken or is taking under § 54.9812-1(c)(4)(iii)(B)(1) to address material differences to comply, in operation, with § 54.9812-1(c)(4), including, as applicable:
(A) A reasoned explanation of any material differences in access to mental health or substance use disorder benefits as compared to medical/surgical benefits that persist despite reasonable actions that have been or are being taken; and
(B) For a plan designing and applying one or more nonquantitative treatment limitations related to network composition, a discussion of the actions that have been or are being taken to address material differences in access to in-network mental health and substance use disorder benefits as compared to in-network medical/surgical benefits, including those listed in § 54.9812-1(c)(4)(iii)(C).
(6) Findings and conclusions. The comparative analysis must address the findings and conclusions as to the comparability of the processes, strategies, evidentiary standards, and other factors used in designing and applying the nonquantitative treatment limitation to mental health or substance use disorder benefits and medical/surgical benefits within each classification, and the relative stringency of their application, both as written and in operation, and include:
(i) Any findings or conclusions indicating that the plan is or is not (or might or might not be) in compliance with the requirements of § 54.9812-1(c)(4), including any additional actions the plan has taken or intends to take to address any potential areas of concern or noncompliance;
(ii) A reasoned and detailed discussion of the findings and conclusions described in paragraph (c)(6)(i) of this section;
(iii) Citations to any additional specific information not otherwise included in the comparative analysis that supports the findings and conclusions described in paragraph (c)(6)(i) of this section not otherwise discussed in the comparative analysis;
(iv) The date the analysis is completed and the title and credentials of all relevant persons who participated in the performance and documentation of the comparative analysis; and
(v) If the comparative analysis relies upon an evaluation by a reviewer or consultant considered by the plan to be an expert, an assessment of each expert's qualifications and the extent to which the plan ultimately relied upon each expert's evaluation in performing and documenting the comparative analysis of the design and application of the nonquantitative treatment limitation applicable to both mental health or substance use disorder benefits and medical/surgical benefits.
(d) Requirements related to submission of comparative analyses to the Secretary upon request—(1) Initial request by the Secretary for comparative analysis. A group health plan must make the comparative analysis required by paragraph (b) of this section available and submit it to the Secretary within 10 business days of receipt of a request from the Secretary (or an additional period of time specified by the Secretary).
(2) Additional information required after a comparative analysis is deemed to be insufficient. In instances in which the Secretary determines that the plan has not submitted sufficient information under paragraph (d)(1) of this section for the Secretary to determine whether the comparative analysis required in paragraph (b) of this section complies with paragraph (c) of this section or whether the plan complies with § 54.9812-1(c)(4), the Secretary will specify to the plan the additional information the plan must submit to the Secretary to be responsive to the request under paragraph (d)(1). Any such information must be provided to the Secretary by the plan within 10 business days after the Secretary specifies the additional information to be submitted (or an additional period of time specified by the Secretary).
(3) Initial determination of noncompliance, required action, and corrective action plan. In instances in which the Secretary reviewed the comparative analysis submitted under paragraph (d)(1) of this section and any additional information submitted under paragraph (d)(2) of this section, and made an initial determination that the plan is not in compliance with the requirements of § 54.9812-1(c)(4) or this section, the plan must respond to the initial determination by the Secretary and specify the actions the plan will take to bring the plan into compliance, and provide to the Secretary additional comparative analyses meeting the requirements of paragraph (c) of this section that demonstrate compliance with § 54.9812-1(c)(4), not later than 45 calendar days after the Secretary's initial determination that the plan is not in compliance.
(4) Requirement to notify participants and beneficiaries of final determination of noncompliance—(i) In general. If the Secretary makes a final determination of noncompliance, the plan must notify all participants and beneficiaries enrolled in the plan that the plan has been determined to not be in compliance with the requirements of § 54.9812-1(c)(4) or this section with respect to such plan. Such notice must be provided within 7 business days of receipt of the final determination of noncompliance, and the plan must provide a copy of the notice to the Secretary, any service provider involved in the claims process, and any fiduciary responsible for deciding benefit claims within the same timeframe.
(ii) Content of notice. The notice to participants and beneficiaries required in paragraph (d)(4)(i) of this section shall be written in a manner calculated to be understood by the average plan participant and must include, in plain language, the following information in a standalone notice:
(A) The following statement prominently displayed on the first page, in no less than 14-point font: “Attention! The Department of the Treasury has determined that [insert the name of group health plan] is not in compliance with the Mental Health Parity and Addiction Equity Act.”;
(B) A summary of changes the plan has made as part of its corrective action plan specified to the Secretary following the initial determination of noncompliance, including an explanation of any opportunity for a participant or beneficiary to have a claim for benefits submitted or reprocessed;
(C) A summary of the Secretary's final determination that the plan is not in compliance with § 54.9812-1(c)(4) or this section, including any provisions or practices identified as being in violation of § 54.9812-1(c)(4) or this section, additional corrective actions identified by the Secretary in the final determination notice, and information on how participants and beneficiaries can obtain from the plan a copy of the final determination of noncompliance;
(D) Any additional actions the plan is taking to come into compliance with § 54.9812-1(c)(4) or this section, when the plan will take such actions, and a clear and accurate statement explaining whether the Secretary has concurred with those actions; and
(E) Contact information for questions and complaints, and a statement explaining how participants and beneficiaries can obtain more information about the notice, including:
(1) The plan's phone number and an email or web portal address; and
(2) The Employee Benefits Security Administration's phone number and email or web portal address.
(iii) Manner of notice. The plan must make the notice required under paragraph (d)(4)(i) of this section available in paper form, or electronically (such as by email or an internet posting) if:
(A) The format is readily accessible;
(B) The notice is provided in paper form free of charge upon request; and
(C) In a case in which the electronic form is an internet posting, the plan timely notifies the participant or beneficiary in paper form (such as a postcard) or email, that the documents are available on the internet, provides the internet address, includes the statement required in paragraph (d)(4)(ii)(A) of this section, and notifies the participant or beneficiary that the documents are available in paper form upon request.
(e) Requests for a copy of a comparative analysis. In addition to making a comparative analysis available upon request to the Secretary, a plan must make available a copy of the comparative analysis required by paragraph (b) of this section when requested by:
(1) Any applicable State authority; and
(2) A participant or beneficiary (including a provider or other person acting as a participant's or beneficiary's authorized representative) who has received an adverse benefit determination related to mental health or substance use disorder benefits.
(f) Rule of construction. Nothing in this section or § 54.9812-1 shall be construed to prevent the Secretary from acting within the scope of existing authorities to address violations of § 54.9812-1 or this section.
(g) Applicability. The provisions of this section apply to group health plans described in § 54.9812-1(e), to the extent the plan is not exempt under § 54.9812-1(f) or (g), on the first day of the first plan year beginning on or after January 1, 2025, except the requirements of paragraphs (c)(2)(ii)(C), (c)(5)(i)(C) and (D), and (c)(5)(ii) through (v) of this section apply on the first day of the first plan year beginning on or after January 1, 2026.
(h) Severability. If any provision of this section is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, unless such holding shall be one of invalidity or unenforceability, in which event the provision shall be severable from this section and shall not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.
[T.D. 10006, 89 FR 77715, Sept. 23, 2024]
§ 54.9815-1251 Preservation of right to maintain existing coverage.
(a) Definition of grandfathered health plan coverage—(1) In general—(i) Grandfathered health plan coverage means coverage provided by a group health plan, or a health insurance issuer, in which an individual was enrolled on March 23, 2010 (for as long as it maintains that status under the rules of this section). A group health plan or group health insurance coverage does not cease to be grandfathered health plan coverage merely because one or more (or even all) individuals enrolled on March 23, 2010 cease to be covered, provided that the plan or group health insurance coverage has continuously covered someone since March 23, 2010 (not necessarily the same person, but at all times at least one person). In addition, subject to the limitation set forth in paragraph (a)(1)(ii) of this section, a group health plan (and any health insurance coverage offered in connection with the group health plan) does not cease to be a grandfathered health plan merely because the plan (or its sponsor) enters into a new policy, certificate, or contract of insurance after March 23, 2010 (for example, a plan enters into a contract with a new issuer or a new policy is issued with an existing issuer). For purposes of this section, a plan or health insurance coverage that provides grandfathered health plan coverage is referred to as a grandfathered health plan. The rules of this section apply separately to each benefit package made available under a group health plan or health insurance coverage. Accordingly, if any benefit package relinquishes grandfather status, it will not affect the grandfather status of the other benefit packages.
(ii) Changes in group health insurance coverage. Subject to paragraphs (f) and (g)(2) of this section, if a group health plan (including a group health plan that was self-insured on March 23, 2010) or its sponsor enters into a new policy, certificate, or contract of insurance after March 23, 2010 that is effective before November 15, 2010, then the plan ceases to be a grandfathered health plan.
(2) Disclosure of grandfather status—(i) To maintain status as a grandfathered health plan, a plan or health insurance coverage must include a statement that the plan or coverage believes it is a grandfathered health plan within the meaning of section 1251 of the Patient Protection and Affordable Care Act, and must provide contact information for questions and complaints, in any summary of benefits provided under the plan.
(ii) The following model language can be used to satisfy this disclosure requirement:
This [group health plan or health insurance issuer] believes this [plan or coverage] is a “grandfathered health plan” under the Patient Protection and Affordable Care Act (the Affordable Care Act). As permitted by the Affordable Care Act, a grandfathered health plan can preserve certain basic health coverage that was already in effect when that law was enacted. Being a grandfathered health plan means that your [plan or policy] may not include certain consumer protections of the Affordable Care Act that apply to other plans, for example, the requirement for the provision of preventive health services without any cost sharing. However, grandfathered health plans must comply with certain other consumer protections in the Affordable Care Act, for example, the elimination of lifetime dollar limits on benefits.
Questions regarding which protections apply and which protections do not apply to a grandfathered health plan and what might cause a plan to change from grandfathered health plan status can be directed to the plan administrator at [insert contact information]. [For ERISA plans, insert: You may also contact the Employee Benefits Security Administration, U.S. Department of Labor at 1-866-444-3272 or www.dol.gov/ebsa/healthreform. This Web site has a table summarizing which protections do and do not apply to grandfathered health plans.] [For individual market policies and nonfederal governmental plans, insert: You may also contact the U.S. Department of Health and Human Services at www.healthcare.gov.]
(3)(i) Documentation of plan or policy terms on March 23, 2010. To maintain status as a grandfathered health plan, a group health plan, or group health insurance coverage, must, for as long as the plan or health insurance coverage takes the position that it is a grandfathered health plan—
(A) Maintain records documenting the terms of the plan or health insurance coverage in connection with the coverage in effect on March 23, 2010, and any other documents necessary to verify, explain, or clarify its status as a grandfathered health plan; and
(B) Make such records available for examination upon request.
(ii) Change in group health insurance coverage. To maintain status as a grandfathered health plan, a group health plan that enters into a new policy, certificate, or contract of insurance must provide to the new health insurance issuer (and the new health insurance issuer must require) documentation of plan terms (including benefits, cost sharing, employer contributions, and annual dollar limits) under the prior health coverage sufficient to determine whether a change causing a cessation of grandfathered health plan status under paragraph (g)(1) of this section has occurred.
(4) Family members enrolling after March 23, 2010. With respect to an individual who is enrolled in a group health plan or health insurance coverage on March 23, 2010, grandfathered health plan coverage includes coverage of family members of the individual who enroll after March 23, 2010 in the grandfathered health plan coverage of the individual.
(b) Allowance for new employees to join current plan— (1) In general. Subject to paragraph (b)(2) of this section, a group health plan (including health insurance coverage provided in connection with the group health plan) that provided coverage on March 23, 2010 and has retained its status as a grandfathered health plan (consistent with the rules of this section, including paragraph (g) of this section) is grandfathered health plan coverage for new employees (whether newly hired or newly enrolled) and their families enrolling in the plan after March 23, 2010. Further, the addition of a new contributing employer or new group of employees of an existing contributing employer to a grandfathered multiemployer health plan will not affect the plan's grandfather status.
(2) Anti-abuse rules—(i) Mergers and acquisitions. If the principal purpose of a merger, acquisition, or similar business restructuring is to cover new individuals under a grandfathered health plan, the plan ceases to be a grandfathered health plan.
(ii) Change in plan eligibility. A group health plan or health insurance coverage (including a benefit package under a group health plan) ceases to be a grandfathered health plan if—
(A) Employees are transferred into the plan or health insurance coverage (the transferee plan) from a plan or health insurance coverage under which the employees were covered on March 23, 2010 (the transferor plan);
(B) Comparing the terms of the transferee plan with those of the transferor plan (as in effect on March 23, 2010) and treating the transferee plan as if it were an amendment of the transferor plan would cause a loss of grandfather status under the provisions of paragraph (g)(1) of this section; and
(C) There was no bona fide employment-based reason to transfer the employees into the transferee plan. For this purpose, changing the terms or cost of coverage is not a bona fide employment-based reason.
(iii) Illustrative list of bona fide employment-based reasons. For purposes of paragraph (b)(2)(ii)(C) of this section, bona fide employment-based reasons include—
(A) When a benefit package is being eliminated because the issuer is exiting the market;
(B) When a benefit package is being eliminated because the issuer no longer offers the product to the employer;
(C) When low or declining participation by plan participants in the benefit package makes it impractical for the plan sponsor to continue to offer the benefit package;
(D) When a benefit package is eliminated from a multiemployer plan as agreed upon as part of the collective bargaining process; or
(E) When a benefit package is eliminated for any reason and multiple benefit packages covering a significant portion of other employees remain available to the employees being transferred.
(3) Examples. The rules of this paragraph (b) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan offers two benefit packages on March 23, 2010, Options F and G. During a subsequent open enrollment period, some of the employees enrolled in Option F on March 23, 2010 switch to Option G.
(ii) Conclusion. In this Example 1, the group health coverage provided under Option G remains a grandfathered health plan under the rules of paragraph (b)(1) of this section because employees previously enrolled in Option F are allowed to enroll in Option G as new employees.
Example 2. (i) Facts. A group health plan offers two benefit packages on March 23, 2010, Options H and I. On March 23, 2010, Option H provides coverage only for employees in one manufacturing plant. Subsequently, the plant is closed, and some employees in the closed plant are moved to another plant. The employer eliminates Option H and the employees that are moved are transferred to Option I. If instead of transferring employees from Option H to Option I, Option H was amended to match the terms of Option I, then Option H would cease to be a grandfathered health plan.
(ii) Conclusion. In this Example 2, the plan has a bona fide employment-based reason to transfer employees from Option H to Option I. Therefore, Option I does not cease to be a grandfathered health plan.
(c) General grandfathering rule—(1) Except as provided in paragraphs (d) and (e) of this section, subtitles A and C of title I of the Patient Protection and Affordable Care Act (and the amendments made by those subtitles, and the incorporation of those amendments into ERISA section 715 and Internal Revenue Code section 9815) do not apply to grandfathered health plan coverage. Accordingly, the provisions of PHS Act sections 2701, 2702, 2703, 2705, 2706, 2707, 2709 (relating to coverage for individuals participating in approved clinical trials, as added by section 10103 of the Patient Protection and Affordable Care Act), 2713, 2715A, 2716, 2717, 2719, and 2719A, as added or amended by the Patient Protection and Affordable Care Act, do not apply to grandfathered health plans. (In addition, see 45 CFR 147.140(c), which provides that the provisions of PHS Act section 2704, and PHS Act section 2711 insofar as it relates to annual dollar limits, do not apply to grandfathered health plans that are individual health insurance coverage.)
(2) To the extent not inconsistent with the rules applicable to a grandfathered health plan, a grandfathered health plan must comply with the requirements of the PHS Act, ERISA, and the Internal Revenue Code applicable prior to the changes enacted by the Patient Protection and Affordable Care Act.
(d) Provisions applicable to all grandfathered health plans. The provisions of PHS Act section 2711 insofar as it relates to lifetime dollar limits, and the provisions of PHS Act sections 2712, 2714, 2715, and 2718, apply to grandfathered health plans for plan years beginning on or after September 23, 2010. The provisions of PHS Act section 2708 apply to grandfathered health plans for plan years beginning on or after January 1, 2014.
(e) Applicability of PHS Act sections 2704, 2711, and 2714 to grandfathered group health plans and group health insurance coverage—(1) The provisions of PHS Act section 2704 as it applies with respect to enrollees who are under 19 years of age, and the provisions of PHS Act section 2711 insofar as it relates to annual dollar limits, apply to grandfathered health plans that are group health plans (including group health insurance coverage) for plan years beginning on or after September 23, 2010. The provisions of PHS Act section 2704 apply generally to grandfathered health plans that are group health plans (including group health insurance coverage) for plan years beginning on or after January 1, 2014.
(2) For plan years beginning before January 1, 2014, the provisions of PHS Act section 2714 apply in the case of an adult child with respect to a grandfathered health plan that is a group health plan only if the adult child is not eligible to enroll in an eligible employer-sponsored health plan (as defined in section 5000A(f)(2) of the Internal Revenue Code) other than a grandfathered health plan of a parent. For plan years beginning on or after January 1, 2014, the provisions of PHS Act section 2714 apply with respect to a grandfathered health plan that is a group health plan without regard to whether an adult child is eligible to enroll in any other coverage.
(f) Effect on collectively bargained plans—In general. In the case of health insurance coverage maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers that was ratified before March 23, 2010, the coverage is grandfathered health plan coverage at least until the date on which the last of the collective bargaining agreements relating to the coverage that was in effect on March 23, 2010 terminates. Any coverage amendment made pursuant to a collective bargaining agreement relating to the coverage that amends the coverage solely to conform to any requirement added by subtitles A and C of title I of the Patient Protection and Affordable Care Act (and the amendments made by those subtitles, and the incorporation of those amendments into ERISA section 715 and Internal Revenue Code section 9815) is not treated as a termination of the collective bargaining agreement. After the date on which the last of the collective bargaining agreements relating to the coverage that was in effect on March 23, 2010 terminates, the determination of whether health insurance coverage maintained pursuant to a collective bargaining agreement is grandfathered health plan coverage is made under the rules of this section other than this paragraph (f) (comparing the terms of the health insurance coverage after the date the last collective bargaining agreement terminates with the terms of the health insurance coverage that were in effect on March 23, 2010).
(g) Maintenance of grandfather status—(1) Changes causing cessation of grandfather status. Subject to paragraphs (g)(2) and (3) of this section, the rules of this paragraph (g)(1) describe situations in which a group health plan or health insurance coverage ceases to be a grandfathered health plan. A plan or coverage will cease to be a grandfathered health plan when an amendment to plan terms that results in a change described in this paragraph (g)(1) becomes effective, regardless of when the amendment was adopted. Once grandfather status is lost, it cannot be regained.
(i) Elimination of benefits. The elimination of all or substantially all benefits to diagnose or treat a particular condition causes a group health plan or health insurance coverage to cease to be a grandfathered health plan. For this purpose, the elimination of benefits for any necessary element to diagnose or treat a condition is considered the elimination of all or substantially all benefits to diagnose or treat a particular condition. Whether or not a plan or coverage has eliminated substantially all benefits to diagnose or treat a particular condition must be determined based on all the facts and circumstances, taking into account the items and services provided for a particular condition under the plan on March 23, 2010, as compared to the benefits offered at the time the plan or coverage makes the benefit change effective.
(ii) Increase in percentage cost-sharing requirement. Any increase, measured from March 23, 2010, in a percentage cost-sharing requirement (such as an individual's coinsurance requirement) causes a group health plan or health insurance coverage to cease to be a grandfathered health plan.
(iii) Increase in a fixed-amount cost-sharing requirement other than a copayment. Any increase in a fixed-amount cost-sharing requirement other than a copayment (for example, deductible or out-of-pocket limit), determined as of the effective date of the increase, causes a group health plan or health insurance coverage to cease to be a grandfathered health plan, if the total percentage increase in the cost-sharing requirement measured from March 23, 2010 exceeds the maximum percentage increase (as defined in paragraph (g)(4)(ii) of this section).
(iv) Increase in a fixed-amount copayment. Any increase in a fixed-amount copayment, determined as of the effective date of the increase, and determined for each copayment level if a plan has different copayment levels for different categories of services, causes a group health plan or health insurance coverage to cease to be a grandfathered health plan, if the total increase in the copayment measured from March 23, 2010 exceeds the greater of:
(A) An amount equal to $5 increased by medical inflation, as defined in paragraph (g)(4)(i) of this section (that is, $5 times medical inflation, plus $5); or
(B) The maximum percentage increase (as defined in paragraph (g)(4)(ii) of this section), determined by expressing the total increase in the copayment as a percentage.
(v) Decrease in contribution rate by employers and employee organizations—(A) Contribution rate based on cost of coverage. A group health plan or group health insurance coverage ceases to be a grandfathered health plan if the employer or employee organization decreases its contribution rate based on cost of coverage (as defined in paragraph (g)(4)(iii)(A) of this section) towards the cost of any tier of coverage for any class of similarly situated individuals (as described in § 54.9802(d)) by more than 5 percentage points below the contribution rate for the coverage period that includes March 23, 2010.
(B) Contribution rate based on a formula. A group health plan or group health insurance coverage ceases to be a grandfathered health plan if the employer or employee organization decreases its contribution rate based on a formula (as defined in paragraph (g)(4)(iii)(B) of this section) towards the cost of any tier of coverage for any class of similarly situated individuals (as described in § 54.9802(d)) by more than 5 percent below the contribution rate for the coverage period that includes March 23,
(vi) Changes in annual limits—(A) Addition of an annual limit. A group health plan, or group health insurance coverage, that, on March 23, 2010, did not impose an overall annual or lifetime limit on the dollar value of all benefits ceases to be a grandfathered health plan if the plan or health insurance coverage imposes an overall annual limit on the dollar value of benefits. (But see § 54.9815-2711, which prohibits all annual dollar limits on essential health benefits for plan years beginning on or after January 1, 2014).
(B) Decrease in limit for a plan or coverage with only a lifetime limit. A group health plan, or group health insurance coverage, that, on March 23, 2010, imposed an overall lifetime limit on the dollar value of all benefits but no overall annual limit on the dollar value of all benefits ceases to be a grandfathered health plan if the plan or health insurance coverage adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010. (But see § 54.9815-2711, which prohibits all annual dollar limits on essential health benefits for plan years beginning on or after January 1, 2014).
(C) Decrease in limit for a plan or coverage with an annual limit. A group health plan, or group health insurance coverage, that, on March 23, 2010, imposed an overall annual limit on the dollar value of all benefits ceases to be a grandfathered health plan if the plan or health insurance coverage decreases the dollar value of the annual limit (regardless of whether the plan or health insurance coverage also imposed an overall lifetime limit on March 23, 2010 on the dollar value of all benefits). (But see § 54.9815-2711, which prohibits all annual dollar limits on essential health benefits for plan years beginning on or after January 1, 2014).
(2) Transitional rules—(i) Changes made prior to March 23, 2010. If a group health plan or health insurance issuer makes the following changes to the terms of the plan or health insurance coverage, the changes are considered part of the terms of the plan or health insurance coverage on March 23, 2010 even though they were not effective at that time and such changes do not cause a plan or health insurance coverage to cease to be a grandfathered health plan:
(A) Changes effective after March 23, 2010 pursuant to a legally binding contract entered into on or before March 23, 2010;
(B) Changes effective after March 23, 2010 pursuant to a filing on or before March 23, 2010 with a State insurance department; or
(C) Changes effective after March 23, 2010 pursuant to written amendments to a plan that were adopted on or before March 23, 2010.
(ii) Changes made after March 23, 2010 and adopted prior to issuance of regulations. If, after March 23, 2010, a group health plan or health insurance issuer makes changes to the terms of the plan or health insurance coverage and the changes are adopted prior to June 14, 2010, the changes will not cause the plan or health insurance coverage to cease to be a grandfathered health plan if the changes are revoked or modified effective as of the first day of the first plan year (in the individual market, policy year) beginning on or after September 23, 2010, and the terms of the plan or health insurance coverage on that date, as modified, would not cause the plan or coverage to cease to be a grandfathered health plan under the rules of this section, including paragraph (g)(1) of this section. For this purpose, changes will be considered to have been adopted prior to June 14, 2010 if:
(A) The changes are effective before that date;
(B) The changes are effective on or after that date pursuant to a legally binding contract entered into before that date;
(C) The changes are effective on or after that date pursuant to a filing before that date with a State insurance department; or
(D) The changes are effective on or after that date pursuant to written amendments to a plan that were adopted before that date.
(3) Special rule for certain grandfathered high deductible health plans. With respect to a grandfathered group health plan or group health insurance coverage that is a high deductible health plan within the meaning of section 223(c)(2), increases to fixed-amount cost-sharing requirements made effective on or after June 15, 2021 that otherwise would cause a loss of grandfather status will not cause the plan or coverage to relinquish its grandfather status, but only to the extent such increases are necessary to maintain its status as a high deductible health plan under section 223(c)(2)(A).
(4) Definitions—(i) Medical inflation defined. For purposes of this paragraph (g), the term medical inflation means the increase since March 2010 in the overall medical care component of the Consumer Price Index for All Urban Consumers (CPI-U) (unadjusted) published by the Department of Labor using the 1982-1984 base of 100. For purposes of this paragraph (g)(4)(i), the increase in the overall medical care component is computed by subtracting 387.142 (the overall medical care component of the CPI-U (unadjusted) published by the Department of Labor for March 2010, using the 1982-1984 base of 100) from the index amount for any month in the 12 months before the new change is to take effect and then dividing that amount by 387.142.
(ii) Maximum percentage increase defined. For purposes of this paragraph (g), the term maximum percentage increase means:
(A) With respect to increases for a group health plan and group health insurance coverage made effective on or after March 23, 2010, and before June 15, 2021, medical inflation (as defined in paragraph (g)(4)(i) of this section), expressed as a percentage, plus 15 percentage points; and
(B) With respect to increases for a group health plan and group health insurance coverage made effective on or after June 15, 2021, the greater of:
(1) Medical inflation (as defined in paragraph (g)(4)(i) of this section), expressed as a percentage, plus 15 percentage points; or
(2) The portion of the premium adjustment percentage, as defined in 45 CFR 156.130(e), that reflects the relative change between 2013 and the calendar year prior to the effective date of the increase (that is, the premium adjustment percentage minus 1), expressed as a percentage, plus 15 percentage points.
(iii) Contribution rate defined. For purposes of paragraph (g)(1)(v) of this section:
(A) Contribution rate based on cost of coverage. The term contribution rate based on cost of coverage means the amount of contributions made by an employer or employee organization compared to the total cost of coverage, expressed as a percentage. The total cost of coverage is determined in the same manner as the applicable premium is calculated under the COBRA continuation provisions of section 604 of ERISA, section 4980B(f)(4) of the Internal Revenue Code, and section 2204 of the PHS Act. In the case of a self-insured plan, contributions by an employer or employee organization are equal to the total cost of coverage minus the employee contributions towards the total cost of coverage.
(B) Contribution rate based on a formula. The term contribution rate based on a formula means, for plans that, on March 23, 2010, made contributions based on a formula (such as hours worked or tons of coal mined), the formula.
(5) Examples. The rules of this paragraph (g) are illustrated by the following examples:
Example 1. (i) Facts. On March 23, 2010, a grandfathered health plan has a coinsurance requirement of 20% for inpatient surgery. The plan is subsequently amended to increase the coinsurance requirement to 25%.
(ii) Conclusion. In this Example 1, the increase in the coinsurance requirement from 20% to 25% causes the plan to cease to be a grandfathered health plan.
Example 2. (i) Facts. Before March 23, 2010, the terms of a group health plan provide benefits for a particular mental health condition, the treatment for which is a combination of counseling and prescription drugs. Subsequently, the plan eliminates benefits for counseling.
(ii) Conclusion. In this Example 2, the plan ceases to be a grandfathered health plan because counseling is an element that is necessary to treat the condition. Thus the plan is considered to have eliminated substantially all benefits for the treatment of the condition.
Example 3. (i) Facts. On March 23, 2010, a grandfathered group health plan has a copayment requirement of $30 per office visit for specialists. The plan is subsequently amended to increase the copayment requirement to $40, effective before June 15, 2021. Within the 12-month period before the $40 copayment takes effect, the greatest value of the overall medical care component of the CPI-U (unadjusted) is 475.
(ii) Conclusion. In this Example 3, the increase in the copayment from $30 to $40, expressed as a percentage, is 33.33% (40−30 = 10; 10 ÷ 30 = 0.3333; 0.3333 = 33.33%). Medical inflation (as defined in paragraph (g)(4)(i) of this section) from March 2010 is 0.2269 (475−387.142 = 87.858; 87.858 ÷ 387.142 = 0.2269). The maximum percentage increase permitted is 37.69% (0.2269 = 22.69%; 22.69% + 15% = 37.69%). Because 33.33% does not exceed 37.69%, the change in the copayment requirement at that time does not cause the plan to cease to be a grandfathered health plan.
Example 4. (i) Facts. Same facts as Example 3 of this paragraph (g)(5), except the grandfathered group health plan subsequently increases the $40 copayment requirement to $45 for a later plan year, effective before June 15, 2021. Within the 12-month period before the $45 copayment takes effect, the greatest value of the overall medical care component of the CPI-U (unadjusted) is 485.
(ii) Conclusion. In this Example 4, the increase in the copayment from $30 (the copayment that was in effect on March 23, 2010) to $45, expressed as a percentage, is 50% (45−30 = 15; 15 ÷ 30 = 0.5; 0.5 = 50%). Medical inflation (as defined in paragraph (g)(4)(i) of this section) from March 2010 is 0.2527 (485−387.142 = 97.858; 97.858 ÷ 387.142 = 0.2527). The increase that would cause a plan to cease to be a grandfathered health plan under paragraph (g)(1)(iv) of this section is the greater of the maximum percentage increase of 40.27% (0.2527 = 25.27%; 25.27% + 15% = 40.27%), or $6.26 (5 × 0.2527 = $1.26; $1.26 + $5 = $6.26). Because 50% exceeds 40.27% and $15 exceeds $6.26, the change in the copayment requirement at that time causes the plan to cease to be a grandfathered health plan.
Example 5. (i) Facts. Same facts as Example 4 of this paragraph (g)(5), except the grandfathered group health plan increases the copayment requirement to $45, effective after June 15, 2021. The greatest value of the overall medical care component of the CPI-U (unadjusted) in the preceding 12-month period is still 485. In the calendar year that includes the effective date of the increase, the applicable portion of the premium adjustment percentage is 36%.
(ii) Conclusion. In this Example 5, the grandfathered health plan may increase the copayment by the greater of: Medical inflation, expressed as a percentage, plus 15 percentage points; or the applicable portion of the premium adjustment percentage for the calendar year that includes the effective date of the increase, plus 15 percentage points. The latter amount is greater because it results in a 51% maximum percentage increase (36% + 15% = 51%) and, as demonstrated in Example 4 of this paragraph (g)(5), determining the maximum percentage increase using medical inflation yields a result of 40.27%. The increase in the copayment, expressed as a percentage, is 50% (45−30 = 15; 15 ÷ 30 = 0.5; 0.5 = 50%). Because the 50% increase in the copayment is less than the 51% maximum percentage increase, the change in the copayment requirement at that time does not cause the plan to cease to be a grandfathered health plan.
Example 6. (i) Facts. On March 23, 2010, a grandfathered group health plan has a copayment of $10 per office visit for primary care providers. The plan is subsequently amended to increase the copayment requirement to $15, effective before June 15, 2021. Within the 12-month period before the $15 copayment takes effect, the greatest value of the overall medical care component of the CPI-U (unadjusted) is 415.
(ii) Conclusion. In this Example 6, the increase in the copayment, expressed as a percentage, is 50% (15−10 = 5; 5 ÷ 10 = 0.5; 0.5 = 50%). Medical inflation (as defined in paragraph (g)(4)(i) of this section) from March 2010 is 0.0720 (415.0−387.142 = 27.858; 27.858 ÷ 387.142 = 0.0720). The increase that would cause a group plan to cease to be a grandfathered health plan under paragraph (g)(1)(iv) of this section is the greater of the maximum percentage increase of 22.20% (0.0720 = 7.20%; 7.20% + 15% = 22.20%), or $5.36 ($5 × 0.0720 = $0.36; $0.36 + $5 = $5.36). The $5 increase in copayment in this Example 6 would not cause the plan to cease to be a grandfathered health plan pursuant to paragraph (g)(1)(iv) of this section, which would permit an increase in the copayment of up to $5.36.
Example 7. (i) Facts. Same facts as Example 6 of this paragraph (g)(5), except on March 23, 2010, the grandfathered health plan has no copayment ($0) for office visits for primary care providers. The plan is subsequently, amended to increase the copayment requirement to $5, effective before June 15, 2021.
(ii) Conclusion. In this Example 7, medical inflation (as defined in paragraph (g)(4)(i) of this section) from March 2010 is 0.0720 (415.0−387.142 = 27.858; 27.858 ÷ 387.142 = 0.0720). The increase that would cause a plan to cease to be a grandfathered health plan under paragraph (g)(1)(iv)(A) of this section is $5.36 ($5 × 0.0720 = $0.36; $0.36 + $5 = $5.36). The $5 increase in copayment in this Example 7 is less than the amount calculated pursuant to paragraph (g)(1)(iv)(A) of this section of $5.36. Thus, the $5 increase in copayment does not cause the plan to cease to be a grandfathered health plan.
Example 8. (i) Facts. On March 23, 2010, a self-insured group health plan provides two tiers of coverage—self-only and family. The employer contributes 80% of the total cost of coverage for self-only and 60% of the total cost of coverage for family. Subsequently, the employer reduces the contribution to 50% for family coverage, but keeps the same contribution rate for self-only coverage.
(ii) Conclusion. In this Example 8, the decrease of 10 percentage points for family coverage in the contribution rate based on cost of coverage causes the plan to cease to be a grandfathered health plan. The fact that the contribution rate for self-only coverage remains the same does not change the result.
Example 9. (i) Facts. On March 23, 2010, a self-insured grandfathered health plan has a COBRA premium for the 2010 plan year of $5,000 for self-only coverage and $12,000 for family coverage. The required employee contribution for the coverage is $1,000 for self-only coverage and $4,000 for family coverage. Thus, the contribution rate based on cost of coverage for 2010 is 80% ((5,000−1,000)/5,000) for self-only coverage and 67% ((12,000−4,000)/12,000) for family coverage. For a subsequent plan year, the COBRA premium is $6,000 for self-only coverage and $15,000 for family coverage. The employee contributions for that plan year are $1,200 for self-only coverage and $5,000 for family coverage. Thus, the contribution rate based on cost of coverage is 80% ((6,000−1,200)/6,000) for self-only coverage and 67% ((15,000−5,000)/15,000) for family coverage.
(ii) Conclusion. In this Example 9, because there is no change in the contribution rate based on cost of coverage, the plan retains its status as a grandfathered health plan. The result would be the same if all or part of the employee contribution was made pre-tax through a cafeteria plan under section 125.
Example 10. (i) Facts. A group health plan not maintained pursuant to a collective bargaining agreement offers three benefit packages on March 23, 2010. Option F is a self-insured option. Options G and H are insured options. Beginning July 1, 2013, the plan increases coinsurance under Option H from 10% to 15%.
(ii) Conclusion. In this Example 10, the coverage under Option H is not grandfathered health plan coverage as of July 1, 2013, consistent with the rule in paragraph (g)(1)(ii) of this section. Whether the coverage under Options F and G is grandfathered health plan coverage is determined separately under the rules of this paragraph (g).
Example 11. (i) Facts. A group health plan that is a grandfathered health plan and also a high deductible health plan within the meaning of section 223(c)(2) had a $2,400 deductible for family coverage on March 23, 2010. The plan is subsequently amended after June 15, 2021 to increase the deductible limit by the amount that is necessary to comply with the requirements for a plan to qualify as a high deductible health plan under section 223(c)(2)(A), but that exceeds the maximum percentage increase.
(ii) Conclusion. In this Example 11, the increase in the deductible at that time does not cause the plan to cease to be a grandfathered health plan because the increase was necessary for the plan to continue to satisfy the definition of a high deductible health plan under section 223(c)(2)(A).
[T.D. 9744, 80 FR 72238, Nov. 18, 2015, as amended by T.D. 9928, 85 FR 81116, Dec. 15, 2020]
§ 54.9815-2704 Prohibition of preexisting condition exclusions.
(a) No preexisting condition exclusions. A group health plan, or a health insurance issuer offering group health insurance coverage, may not impose any preexisting condition exclusion (as defined in § 54.9801-2).
(b) Examples. The rules of paragraph (a) of this section are illustrated by the following examples (for additional examples illustrating the definition of a preexisting condition exclusion, see § 54.9801-3(a)(2)):
Example 1. (i) Facts. A group health plan provides benefits solely through an insurance policy offered by Issuer P. At the expiration of the policy, the plan switches coverage to a policy offered by Issuer N. N's policy excludes benefits for oral surgery required as a result of a traumatic injury if the injury occurred before the effective date of coverage under the policy.
(ii) Conclusion. In this Example 1, the exclusion of benefits for oral surgery required as a result of a traumatic injury if the injury occurred before the effective date of coverage is a preexisting condition exclusion because it operates to exclude benefits for a condition based on the fact that the condition was present before the effective date of coverage under the policy. Therefore, such an exclusion is prohibited.
Example 2. (i) Facts. Individual C applies for individual health insurance coverage with Issuer M. M denies C's application for coverage because a pre-enrollment physical revealed that C has type 2 diabetes.
(ii) Conclusion. See Example 2 in 45 CFR 147.108(a)(2) for a conclusion that M's denial of C's application for coverage is a preexisting condition exclusion because a denial of an application for coverage based on the fact that a condition was present before the date of denial is an exclusion of benefits based on a preexisting condition. Therefore, such an exclusion is prohibited.
(c) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2017. Until the applicability date for this regulation, plans and issuers are required to continue to comply with the interim final regulations promulgated by the Department of Labor at 29 CFR part 2590, contained in the 29 CFR, parts 1927 to end, edition revised as of July 1, 2015.
[T.D. 9744, 80 FR 72243, Nov. 18, 2015]
§ 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 requirements of § 54.9802-1.
(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.
[T.D. 9620, 78 FR 33181, June 3, 2013]
§ 54.9815-2708 Prohibition on waiting periods that exceed 90 days.
(a) General rule. A group health plan, and a health insurance issuer offering group health insurance coverage, must not apply any waiting period that exceeds 90 days, in accordance with the rules of this section. If, under the terms of a plan, an individual can elect coverage that would begin on a date that is not later than the end of the 90-day waiting period, this paragraph (a) is considered satisfied. Accordingly, in that case, a plan or issuer will not be considered to have violated this paragraph (a) solely because individuals take, or are permitted to take, additional time (beyond the end of the 90-day waiting period) to elect coverage.
(b) Waiting period defined. For purposes of this part, a waiting period is the period that must pass before coverage for an individual who is otherwise eligible to enroll under the terms of a group health plan can become effective. If an individual enrolls as a late enrollee (as defined under § 54.9801-2) or special enrollee (as described in § 54.9801-6), any period before such late or special enrollment is not a waiting period.
(c) Relation to a plan's eligibility criteria—(1) In general. Except as provided in paragraphs (c)(2) and (c)(3) of this section, being otherwise eligible to enroll under the terms of a group health plan means having met the plan's substantive eligibility conditions (such as, for example, being in an eligible job classification, achieving job-related licensure requirements specified in the plan's terms, or satisfying a reasonable and bona fide employment-based orientation period). Moreover, except as provided in paragraphs (c)(2) and (c)(3) of this section, nothing in this section requires a plan sponsor to offer coverage to any particular individual or class of individuals (including, for example, part-time employees). Instead, this section prohibits requiring otherwise eligible individuals to wait more than 90 days before coverage is effective. See also section 4980H of the Code and its implementing regulations for an applicable large employer's shared responsibility to provide health coverage to full-time employees.
(2) Eligibility conditions based solely on the lapse of time. Eligibility conditions that are based solely on the lapse of a time period are permissible for no more than 90 days.
(3) Other conditions for eligibility. Other conditions for eligibility under the terms of a group health plan are generally permissible under PHS Act section 2708, unless the condition is designed to avoid compliance with the 90-day waiting period limitation, determined in accordance with the rules of this paragraph (c)(3).
(i) Application to variable-hour employees in cases in which a specified number of hours of service per period is a plan eligibility condition. If a group health plan conditions eligibility on an employee regularly having a specified number of hours of service per period (or working full-time), and it cannot be determined that a newly-hired employee is reasonably expected to regularly work that number of hours per period (or work full-time), the plan may take a reasonable period of time, not to exceed 12 months and beginning on any date between the employee's start date and the first day of the first calendar month following the employee's start date, to determine whether the employee meets the plan's eligibility condition. Except in cases in which a waiting period that exceeds 90 days is imposed in addition to a measurement period, the time period for determining whether such an employee meets the plan's eligibility condition will not be considered to be designed to avoid compliance with the 90-day waiting period limitation if coverage is made effective no later than 13 months from the employee's start date plus, if the employee's start date is not the first day of a calendar month, the time remaining until the first day of the next calendar month.
(ii) Cumulative service requirements. If a group health plan or health insurance issuer conditions eligibility on an employee's having completed a number of cumulative hours of service, the eligibility condition is not considered to be designed to avoid compliance with the 90-day waiting period limitation if the cumulative hours-of-service requirement does not exceed 1,200 hours.
(iii) Limitation on orientation periods. To ensure that an orientation period is not used as a subterfuge for the passage of time, or designed to avoid compliance with the 90-day waiting period limitation, an orientation period is permitted only if it does not exceed one month. For this purpose, one month is determined by adding one calendar month and subtracting one calendar day, measured from an employee's start date in a position that is otherwise eligible for coverage. For example, if an employee's start date in an otherwise eligible position is May 3, the last permitted day of the orientation period is June 2. Similarly, if an employee's start date in an otherwise eligible position is October 1, the last permitted day of the orientation period is October 31. If there is not a corresponding date in the next calendar month upon adding a calendar month, the last permitted day of the orientation period is the last day of the next calendar month. For example, if the employee's start date is January 30, the last permitted day of the orientation period is February 28 (or February 29 in a leap year). Similarly, if the employee's start date is August 31, the last permitted day of the orientation period is September 30.
(d) Application to rehires. A plan or issuer may treat an employee whose employment has terminated and who then is rehired as newly eligible upon rehire and, therefore, required to meet the plan's eligibility criteria and waiting period anew, if reasonable under the circumstances (for example, the termination and rehire cannot be a subterfuge to avoid compliance with the 90-day waiting period limitation).
(e) Counting days. Under this section, all calendar days are counted beginning on the enrollment date (as defined in § 54.9801-2), including weekends and holidays. A plan or issuer that imposes a 90-day waiting period may, for administrative convenience, choose to permit coverage to become effective earlier than the 91st day if the 91st day is a weekend or holiday.
(f) Examples. The rules of this section are illustrated by the following examples:
Example 1. (i) Facts. A group health plan provides that full-time employees are eligible for coverage under the plan. Employee A begins employment as a full-time employee on January 19.
(ii) Conclusion. In this Example 1, any waiting period for A would begin on January 19 and may not exceed 90 days. Coverage under the plan must become effective no later than April 19 (assuming February lasts 28 days).
Example 2. (i) Facts. A group health plan provides that only employees with job title M are eligible for coverage under the plan. Employee B begins employment with job title L on January 30.
(ii) Conclusion. In this Example 2, B is not eligible for coverage under the plan, and the period while B is working with job title L and therefore not in an eligible class of employees, is not part of a waiting period under this section.
Example 3. (i) Facts. Same facts as in Example 2, except that B transfers to a new position with job title M on April 11.
(ii) Conclusion. In this Example 3, B becomes eligible for coverage on April 11, but for the waiting period. Any waiting period for B begins on April 11 and may not exceed 90 days; therefore, coverage under the plan must become effective no later than July 10.
Example 4. (i) Facts. A group health plan provides that only employees who have completed specified training and achieved specified certifications are eligible for coverage under the plan. Employee C is hired on May 3 and meets the plan's eligibility criteria on September 22.
(ii) Conclusion. In this Example 4, C becomes eligible for coverage-on September 22, but for the waiting period. Any waiting period for C would begin on September 22 and may not exceed 90 days; therefore, coverage under the plan must become effective no later than December 21.
Example 5. (i) Facts. A group health plan provides that employees are eligible for coverage after one year of service.
(ii) Conclusion. In this Example 5, the plan's eligibility condition is based solely on the lapse of time and, therefore, is impermissible under paragraph (c)(2) of this section because it exceeds 90 days.
Example 6. (i) Facts. Employer V's group health plan provides for coverage to begin on the first day of the first payroll period on or after the date an employee is hired and completes the applicable enrollment forms. Enrollment forms are distributed on an employee's start date and may be completed within 90 days. Employee D is hired and starts on October 31, which is the first day of a pay period. D completes the enrollment forms and submits them on the 90th day after D's start date, which is January 28. Coverage is made effective 7 days later, February 4, which is the first day of the next pay period.
(ii) Conclusion. In this Example 6, under the terms of V's plan, coverage may become effective as early as October 31, depending on when D completes the applicable enrollment forms. Under the terms of the plan, when coverage becomes effective depends solely on the length of time taken by D to complete the enrollment materials. Therefore, under the terms of the plan, D may elect coverage that would begin on a date that does not exceed the 90-day waiting period limitation, and the plan complies with this section.
Example 7. (i) Facts. Under Employer W's group health plan, only employees who are full-time (defined under the plan as regularly averaging 30 hours of service per week) are eligible for coverage. Employee E begins employment for Employer W on November 26 of Year 1. E's hours are reasonably expected to vary, with an opportunity to work between 20 and 45 hours per week, depending on shift availability and E's availability. Therefore, it cannot be determined at E's start date that E is reasonably expected to work full-time. Under the terms of the plan, variable-hour employees, such as E, are eligible to enroll in the plan if they are determined to be a full-time employee after a measurement period of 12 months that begins on the employee's start date. Coverage is made effective no later than the first day of the first calendar month after the applicable enrollment forms are received. E's 12-month measurement period ends November 25 of Year 2. E is determined to be a full-time employee and is notified of E's plan eligibility. If E then elects coverage, E's first day of coverage will be January 1 of Year 3.
(ii) Conclusion. In this Example 7, the measurement period is permissible because it is not considered to be designed to avoid compliance with the 90-day waiting period limitation. The plan may use a reasonable period of time to determine whether a variable-hour employee is a full-time employee, provided that (a) the period of time is no longer than 12 months; (b) the period of time begins on a date between the employee's start date and the first day of the next calendar month (inclusive); (c) coverage is made effective no later than 13 months from E's start date plus, if the employee's start date is not the first day of a calendar month, the time remaining until the first day of the next calendar month; and (d) in addition to the measurement period, no more than 90 days elapse prior to the employee's eligibility for coverage.
Example 8. (i) Facts. Employee F begins working 25 hours per week for Employer X on January 6 and is considered a part-time employee for purposes of X's group health plan. X sponsors a group health plan that provides coverage to part-time employees after they have completed a cumulative 1,200 hours of service. F satisfies the plan's cumulative hours of service condition on December 15.
(ii) Conclusion. In this Example 8, the cumulative hours of service condition with respect to part-time employees is not considered to be designed to avoid compliance with the 90-day waiting period limitation. Accordingly, coverage for F under the plan must begin no later than the 91st day after F completes 1,200 hours. (If the plan's cumulative hours-of-service requirement was more than 1,200 hours, the requirement would be considered to be designed to avoid compliance with the 90-day waiting period limitation.)
Example 9. (i) Facts. A multiemployer plan operating pursuant to an arms-length collective bargaining agreement has an eligibility provision that allows employees to become eligible for coverage by working a specified number of hours of covered employment for multiple contributing employers. The plan aggregates hours in a calendar quarter and then, if enough hours are earned, coverage begins the first day of the next calendar quarter. The plan also permits coverage to extend for the next full calendar quarter, regardless of whether an employee's employment has terminated.
(ii) Conclusion. In this Example 9, these eligibility provisions are designed to accommodate a unique operating structure, and, therefore, are not considered to be designed to avoid compliance with the 90-day waiting period limitation, and the plan complies with this section.
Example 10. (i) Facts. Employee G retires at age 55 after 30 years of employment with Employer Y with no expectation of providing further services to Employer Y. Three months later, Y recruits G to return to work as an employee providing advice and transition assistance for G's replacement under a one-year employment contract. Y's plan imposes a 90-day waiting period from an employee's start date before coverage becomes effective.
(ii) Conclusion. In this Example 10, Y's plan may treat G as newly eligible for coverage under the plan upon rehire and therefore may impose the 90-day waiting period with respect to G for coverage offered in connection with G's rehire.
Example 11. (i) Facts. Employee H begins working full time for Employer Z on October 16. Z sponsors a group health plan, under which full time employees are eligible for coverage after they have successfully completed a bona fide one-month orientation period. H completes the orientation period on November 15.
(ii) Conclusion. In this Example 11, the orientation period is not considered a subterfuge for the passage of time and is not considered to be designed to avoid compliance with the 90-day waiting period limitation. Accordingly, plan coverage for H must begin no later than February 14, which is the 91st day after H completes the orientation period. (If the orientation period was longer than one month, it would be considered to be a subterfuge for the passage of time and designed to avoid compliance with the 90-day waiting period limitation. Accordingly it would violate the rules of this section.)
(g) Special rule for health insurance issuers. To the extent coverage under a group health plan is insured by a health insurance issuer, the issuer is permitted to rely on the eligibility information reported to it by the employer (or other plan sponsor) and will not be considered to violate the requirements of this section with respect to its administration of any waiting period, if both of the following conditions are satisfied:
(1) The issuer requires the plan sponsor to make a representation regarding the terms of any eligibility conditions or waiting periods imposed by the plan sponsor before an individual is eligible to become covered under the terms of the plan (and requires the plan sponsor to update this representation with any changes), and
(2) The issuer has no specific knowledge of the imposition of a waiting period that would exceed the permitted 90-day period.
(h) No effect on other laws. Compliance with this section is not determinative of compliance with any other provision of State or Federal law (including ERISA, the Code, or other provisions of the Patient Protection and Affordable Care Act). See e.g., § 54.9802-1, which prohibits discrimination in eligibility for coverage based on a health factor and section 4980H, which generally requires applicable large employers to offer coverage to full-time employees and their dependents or make an assessable payment.
(i) Applicability date. The provisions of this section apply for plan years beginning on or after January 1, 2015. See section 1251 of the Affordable Care Act, as amended by section 10103 of the Affordable Care Act and section 2301 of the Health Care and Education Reconciliation Act, and its implementing regulations providing that the prohibition on waiting periods exceeding 90 days applies to all group health plans and group health insurance issuers, including grandfathered health plans.
[T.D. 9656, 79 FR 10306, Feb. 24, 2014, as amended by T.D. 9671, 79 FR 35947, June 25, 2014]
§ 54.9815-2711 No lifetime or annual limits.
(a) Prohibition—(1) Lifetime limits. Except as provided in paragraph (b) of this section, a group health plan, or a health insurance issuer offering group health insurance coverage, may not establish any lifetime limit on the dollar amount of essential health benefits for any individual, whether provided in-network or out-of-network.
(2) Annual limits—(i) General rule. Except as provided in paragraphs (a)(2)(ii) and (b) of this section, a group health plan, or a health insurance issuer offering group health insurance coverage, may not establish any annual limit on the dollar amount of essential health benefits for any individual, whether provided in-network or out-of-network.
(ii) Exception for health flexible spending arrangements. A health flexible spending arrangement (as defined in section 106(c)(2) of the Internal Revenue Code) offered through a cafeteria plan pursuant to section 125 of the Internal Revenue Code is not subject to the requirement in paragraph (a)(2)(i) of this section.
(b) Construction—(1) Permissible limits on specific covered benefits. The rules of this section do not prevent a group health plan, or a health insurance issuer offering group health insurance coverage, from placing annual or lifetime dollar limits with respect to any individual on specific covered benefits that are not essential health benefits to the extent that such limits are otherwise permitted under applicable Federal or State law. (The scope of essential health benefits is addressed in paragraph (c) of this section).
(2) Condition-based exclusions. The rules of this section do not prevent a group health plan, or a health insurance issuer offering group health insurance coverage, from excluding all benefits for a condition. However, if any benefits are provided for a condition, then the requirements of this section apply. Other requirements of Federal or State law may require coverage of certain benefits.
(c) Definition of essential health benefits. The term “essential health benefits” means essential health benefits under section 1302(b) of the Patient Protection and Affordable Care Act and applicable regulations. For the purpose of this section, a group health plan or a health insurance issuer that is not required to provide essential health benefits under section 1302(b) must define “essential health benefits” in a manner that is consistent with the following:
(1) For plan years beginning before January 1, 2020, one of the EHB-benchmark plans applicable in a State under 45 CFR 156.110, and including coverage of any additional required benefits that are considered essential health benefits consistent with 45 CFR 155.170(a)(2), or one of the three Federal Employees Health Benefits Program (FEHBP) plan options as defined by 45 CFR 156.100(a)(3), supplemented as necessary, to satisfy the standards in 45 CFR 156.110; or
(2) For plan years beginning on or after January 1, 2020, an EHB-benchmark plan selected by a State in accordance with the available options and requirements for EHB-benchmark plan selection at 45 CFR 156.111, including an EHB-benchmark plan in a State that takes no action to change its EHB-benchmark plan and thus retains the EHB-benchmark plan applicable in that State for the prior year in accordance with 45 CFR 156.111(d)(1), and including coverage of any additional required benefits that are considered essential health benefits consistent with 45 CFR 155.170(a)(2).
(d) Health reimbursement arrangements (HRAs) and other account-based group health plans—(1) In general. If an HRA or other account-based group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as applicable, separately is subject to and satisfies the requirements in PHS Act section 2711 and paragraph (a)(2) of this section, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2711 and paragraph (a)(2) of this section. Similarly, if an HRA or other account-based group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as applicable, separately is subject to and satisfies the requirements in PHS Act section 2713 and § 54.9815-2713(a)(1) of this chapter, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2713 and § 54.9815-2713(a)(1) of this chapter. For the purpose of this paragraph (d), all individual health insurance coverage, except for coverage that consists solely of excepted benefits, is treated as being subject to and complying with PHS Act sections 2711 and 2713.
(2) Requirements for an HRA or other account-based group health plan to be integrated with another group health plan. An HRA or other account-based group health plan is integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section if it satisfies the requirements under one of the integration methods set forth in paragraph (d)(2)(i) or (ii) of this section. For purposes of the integration methods under which an HRA or other account-based group health plan is integrated with another group health plan, integration does not require that the HRA or other account-based group health plan and the other group health plan with which it is integrated share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable. An HRA or other account-based group health plan integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section may not be used to purchase individual health insurance coverage unless that coverage consists solely of excepted benefits, as defined in 45 CFR 148.220.
(i) Method for integration with a group health plan: Minimum value not required. An HRA or other account-based group health plan is integrated with another group health plan for purposes of this paragraph (d) if:
(A) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan) to the employee that does not consist solely of excepted benefits;
(B) The employee receiving the HRA or other account-based group health plan is actually enrolled in a group health plan (other than the HRA or other account-based group health plan) that does not consist solely of excepted benefits, regardless of whether the plan is offered by the same plan sponsor (referred to as non-HRA group coverage);
(C) The HRA or other account-based group health plan is available only to employees who are enrolled in non-HRA group coverage, regardless of whether the non-HRA group coverage is offered by the plan sponsor of the HRA or other account-based group health plan (for example, the HRA may be offered only to employees who do not enroll in an employer's group health plan but are enrolled in other non-HRA group coverage, such as a group health plan maintained by the employer of the employee's spouse);
(D) The benefits under the HRA or other account-based group health plan are limited to reimbursement of one or more of the following—co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care expenses that do not constitute essential health benefits as defined in paragraph (c) of this section; and
(E) Under the terms of the HRA or other account-based group health plan, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan at least annually and, upon termination of employment, either the remaining amounts in the HRA or other account-based group health plan are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan (see paragraph (d)(3) of this section for additional rules regarding forfeiture and waiver).
(ii) Method for integration with another group health plan: Minimum value required. An HRA or other account-based group health plan is integrated with another group health plan for purposes of this paragraph (d) if:
(A) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan) to the employee that provides minimum value pursuant to section 36B(c)(2)(C)(ii) (and its implementing regulations and applicable guidance);
(B) The employee receiving the HRA or other account-based group health plan is actually enrolled in a group health plan (other than the HRA or other account-based group health plan) that provides minimum value pursuant to section 36B(c)(2)(C)(ii) (and applicable guidance), regardless of whether the plan is offered by the plan sponsor of the HRA or other account-based group health plan (referred to as non-HRA MV group coverage);
(C) The HRA or other account-based group health plan is available only to employees who are actually enrolled in non-HRA MV group coverage, regardless of whether the non-HRA MV group coverage is offered by the plan sponsor of the HRA or other account-based group health plan (for example, the HRA may be offered only to employees who do not enroll in an employer's group health plan but are enrolled in other non-HRA MV group coverage, such as a group health plan maintained by an employer of the employee's spouse); and
(D) Under the terms of the HRA or other account-based group health plan, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan at least annually, and, upon termination of employment, either the remaining amounts in the HRA or other account-based group health plan are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA or other account-based group health plan (see paragraph (d)(3) of this section for additional rules regarding forfeiture and waiver).
(3) Forfeiture. For purposes of integration under paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section, forfeiture or waiver occurs even if the forfeited or waived amounts may be reinstated upon a fixed date, a participant's death, or the earlier of the two events (the reinstatement event). For the purpose of this paragraph (d)(3), coverage under an HRA or other account-based group health plan is considered forfeited or waived prior to a reinstatement event only if the participant's election to forfeit or waive is irrevocable, meaning that, beginning on the effective date of the election and through the date of the reinstatement event, the participant and the participant's beneficiaries have no access to amounts credited to the HRA or other account-based group health plan. This means that upon and after reinstatement, the reinstated amounts under the HRA or other account-based group health plan may not be used to reimburse or pay medical care expenses incurred during the period after forfeiture and prior to reinstatement.
(4) Requirements for an HRA or other account-based group health plan to be integrated with individual health insurance coverage or Medicare Part A and B or Medicare Part C. An HRA or other account-based group health plan is integrated with individual health insurance coverage or Medicare Part A and B or Medicare Part C (and treated as complying with PHS Act sections 2711 and 2713) if the HRA or other account-based group health plan satisfies the requirements of § 54.9802-4(c) of this chapter (as modified by § 54.9802-4(e), for HRAs or other account-based group health plans integrated with Medicare Part A and B or Medicare Part C).
(5) Integration with Medicare Part B and D. For employers that are not required to offer their non-HRA group health plan coverage to employees who are Medicare beneficiaries, an HRA or other account-based group health plan that may be used to reimburse premiums under Medicare Part B or D may be integrated with Medicare (and deemed to comply with PHS Act sections 2711 and 2713) if the following requirements are satisfied with respect to employees who would be eligible for the employer's non-HRA group health plan but for their eligibility for Medicare (and the integration rules under paragraphs (d)(2)(i) and (ii) of this section continue to apply to employees who are not eligible for Medicare):
(i) The plan sponsor offers a group health plan (other than the HRA or other account-based group health plan and that does not consist solely of excepted benefits) to employees who are not eligible for Medicare;
(ii) The employee receiving the HRA or other account-based group health plan is actually enrolled in Medicare Part B or D;
(iii) The HRA or other account-based group health plan is available only to employees who are enrolled in Medicare Part B or D; and
(iv) The HRA or other account-based group health plan complies with paragraphs (d)(2)(i)(E) and (d)(2)(ii)(D) of this section.
(6) Definitions. The following definitions apply for purposes of this section.
(i) Account-based group health plan. An account-based group health plan is an employer-provided group health plan that provides reimbursements of medical care expenses with the reimbursement subject to a maximum fixed dollar amount for a period. An HRA is a type of account-based group health plan. An account-based group health plan does not include a qualified small employer health reimbursement arrangement, as defined in section 9831(d)(2).
(ii) Medical care expenses. Medical care expenses means expenses for medical care as defined under section 213(d).
(e) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2020. Until the applicability date for this section, plans and issuers are required to continue to comply with the corresponding sections of 26 CFR part 54, contained in the 26 CFR, subchapter D, revised as of April 1, 2018.
[T.D. 9744, 80 FR 72243, Nov. 18, 2015, as amended by T.D. 9791, 81 FR 75324, Oct. 31, 2016; T.D. 9867, 84 FR 28997, June 20, 2019]
§ 54.9815-2712 Rules regarding rescissions.
(a) Prohibition on rescissions—(1) A group health plan, or a health insurance issuer offering group health insurance coverage, must not rescind coverage under the plan, or under the policy, certificate, or contract of insurance, with respect to an individual (including a group to which the individual belongs or family coverage in which the individual is included) once the individual is covered under the plan or coverage, unless the individual (or a person seeking coverage on behalf of the individual) performs an act, practice, or omission that constitutes fraud, or makes an intentional misrepresentation of material fact, as prohibited by the terms of the plan or coverage. A group health plan, or a health insurance issuer offering group health insurance coverage, must provide at least 30 days advance written notice to each participant who would be affected before coverage may be rescinded under this paragraph (a)(1), regardless of whether the coverage is insured or self-insured, or whether the rescission applies to an entire group or only to an individual within the group. (The rules of this paragraph (a)(1) apply regardless of any contestability period that may otherwise apply.)
(2) For purposes of this section, a rescission is a cancellation or discontinuance of coverage that has retroactive effect. For example, a cancellation that treats a policy as void from the time of the individual's or group's enrollment is a rescission. As another example, a cancellation that voids benefits paid up to a year before the cancellation is also a rescission for this purpose. A cancellation or discontinuance of coverage is not a rescission if—
(i) The cancellation or discontinuance of coverage has only a prospective effect;
(ii) The cancellation or discontinuance of coverage is effective retroactively to the extent it is attributable to a failure to timely pay required premiums or contributions (including COBRA premiums) towards the cost of coverage;
(iii) The cancellation or discontinuance of coverage is initiated by the individual (or by the individual's authorized representative) and the sponsor, employer, plan, or issuer does not, directly or indirectly, take action to influence the individual's decision to cancel or discontinue coverage retroactively or otherwise take any adverse action or retaliate against, interfere with, coerce, intimidate, or threaten the individual; or
(iv) The cancellation or discontinuance of coverage is initiated by the Exchange pursuant to 45 CFR 155.430 (other than under paragraph (b)(2)(iii)).
(3) The rules of this paragraph (a) are illustrated by the following examples:
Example 1. (i) Facts. Individual A seeks enrollment in an insured group health plan. The plan terms permit rescission of coverage with respect to an individual if the individual engages in fraud or makes an intentional misrepresentation of a material fact. The plan requires A to complete a questionnaire regarding A's prior medical history, which affects setting the group rate by the health insurance issuer. The questionnaire complies with the other requirements of this part. The questionnaire includes the following question: “Is there anything else relevant to your health that we should know?” A inadvertently fails to list that A visited a psychologist on two occasions, six years previously. A is later diagnosed with breast cancer and seeks benefits under the plan. On or around the same time, the issuer receives information about A's visits to the psychologist, which was not disclosed in the questionnaire.
(ii) Conclusion. In this Example 1, the plan cannot rescind A's coverage because A's failure to disclose the visits to the psychologist was inadvertent. Therefore, it was not fraudulent or an intentional misrepresentation of material fact.
Example 2. (i) Facts. An employer sponsors a group health plan that provides coverage for employees who work at least 30 hours per week. Individual B has coverage under the plan as a full-time employee. The employer reassigns B to a part-time position. Under the terms of the plan, B is no longer eligible for coverage. The plan mistakenly continues to provide health coverage, collecting premiums from B and paying claims submitted by B. After a routine audit, the plan discovers that B no longer works at least 30 hours per week. The plan rescinds B's coverage effective as of the date that B changed from a full-time employee to a part-time employee.
(ii) Conclusion. In this Example 2, the plan cannot rescind B's coverage because there was no fraud or an intentional misrepresentation of material fact. The plan may cancel coverage for B prospectively, subject to other applicable Federal and State laws.
(b) Compliance with other requirements. Other requirements of Federal or State law may apply in connection with a rescission of coverage.
(c) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2017. Until the applicability date for this regulation, plans and issuers are required to continue to comply with the interim final regulations promulgated by the Department of Labor at 29 CFR part 2590, contained in the 29 CFR, parts 1927 to end, edition revised as of July 1, 2015.
[T.D. 9744, 80 FR 72244, Nov. 18, 2015]
§ 54.9815-2713 Coverage of preventive health services.
(a) Services—(1) In general. Beginning at the time described in paragraph (b) of this section and subject to § 54.9815-2713A, a group health plan, or a health insurance issuer offering group health insurance coverage, must provide coverage for and must not impose any cost-sharing requirements (such as a copayment, coinsurance, or a deductible) for—
(i) Evidence-based items or services that have in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force with respect to the individual involved (except as otherwise provided in paragraph (c) of this section);
(ii) Immunizations for routine use in children, adolescents, and adults that have in effect a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention with respect to the individual involved (for this purpose, a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention is considered in effect after it has been adopted by the Director of the Centers for Disease Control and Prevention, and a recommendation is considered to be for routine use if it is listed on the Immunization Schedules of the Centers for Disease Control and Prevention);
(iii) With respect to infants, children, and adolescents, evidence-informed preventive care and screenings provided for in comprehensive guidelines supported by the Health Resources and Services Administration; and
(iv) With respect to women, such additional preventive care and screenings not described in paragraph (a)(1)(i) of this section as provided for in comprehensive guidelines supported by the Health Resources and Services Administration for purposes of section 2713(a)(4) of the Public Health Service Act, subject to 45 CFR 147.131, 147.132, and 147.133.
(2) Office visits—(i) If an item or service described in paragraph (a)(1) of this section is billed separately (or is tracked as individual encounter data separately) from an office visit, then a plan or issuer may impose cost-sharing requirements with respect to the office visit.
(ii) If an item or service described in paragraph (a)(1) of this section is not billed separately (or is not tracked as individual encounter data separately) from an office visit and the primary purpose of the office visit is the delivery of such an item or service, then a plan or issuer may not impose cost-sharing requirements with respect to the office visit.
(iii) If an item or service described in paragraph (a)(1) of this section is not billed separately (or is not tracked as individual encounter data separately) from an office visit and the primary purpose of the office visit is not the delivery of such an item or service, then a plan or issuer may impose cost-sharing requirements with respect to the office visit.
(iv) The rules of this paragraph (a)(2) are illustrated by the following examples:
Example 1. (i) Facts. An individual covered by a group health plan visits an in-network health care provider. While visiting the provider, the individual is screened for cholesterol abnormalities, which has in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force with respect to the individual. The provider bills the plan for an office visit and for the laboratory work of the cholesterol screening test.
(ii) Conclusion. In this Example 1, the plan may not impose any cost-sharing requirements with respect to the separately-billed laboratory work of the cholesterol screening test. Because the office visit is billed separately from the cholesterol screening test, the plan may impose cost-sharing requirements for the office visit.
Example 2. (i) Facts. Same facts as Example 1 of this section. As the result of the screening, the individual is diagnosed with hyperlipidemia and is prescribed a course of treatment that is not included in the recommendations under paragraph (a)(1) of this section.
(ii) Conclusion. In this Example 2, because the treatment is not included in the recommendations under paragraph (a)(1) of this section, the plan is not prohibited from imposing cost-sharing requirements with respect to the treatment.
Example 3. (i) Facts. An individual covered by a group health plan visits an in-network health care provider to discuss recurring abdominal pain. During the visit, the individual has a blood pressure screening, which has in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force with respect to the individual. The provider bills the plan for an office visit.
(ii) Conclusion. In this Example 3, the blood pressure screening is provided as part of an office visit for which the primary purpose was not to deliver items or services described in paragraph (a)(1) of this section. Therefore, the plan may impose a cost-sharing requirement for the office visit charge.
Example 4. (i) Facts. A child covered by a group health plan visits an in-network pediatrician to receive an annual physical exam described as part of the comprehensive guidelines supported by the Health Resources and Services Administration. During the office visit, the child receives additional items and services that are not described in the comprehensive guidelines supported by the Health Resources and Services Administration, nor otherwise described in paragraph (a)(1) of this section. The provider bills the plan for an office visit.
(ii) Conclusion. In this Example 4, the service was not billed as a separate charge and was billed as part of an office visit. Moreover, the primary purpose for the visit was to deliver items and services described as part of the comprehensive guidelines supported by the Health Resources and Services Administration. Therefore, the plan may not impose a cost-sharing requirement with respect to the office visit.
(3) Out-of-network providers. (i) Subject to paragraph (a)(3)(ii) of this section, nothing in this section requires a plan or issuer that has a network of providers to provide benefits for items or services described in paragraph (a)(1) of this section that are delivered by an out-of-network provider. Moreover, nothing in this section precludes a plan or issuer that has a network of providers from imposing cost-sharing requirements for items or services described in paragraph (a)(1) of this section that are delivered by an out-of-network provider.
(ii) If a plan or issuer does not have in its network a provider who can provide an item or service described in paragraph (a)(1) of this section, the plan or issuer must cover the item or service when performed by an out-of-network provider, and may not impose cost-sharing with respect to the item or service.
(4) Reasonable medical management. Nothing prevents a plan or issuer from using reasonable medical management techniques to determine the frequency, method, treatment, or setting for an item or service described in paragraph (a)(1) of this section to the extent not specified in the relevant recommendation or guideline. To the extent not specified in a recommendation or guideline, a plan or issuer may rely on the relevant clinical evidence base and established reasonable medical management techniques to determine the frequency, method, treatment, or setting for coverage of a recommended preventive health service.
(5) Services not described. Nothing in this section prohibits a plan or issuer from providing coverage for items and services in addition to those recommended by the United States Preventive Services Task Force or the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention, or provided for by guidelines supported by the Health Resources and Services Administration, or from denying coverage for items and services that are not recommended by that task force or that advisory committee, or under those guidelines. A plan or issuer may impose cost-sharing requirements for a treatment not described in paragraph (a)(1) of this section, even if the treatment results from an item or service described in paragraph (a)(1) of this section.
(b) Timing—(1) In general. A plan or issuer must provide coverage pursuant to paragraph (a)(1) of this section for plan years that begin on or after September 23, 2010, or, if later, for plan years that begin on or after the date that is one year after the date the recommendation or guideline is issued.
(2) Changes in recommendations or guidelines. (i) A plan or issuer that is required to provide coverage for any items and services specified in any recommendation or guideline described in paragraph (a)(1) of this section on the first day of a plan year must provide coverage through the last day of the plan year, even if the recommendation or guideline changes is or is no longer described in paragraph (a)(1) of this section, during the plan year.
(ii) Notwithstanding paragraph (b)(2)(i) of this section, to the extent a recommendation or guideline described in paragraph (a)(1)(i) of this section that was in effect on the first day of a plan year is downgraded to a “D” rating, or any item or service associated with any recommendation or guideline specified in paragraph (a)(1) of this section is subject to a safety recall or is otherwise determined to pose a significant safety concern by a federal agency authorized to regulate the item or service during a plan year, there is no requirement under this section to cover these items and services through the last day of the plan year.
(c) Recommendations not current. For purposes of paragraph (a)(1)(i) of this section, and for purposes of any other provision of law, recommendations of the United States Preventive Services Task Force regarding breast cancer screening, mammography, and prevention issued in or around November 2009 are not considered to be current.
(d) Effective/applicability date. April 16, 2012.
[T.D. 9578, 77 FR 8729, Feb. 15, 2012, as amended by T.D. 9624, 78 FR 39892, July 2, 2013; T.D. 9726, 80 FR 41342, July 14, 2015; T.D. 9827, 82 FR 47828, Oct. 13, 2017; T.D. 9840, 83 FR 57586, Nov. 15, 2018; T.D. 9841, 83 FR 57630, Nov. 15, 2018]
§ 54.9815-2713T Coverage of preventive health services (temporary).
(a) Services—(1) In general. Beginning at the time described in paragraph (b) of this section and subject to § 54.9815-2713A, a group health plan, or a health insurance issuer offering group health insurance coverage, must provide coverage for and must not impose any cost-sharing requirements (such as a copayment, coinsurance, or a deductible) for—
(i) Evidence-based items or services that have in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force with respect to the individual involved (except as otherwise provided in paragraph (c) of this section);
(ii) Immunizations for routine use in children, adolescents, and adults that have in effect a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention with respect to the individual involved (for purposes of this paragraph (a)(1)(ii), a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention is considered in effect after it has been adopted by the Director of the Centers for Disease Control and Prevention, and a recommendation is considered to be for routine use if it is listed on the Immunization Schedules of the Centers for Disease Control and Prevention);
(iii) With respect to infants, children, and adolescents, evidence-informed preventive care and screenings provided for in comprehensive guidelines supported by the Health Resources and Services Administration;
(iv) With respect to women, such additional preventive care and screenings not described in paragraph (a)(1)(i) of this section as provided for in comprehensive guidelines supported by the Health Resources and Services Administration for purposes of section 2713(a)(4) of the Public Health Service Act, subject to 45 CFR 147.131, 147.132, and 147.133; and
(v) Any qualifying coronavirus preventive service, which means an item, service, or immunization that is intended to prevent or mitigate coronavirus disease 2019 (COVID-19) and that is, with respect to the individual involved—
(A) An evidence-based item or service that has in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force; or
(B) An immunization that has in effect a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention (regardless of whether the immunization is recommended for routine use). For purposes of this paragraph (a)(1)(v)(B), a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention is considered in effect after it has been adopted by the Director of the Centers for Disease Control and Prevention.
(2) Office visits. (i) If an item or service described in paragraph (a)(1) of this section is billed separately (or is tracked as individual encounter data separately) from an office visit, then a plan or issuer may impose cost-sharing requirements with respect to the office visit.
(ii) If an item or service described in paragraph (a)(1) of this section is not billed separately (or is not tracked as individual encounter data separately) from an office visit and the primary purpose of the office visit is the delivery of such an item or service, then a plan or issuer may not impose cost-sharing requirements with respect to the office visit.
(iii) If an item or service described in paragraph (a)(1) of this section is not billed separately (or is not tracked as individual encounter data separately) from an office visit and the primary purpose of the office visit is not the delivery of such an item or service, then a plan or issuer may impose cost-sharing requirements with respect to the office visit.
(iv) The rules of this paragraph (a)(2) are illustrated by the following examples:
(A) Example 1—(1) Facts. An individual covered by a group health plan visits an in-network health care provider. While visiting the provider, the individual is screened for cholesterol abnormalities, which has in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force with respect to the individual. The provider bills the plan for an office visit and for the laboratory work of the cholesterol screening test.
(2) Conclusion. In paragraph (a)(2)(iv)(A)(1) of this section, the plan may not impose any cost-sharing requirements with respect to the separately-billed laboratory work of the cholesterol screening test. Because the office visit is billed separately from the cholesterol screening test, the plan may impose cost-sharing requirements for the office visit.
(B) Example 2—(1) Facts. Same facts as in paragraph (a)(2)(iv)(A)(1) of this section (Example 1). As the result of the screening, the individual is diagnosed with hyperlipidemia and is prescribed a course of treatment that is not included in the recommendations under paragraph (a)(1) of this section.
(2) Conclusion. In paragraph (a)(2)(iv)(B)(1) of this section, because the treatment is not included in the recommendations under paragraph (a)(1) of this section, the plan is not prohibited from imposing cost-sharing requirements with respect to the treatment.
(C) Example 3—(1) Facts. An individual covered by a group health plan visits an in-network health care provider to discuss recurring abdominal pain. During the visit, the individual has a blood pressure screening, which has in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force with respect to the individual. The provider bills the plan for an office visit.
(2) Conclusion. In paragraph (a)(2)(iv)(C)(1) of this section, the blood pressure screening is provided as part of an office visit for which the primary purpose was not to deliver items or services described in paragraph (a)(1) of this section. Therefore, the plan may impose a cost-sharing requirement for the office visit charge.
(D) Example 4—(1) Facts. A child covered by a group health plan visits an in-network pediatrician to receive an annual physical exam described as part of the comprehensive guidelines supported by the Health Resources and Services Administration. During the office visit, the child receives additional items and services that are not described in the comprehensive guidelines supported by the Health Resources and Services Administration, nor otherwise described in paragraph (a)(1) of this section. The provider bills the plan for an office visit.
(2) Conclusion. In paragraph (a)(2)(iv)(D)(1) of this section, the service was not billed as a separate charge and was billed as part of an office visit. Moreover, the primary purpose for the visit was to deliver items and services described as part of the comprehensive guidelines supported by the Health Resources and Services Administration. Therefore, the plan may not impose a cost-sharing requirement with respect to the office visit.
(3) Out-of-network providers. (i) Subject to paragraphs (a)(3)(ii) and (iii) of this section, nothing in this section requires a plan or issuer that has a network of providers to provide benefits for items or services described in paragraph (a)(1) of this section that are delivered by an out-of-network provider, or precludes a plan or issuer that has a network of providers from imposing cost-sharing requirements for items or services described in paragraph (a)(1) of this section that are delivered by an out-of-network provider.
(ii) If a plan or issuer does not have in its network a provider who can provide an item or service described in paragraph (a)(1) of this section, the plan or issuer must cover the item or service when performed by an out-of-network provider, and may not impose cost-sharing with respect to the item or service.
(iii) A plan or issuer must provide coverage for and must not impose any cost-sharing requirements (such as a copayment, coinsurance, or a deductible) for any qualifying coronavirus preventive service described in paragraph (a)(1)(v) of this section, regardless of whether such service is delivered by an in-network or out-of-network provider. For purposes of this paragraph (a)(3)(iii), with respect to a qualifying coronavirus preventive service and a provider with whom the plan or issuer does not have a negotiated rate for such service (such as an out-of-network provider), the plan or issuer must reimburse the provider for such service in an amount that is reasonable, as determined in comparison to prevailing market rates for such service.
(4) Reasonable medical management. Nothing prevents a plan or issuer from using reasonable medical management techniques to determine the frequency, method, treatment, or setting for an item or service described in paragraph (a)(1) of this section to the extent not specified in the relevant recommendation or guideline. To the extent not specified in a recommendation or guideline, a plan or issuer may rely on the relevant clinical evidence base and established reasonable medical management techniques to determine the frequency, method, treatment, or setting for coverage of a recommended preventive health service.
(5) Services not described. Nothing in this section prohibits a plan or issuer from providing coverage for items and services in addition to those recommended by the United States Preventive Services Task Force or the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention, or provided for by guidelines supported by the Health Resources and Services Administration, or from denying coverage for items and services that are not recommended by that task force or that advisory committee, or under those guidelines. A plan or issuer may impose cost-sharing requirements for a treatment not described in paragraph (a)(1) of this section, even if the treatment results from an item or service described in paragraph (a)(1) of this section.
(b) Timing—(1) In general. A plan or issuer must provide coverage pursuant to paragraph (a)(1) of this section for plan years that begin on or after September 23, 2010, or, if later, for plan years that begin on or after the date that is one year after the date the recommendation or guideline is issued, except as provided in paragraph (b)(3) of this section.
(2) Changes in recommendations or guidelines. (i) A plan or issuer that is required to provide coverage for any items and services specified in any recommendation or guideline described in paragraph (a)(1) of this section on the first day of a plan year, or as otherwise provided in paragraph (b)(3) of this section, must provide coverage through the last day of the plan or policy year, even if the recommendation or guideline changes or is no longer described in paragraph (a)(1) of this section, during the applicable plan or policy year.
(ii) Notwithstanding paragraph (b)(2)(i) of this section, to the extent a recommendation or guideline described in paragraph (a)(1)(i) of this section that was in effect on the first day of a plan year, or as otherwise provided in paragraph (b)(3) of this section, is downgraded to a “D” rating, or any item or service associated with any recommendation or guideline specified in paragraph (a)(1) of this section is subject to a safety recall or is otherwise determined to pose a significant safety concern by a Federal agency authorized to regulate the item or service during a plan or policy year, there is no requirement under this section to cover these items and services through the last day of the applicable plan or policy year.
(3) Rapid coverage of preventive services for coronavirus. In the case of a qualifying coronavirus preventive service described in paragraph (a)(1)(v) of this section, a plan or issuer must provide coverage for such item, service, or immunization in accordance with this section by the date that is 15 business days after the date on which a recommendation specified in paragraph (a)(1)(v)(A) or (B) of this section is made relating to such item, service, or immunization.
(c) Recommendations not current. For purposes of paragraph (a)(1)(i) of this section, and for purposes of any other provision of law, recommendations of the United States Preventive Services Task Force regarding breast cancer screening, mammography, and prevention issued in or around November 2009 are not considered to be current.
(d) Applicability date. The provisions of paragraphs (a)(1)(i) through (iv), (a)(2), (a)(3)(i) and (ii), (a)(4) through (5), (b)(1) and (2), and (c) of this section are applicable as of April 16, 2012.
(e) Sunset date. The provisions of paragraphs (a)(1)(v), (a)(3)(iii), and (b)(3) of this section will not apply with respect to a qualifying coronavirus preventive service furnished on or after the expiration of the public health emergency determined on January 31, 2020, to exist nationwide as of January 27, 2020, by the Secretary of Health and Human Services pursuant to section 319 of the Public Health Service Act, as a result of COVID-19, including any subsequent renewals of that determination.
[T.D. 9931, 85 FR 71193, Nov. 6, 2020]
§ 54.9815-2713A Accommodations in connection with coverage of preventive health services.
(a) Eligible organizations for optional accommodation. An eligible organization is an organization that meets the criteria of paragraphs (a)(1) through (4) of this section.
(1) The organization is an objecting entity described in 45 CFR 147.132(a)(1)(i) or (ii), or 45 CFR 147.133(a)(1)(i) or (ii);
(2) Notwithstanding its status under paragraph (a)(1) of this section and under 45 CFR 147.132(a) or 147.133(a), the organization voluntarily seeks to be considered an eligible organization to invoke the optional accommodation under paragraph (b) or (c) of this section as applicable; and
(3) [Reserved]
(4) The organization self-certifies in the form and manner specified by the Secretary of Labor or provides notice to the Secretary of the Department of Health and Human Services as described in paragraph (b) or (c) of this section. To qualify as an eligible organization, the organization must make such self-certification or notice available for examination upon request by the first day of the first plan year to which the accommodation in paragraph (b) or (c) of this section applies. The self-certification or notice must be executed by a person authorized to make the certification or provide the notice on behalf of the organization, and must be maintained in a manner consistent with the record retention requirements under section 107 of ERISA.
(5) An eligible organization may revoke its use of the accommodation process, and its issuer or third party administrator must provide participants and beneficiaries written notice of such revocation, as specified herein.
(i) Transitional rule—If contraceptive coverage is being offered on the date on which these final rules go into effect, by an issuer or third party administrator through the accommodation process, an eligible organization may give 60-days notice pursuant to section 2715(d)(4) of the PHS Act and § 54.9815-2715(b), if applicable, to revoke its use of the accommodation process (to allow for the provision of notice to plan participants in cases where contraceptive benefits will no longer be provided). Alternatively, such eligible organization may revoke its use of the accommodation process effective on the first day of the first plan year that begins on or after 30 days after the date of the revocation.
(ii) General rule—In plan years that begin after the date on which these final rules go into effect, if contraceptive coverage is being offered by an issuer or third party administrator through the accommodation process, an eligible organization's revocation of use of the accommodation process will be effective no sooner than the first day of the first plan year that begins on or after 30 days after the date of the revocation.
(b) Optional accommodation—self-insured group health plans—(1) A group health plan established or maintained by an eligible organization that provides benefits on a self-insured basis may voluntarily elect an optional accommodation under which its third party administrator(s) will provide or arrange payments for all or a subset of contraceptive services for one or more plan years. To invoke the optional accommodation process:
(i) The eligible organization or its plan must contract with one or more third party administrators.
(ii) The eligible organization must provide either a copy of the self-certification to each third party administrator or a notice to the Secretary of the Department of Health and Human Services that it is an eligible organization and of its objection as described in 45 CFR 147.132 or 147.133 to coverage of all or a subset of contraceptive services.
(A) When a copy of the self-certification is provided directly to a third party administrator, such self-certification must include notice that obligations of the third party administrator are set forth in 29 CFR 2510.3-16 and this section.
(B) When a notice is provided to the Secretary of Health and Human Services, the notice must include the name of the eligible organization; a statement that it objects as described in 45 CFR 147.132 or 147.133 to coverage of some or all contraceptive services (including an identification of the subset of contraceptive services to which coverage the eligible organization objects, if applicable), but that it would like to elect the optional accommodation process; the plan name and type (that is, whether it is a student health insurance plan within the meaning of 45 CFR 147.145(a) or a church plan within the meaning of section 3(33) of ERISA); and the name and contact information for any of the plan's third party administrators. If there is a change in any of the information required to be included in the notice, the eligible organization must provide updated information to the Secretary of the Department of Health and Human Services for the optional accommodation process to remain in effect. The Department of Labor (working with the Department of Health and Human Services) will send a separate notification to each of the plan's third party administrators informing the third party administrator that the Secretary of the Department of Health and Human Services has received a notice under paragraph (b)(1)(ii) of this section and describing the obligations of the third party administrator under 29 CFR 2510.3-16 and this section.
(2) If a third party administrator receives a copy of the self-certification from an eligible organization or a notification from the Department of Labor, as described in paragraph (b)(1)(ii) of this section, and is willing to enter into or remain in a contractual relationship with the eligible organization or its plan to provide administrative services for the plan, then the third party administrator will provide or arrange payments for contraceptive services, using one of the following methods—
(i) Provide payments for the contraceptive services for plan participants and beneficiaries without imposing any cost-sharing requirements (such as a copayment, coinsurance, or a deductible), premium, fee, or other charge, or any portion thereof, directly or indirectly, on the eligible organization, the group health plan, or plan participants or beneficiaries; or
(ii) Arrange for an issuer or other entity to provide payments for the contraceptive services for plan participants and beneficiaries without imposing any cost-sharing requirements (such as a copayment, coinsurance, or a deductible), premium, fee, or other charge, or any portion thereof, directly or indirectly, on the eligible organization, the group health plan, or plan participants or beneficiaries.
(3) If a third party administrator provides or arranges payments for contraceptive services in accordance with either paragraph (b)(2)(i) or (ii) of this section, the costs of providing or arranging such payments may be reimbursed through an adjustment to the federally facilitated Exchange user fee for a participating issuer pursuant to 45 CFR 156.50(d).
(4) A third party administrator may not require any documentation other than a copy of the self-certification from the eligible organization or notification from the Department of Labor described in paragraph (b)(1)(ii) of this section.
(5) Where an otherwise eligible organization does not contract with a third party administrator and files a self-certification or notice under paragraph (b)(1)(ii) of this section, the obligations under paragraph (b)(2) of this section do not apply, and the otherwise eligible organization is under no requirement to provide coverage or payments for contraceptive services to which it objects. The plan administrator for that otherwise eligible organization may, if it and the otherwise eligible organization choose, arrange for payments for contraceptive services from an issuer or other entity in accordance with paragraph (b)(2)(ii) of this section, and such issuer or other entity may receive reimbursements in accordance with paragraph (b)(3) of this section.
(6) Where an otherwise eligible organization is an ERISA-exempt church plan within the meaning of section 3(33) of ERISA and it files a self-certification or notice under paragraph (b)(1)(ii) of this section, the obligations under paragraph (b)(2) of this section do not apply, and the otherwise eligible organization is under no requirement to provide coverage or payments for contraceptive services to which it objects. The third party administrator for that otherwise eligible organization may, if it and the otherwise eligible organization choose, provide or arrange payments for contraceptive services in accordance with paragraphs (b)(2)(i) or (ii) of this section, and receive reimbursements in accordance with paragraph (b)(3) of this section.
(c) Optional accommodation—insured group health plans—(1) General rule. A group health plan established or maintained by an eligible organization that provides benefits through one or more group health insurance issuers may voluntarily elect an optional accommodation under which its health insurance issuer(s) will provide payments for all or a subset of contraceptive services for one or more plan years. To invoke the optional accommodation process—
(i) The eligible organization or its plan must contract with one or more health insurance issuers.
(ii) The eligible organization must provide either a copy of the self-certification to each issuer providing coverage in connection with the plan or a notice to the Secretary of the Department of Health and Human Services that it is an eligible organization and of its objection as described in 45 CFR 147.132 or 147.133 to coverage for all or a subset of contraceptive services.
(A) When a self-certification is provided directly to an issuer, the issuer has sole responsibility for providing such coverage in accordance with § 54.9815-2713.
(B) When a notice is provided to the Secretary of the Department Health and Human Services, the notice must include the name of the eligible organization; a statement that it objects as described in 45 CFR 147.132 or 147.133 to coverage of some or all contraceptive services (including an identification of the subset of contraceptive services to which coverage the eligible organization objects, if applicable) but that it would like to elect the optional accommodation process; the plan name and type (that is, whether it is a student health insurance plan within the meaning of 45 CFR 147.145(a) or a church plan within the meaning of section 3(33) of ERISA); and the name and contact information for any of the plan's health insurance issuers. If there is a change in any of the information required to be included in the notice, the eligible organization must provide updated information to the Secretary of Department of Health and Human Services for the optional accommodation process to remain in effect. The Department of Health and Human Services will send a separate notification to each of the plan's health insurance issuers informing the issuer that the Secretary of the Department Health and Human Services has received a notice under paragraph (c)(2)(ii) of this section and describing the obligations of the issuer under this section.
(2) If an issuer receives a copy of the self-certification from an eligible organization or the notification from the Department of Health and Human Services as described in paragraph (c)(2)(ii) of this section and does not have its own objection as described in 45 CFR 147.132 or 147.133 to providing the contraceptive services to which the eligible organization objects, then the issuer will provide payments for contraceptive services as follows—
(i) The issuer must expressly exclude contraceptive coverage from the group health insurance coverage provided in connection with the group health plan and provide separate payments for any contraceptive services required to be covered under § 54.9815-2713(a)(1)(iv) for plan participants and beneficiaries for so long as they remain enrolled in the plan.
(ii) With respect to payments for contraceptive services, the issuer may not impose any cost-sharing requirements (such as a copayment, coinsurance, or a deductible), or impose any premium, fee, or other charge, or any portion thereof, directly or indirectly, on the eligible organization, the group health plan, or plan participants or beneficiaries. The issuer must segregate premium revenue collected from the eligible organization from the monies used to provide payments for contraceptive services. The issuer must provide payments for contraceptive services in a manner that is consistent with the requirements under sections 2706, 2709, 2711, 2713, 2719, and 2719A of the PHS Act, as incorporated into section 9815 of the PHS Act. If the group health plan of the eligible organization provides coverage for some but not all of any contraceptive services required to be covered under § 54.9815-2713(a)(1)(iv), the issuer is required to provide payments only for those contraceptive services for which the group health plan does not provide coverage. However, the issuer may provide payments for all contraceptive services, at the issuer's option.
(3) A health insurance issuer may not require any documentation other than a copy of the self-certification from the eligible organization or the notification from the Department of Health and Human Services described in paragraph (c)(1)(ii) of this section.
(d) Notice of availability of separate payments for contraceptive services—self-insured and insured group health plans. For each plan year to which the optional accommodation in paragraph (b) or (c) of this section is to apply, a third party administrator required to provide or arrange payments for contraceptive services pursuant to paragraph (b) of this section, and an issuer required to provide payments for contraceptive services pursuant to paragraph (c) of this section, must provide to plan participants and beneficiaries written notice of the availability of separate payments for contraceptive services contemporaneous with (to the extent possible), but separate from, any application materials distributed in connection with enrollment (or re-enrollment) in group health coverage that is effective beginning on the first day of each applicable plan year. The notice must specify that the eligible organization does not administer or fund contraceptive benefits, but that the third party administrator or issuer, as applicable, provides or arranges separate payments for contraceptive services, and must provide contact information for questions and complaints. The following model language, or substantially similar language, may be used to satisfy the notice requirement of this paragraph (d): “Your employer has certified that your group health plan qualifies for an accommodation with respect to the federal requirement to cover all Food and Drug Administration-approved contraceptive services for women, as prescribed by a health care provider, without cost sharing. This means that your employer will not contract, arrange, pay, or refer for contraceptive coverage. Instead, [name of third party administrator/health insurance issuer] will provide or arrange separate payments for contraceptive services that you use, without cost sharing and at no other cost, for so long as you are enrolled in your group health plan. Your employer will not administer or fund these payments. If you have any questions about this notice, contact [contact information for third party administrator/health insurance issuer].”
(e) Reliance—insured group health plans—(1) If an issuer relies reasonably and in good faith on a representation by the eligible organization as to its eligibility for the accommodation in paragraph (c) of this section, and the representation is later determined to be incorrect, the issuer is considered to comply with any applicable requirement under § 54.9815-2713(a)(1)(iv) to provide contraceptive coverage if the issuer complies with the obligations under this section applicable to such issuer.
(2) A group health plan is considered to comply with any applicable requirement under § 54.9815-2713(a)(1)(iv) to provide contraceptive coverage if the plan complies with its obligations under paragraph (c) of this section, without regard to whether the issuer complies with the obligations under this section applicable to such issuer.
(f) Definition. For the purposes of this section, reference to “contraceptive” services, benefits, or coverage includes contraceptive or sterilization items, procedures, or services, or related patient education or counseling, to the extent specified for purposes of § 54.9815-2713(a)(1)(iv).
(g) Severability. Any provision of this section held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, shall be construed so as to continue to give maximum effect to the provision permitted by law, unless such holding shall be one of utter invalidity or unenforceability, in which event the provision shall be severable from this section and shall not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.
[T.D. 9840, 83 FR 57586, Nov. 15, 2018, as amended by T.D. 9841, 83 FR 57630, Nov. 15, 2018]
§ 54.9815-2714 Eligibility of children until at least age 26.
(a) In general—(1) A group health plan, or a health insurance issuer offering group health insurance coverage, that makes available dependent coverage of children must make such coverage available for children until attainment of 26 years of age.
(2) The rule of this paragraph (a) is illustrated by the following example:
Example. (i) Facts. For the plan year beginning January 1, 2011, a group health plan provides health coverage for employees, employees' spouses, and employees' children until the child turns 26. On the birthday of a child of an employee, July 17, 2011, the child turns 26. The last day the plan covers the child is July 16, 2011.
(ii) Conclusion. In this Example, the plan satisfies the requirement of this paragraph (a) with respect to the child.
(b) Restrictions on plan definition of dependent—(1) In general. With respect to a child who has not attained age 26, a plan or issuer may not define dependent for purposes of eligibility for dependent coverage of children other than in terms of a relationship between a child and the participant. Thus, for example, a plan or issuer may not deny or restrict dependent coverage for a child who has not attained age 26 based on the presence or absence of the child's financial dependency (upon the participant or any other person); residency with the participant or with any other person; whether the child lives, works, or resides in an HMO's service area or other network service area; marital status; student status; employment; eligibility for other coverage; or any combination of those factors. (Other requirements of Federal or State law, including section 609 of ERISA or section 1908 of the Social Security Act, may require coverage of certain children.)
(2) Construction. A plan or issuer will not fail to satisfy the requirements of this section if the plan or issuer limits dependent child coverage to children under age 26 who are described in section 152(f)(1) . For an individual not described in section 152(f)(1), such as a grandchild or niece, a plan may impose additional conditions on eligibility for dependent child health coverage, such as a condition that the individual be a dependent for income tax purposes.
(c) Coverage of grandchildren not required. Nothing in this section requires a plan or issuer to make coverage available for the child of a child receiving dependent coverage.
(d) Uniformity irrespective of age. The terms of the plan or health insurance coverage providing dependent coverage of children cannot vary based on age (except for children who are age 26 or older).
(e) Examples. The rules of paragraph (d) of this section are illustrated by the following examples:
Example 1. (i) Facts. A group health plan offers a choice of self-only or family health coverage. Dependent coverage is provided under family health coverage for children of participants who have not attained age 26. The plan imposes an additional premium surcharge for children who are older than age 18.
(ii) Conclusion. In this Example 1, the plan violates the requirement of paragraph (d) of this section because the plan varies the terms for dependent coverage of children based on age.
Example 2. (i) Facts. A group health plan offers a choice among the following tiers of health coverage: Self-only, self-plus-one, self-plus-two, and self-plus-three-or-more. The cost of coverage increases based on the number of covered individuals. The plan provides dependent coverage of children who have not attained age 26.
(ii) Conclusion. In this Example 2, the plan does not violate the requirement of paragraph (d) of this section that the terms of dependent coverage for children not vary based on age. Although the cost of coverage increases for tiers with more covered individuals, the increase applies without regard to the age of any child.
Example 3. (i) Facts. A group health plan offers two benefit packages—an HMO option and an indemnity option. Dependent coverage is provided for children of participants who have not attained age 26. The plan limits children who are older than age 18 to the HMO option.
(ii) Conclusion. In this Example 3, the plan violates the requirement of paragraph (d) of this section because the plan, by limiting children who are older than age 18 to the HMO option, varies the terms for dependent coverage of children based on age.
Example 4. (i) Facts. A group health plan sponsored by a large employer normally charges a copayment for physician visits that do not constitute preventive services. The plan charges this copayment to individuals age 19 and over, including employees, spouses, and dependent children, but waives it for those under age 19.
(ii) Conclusion. In this Example 4, the plan does not violate the requirement of paragraph (d) of this section that the terms of dependent coverage for children not vary based on age. While the requirement of paragraph (d) of this section generally prohibits distinctions based upon age in dependent coverage of children, it does not prohibit distinctions based upon age that apply to all coverage under the plan, including coverage for employees and spouses as well as dependent children. In this Example 4, the copayments charged to dependent children are the same as those charged to employees and spouses. Accordingly, the arrangement described in this Example 4 (including waiver, for individuals under age 19, of the generally applicable copayment) does not violate the requirement of paragraph (d) of this section.
(f) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2017. Until the applicability date for this regulation, plans and issuers are required to continue to comply with the interim final regulations promulgated by the Department of Labor at 29 CFR part 2590, contained in the 29 CFR, parts 1927 to end, edition revised as of July 1, 2015.
[T.D. 9744, 80 FR 72245, Nov. 18, 2015]
§ 54.9815-2715 Summary of benefits and coverage and uniform glossary.
(a) Summary of benefits and coverage—(1) In general. A group health plan (and its administrator as defined in section 3(16)(A) of ERISA)), and a health insurance issuer offering group health insurance coverage, is required to provide a written summary of benefits and coverage (SBC) for each benefit package without charge to entities and individuals described in this paragraph (a)(1) in accordance with the rules of this section.
(i) SBC provided by a group health insurance issuer to a group health plan—(A) Upon application. A health insurance issuer offering group health insurance coverage must provide the SBC to a group health plan (or its sponsor) upon application for health coverage, as soon as practicable following receipt of the application, but in no event later than seven business days following receipt of the application. If an SBC was provided before application pursuant to paragraph (a)(1)(i)(D) of this section (relating to SBCs upon request), this paragraph (a)(1)(i)(A) is deemed satisfied, provided there is no change to the information required to be in the SBC. However, if there has been a change in the information required, a new SBC that includes the changed information must be provided upon application pursuant to this paragraph (a)(1)(i)(A).
(B) By first day of coverage (if there are changes). If there is any change in the information required to be in the SBC that was provided upon application and before the first day of coverage, the issuer must update and provide a current SBC to the plan (or its sponsor) no later than the first day of coverage.
(C) Upon renewal, reissuance, or reenrollment. If the issuer renews or reissues a policy, certificate, or contract of insurance for a succeeding policy year, or automatically re-enrolls the policyholder or its participants and beneficiaries in coverage, the issuer must provide a new SBC as follows:
(1) If written application is required (in either paper or electronic form) for renewal or reissuance, the SBC must be provided no later than the date the written application materials are distributed.
(2) If renewal, reissuance, or reenrollment is automatic, the SBC must be provided no later than 30 days prior to the first day of the new plan or policy year; however, with respect to an insured plan, if the policy, certificate, or contract of insurance has not been issued or renewed before such 30-day period, the SBC must be provided as soon as practicable but in no event later than seven business days after issuance of the new policy, certificate, or contract of insurance, or the receipt of written confirmation of intent to renew, whichever is earlier.
(D) Upon request. If a group health plan (or its sponsor) requests an SBC or summary information about a health insurance product from a health insurance issuer offering group health insurance coverage, an SBC must be provided as soon as practicable, but in no event later than seven business days following receipt of the request.
(ii) SBC provided by a group health insurance issuer and a group health plan to participants and beneficiaries—(A) In general. A group health plan (including its administrator, as defined under section 3(16) of ERISA), and a health insurance issuer offering group health insurance coverage, must provide an SBC to a participant or beneficiary (as defined under sections 3(7) and 3(8) of ERISA), and consistent with the rules of paragraph (a)(1)(iii) of this section, with respect to each benefit package offered by the plan or issuer for which the participant or beneficiary is eligible.
(B) Upon application. The SBC must be provided as part of any written application materials that are distributed by the plan or issuer for enrollment. If the plan or issuer does not distribute written application materials for enrollment, the SBC must be provided no later than the first date on which the participant is eligible to enroll in coverage for the participant or any beneficiaries. If an SBC was provided before application pursuant to paragraph (a)(1)(ii)(F) of this section (relating to SBCs upon request), this paragraph (a)(1)(ii)(B) is deemed satisfied, provided there is no change to the information required to be in the SBC. However, if there has been a change in the information that is required to be in the SBC, a new SBC that includes the changed information must be provided upon application pursuant to this paragraph (a)(1)(ii)(B).
(C) By first day of coverage (if there are changes). (1) If there is any change to the information required to be in the SBC that was provided upon application and before the first day of coverage, the plan or issuer must update and provide a current SBC to a participant or beneficiary no later than the first day of coverage.
(2) If the plan sponsor is negotiating coverage terms after an application has been filed and the information required to be in the SBC changes, the plan or issuer is not required to provide an updated SBC (unless an updated SBC is requested) until the first day of coverage.
(D) Special enrollees. The plan or issuer must provide the SBC to special enrollees (as described in § 54.9801-6) no later than the date by which a summary plan description is required to be provided under the timeframe set forth in ERISA section 104(b)(1)(A) and its implementing regulations, which is 90 days from enrollment.
(E) Upon renewal, reissuance, or reenrollment. If the plan or issuer requires participants or beneficiaries to renew in order to maintain coverage (for example, for a succeeding plan year), or automatically re-enrolls participants and beneficiaries in coverage, the plan or issuer must provide a new SBC, as follows:
(1) If written application is required for renewal, reissuance, or reenrollment (in either paper or electronic form), the SBC must be provided no later than the date on which the written application materials are distributed.
(2) If renewal, reissuance, or reenrollment is automatic, the SBC must be provided no later than 30 days prior to the first day of the new plan or policy year; however, with respect to an insured plan, if the policy, certificate, or contract of insurance has not been issued or renewed before such 30-day period, the SBC must be provided as soon as practicable but in no event later than seven business days after issuance of the new policy, certificate, or contract of insurance, or the receipt of written confirmation of intent to renew, whichever is earlier.
(F) Upon request. A plan or issuer must provide the SBC to participants or beneficiaries upon request for an SBC or summary information about the health coverage, as soon as practicable, but in no event later than seven business days following receipt of the request.
(iii) Special rules to prevent unnecessary duplication with respect to group health coverage—(A) An entity required to provide an SBC under this paragraph (a)(1) with respect to an individual satisfies that requirement if another party provides the SBC, but only to the extent that the SBC is timely and complete in accordance with the other rules of this section. Therefore, for example, in the case of a group health plan funded through an insurance policy, the plan satisfies the requirement to provide an SBC with respect to an individual if the issuer provides a timely and complete SBC to the individual. An entity required to provide an SBC under this paragraph (a)(1) with respect to an individual that contracts with another party to provide such SBC is considered to satisfy the requirement to provide such SBC if:
(1) The entity monitors performance under the contract;
(2) If the entity has knowledge that the SBC is not being provided in a manner that satisfies the requirements of this section and the entity has all information necessary to correct the noncompliance, the entity corrects the noncompliance as soon as practicable; and
(3) If the entity has knowledge the SBC is not being provided in a manner that satisfies the requirements of this section and the entity does not have all information necessary to correct the noncompliance, the entity communicates with participants and beneficiaries who are affected by the noncompliance regarding the noncompliance, and begins taking significant steps as soon as practicable to avoid future violations.
(B) If a single SBC is provided to a participant and any beneficiaries at the participant's last known address, then the requirement to provide the SBC to the participant and any beneficiaries is generally satisfied. However, if a beneficiary's last known address is different than the participant's last known address, a separate SBC is required to be provided to the beneficiary at the beneficiary's last known address.
(C) With respect to a group health plan that offers multiple benefit packages, the plan or issuer is required to provide a new SBC automatically to participants and beneficiaries upon renewal or reenrollment only with respect to the benefit package in which a participant or beneficiary is enrolled (or will be automatically re-enrolled under the plan); SBCs are not required to be provided automatically upon renewal or reenrollment with respect to benefit packages in which the participant or beneficiary is not enrolled (or will not automatically be enrolled). However, if a participant or beneficiary requests an SBC with respect to another benefit package (or more than one other benefit package) for which the participant or beneficiary is eligible, the SBC (or SBCs, in the case of a request for SBCs relating to more than one benefit package) must be provided upon request as soon as practicable, but in no event later than seven business days following receipt of the request.
(D) Subject to paragraph (a)(2)(ii) of this section, a plan administrator of a group health plan that uses two or more insurance products provided by separate health insurance issuers with respect to a single group health plan may synthesize the information into a single SBC or provide multiple partial SBCs provided that all the SBC include the content in paragraph (a)(2)(iii) of this section.
(2) Content—(i) In general. Subject to paragraph (a)(2)(iii) of this section, the SBC must include the following:
(A) Uniform definitions of standard insurance terms and medical terms so that consumers may compare health coverage and understand the terms of (or exceptions to) their coverage, in accordance with guidance as specified by the Secretary;
(B) A description of the coverage, including cost sharing, for each category of benefits identified by the Secretary in guidance;
(C) The exceptions, reductions, and limitations of the coverage;
(D) The cost-sharing provisions of the coverage, including deductible, coinsurance, and copayment obligations;
(E) The renewability and continuation of coverage provisions;
(F) Coverage examples, in accordance with the rules of paragraph (a)(2)(ii) of this section;
(G) With respect to coverage beginning on or after January 1, 2014, a statement about whether the plan or coverage provides minimum essential coverage as defined under section 5000A(f) and whether the plan's or coverage's share of the total allowed costs of benefits provided under the plan or coverage meets applicable requirements;
(H) A statement that the SBC is only a summary and that the plan document, policy, certificate, or contract of insurance should be consulted to determine the governing contractual provisions of the coverage;
(I) Contact information for questions;
(J) For issuers, an Internet web address where a copy of the actual individual coverage policy or group certificate of coverage can be reviewed and obtained;
(K) For plans and issuers that maintain one or more networks of providers, an Internet address (or similar contact information) for obtaining a list of network providers;
(L) For plans and issuers that use a formulary in providing prescription drug coverage, an Internet address (or similar contact information) for obtaining information on prescription drug coverage; and
(M) An Internet address for obtaining the uniform glossary, as described in paragraph (c) of this section, as well as a contact phone number to obtain a paper copy of the uniform glossary, and a disclosure that paper copies are available.
(ii) Coverage examples. The SBC must include coverage examples specified by the Secretary in guidance that illustrate benefits provided under the plan or coverage for common benefits scenarios (including pregnancy and serious or chronic medical conditions) in accordance with this paragraph (a)(2)(ii).
(A) Number of examples. The Secretary may identify up to six coverage examples that may be required in an SBC.
(B) Benefits scenarios. For purposes of this paragraph (a)(2)(ii), a benefits scenario is a hypothetical situation, consisting of a sample treatment plan for a specified medical condition during a specific period of time, based on recognized clinical practice guidelines as defined by the National Guideline Clearinghouse, Agency for Healthcare Research and Quality. The Secretary will specify, in guidance, the assumptions, including the relevant items and services and reimbursement information, for each claim in the benefits scenario.
(C) Illustration of benefit provided. For purposes of this paragraph (a)(2)(ii), to illustrate benefits provided under the plan or coverage for a particular benefits scenario, a plan or issuer simulates claims processing in accordance with guidance issued by the Secretary to generate an estimate of what an individual might expect to pay under the plan, policy, or benefit package. The illustration of benefits provided will take into account any cost sharing, excluded benefits, and other limitations on coverage, as specified by the Secretary in guidance.
(iii) Coverage provided outside the United States. In lieu of summarizing coverage for items and services provided outside the United States, a plan or issuer may provide an Internet address (or similar contact information) for obtaining information about benefits and coverage provided outside the United States. In any case, the plan or issuer must provide an SBC in accordance with this section that accurately summarizes benefits and coverage available under the plan or coverage within the United States.
(3) Appearance. (i) A group health plan and a health insurance issuer must provide an SBC in the form, and in accordance with the instructions for completing the SBC, that are specified by the Secretary in guidance. The SBC must be presented in a uniform format, use terminology understandable by the average plan enrollee, not exceed four double-sided pages in length, and not include print smaller than 12-point font.
(ii) A group health plan that utilizes two or more benefit packages (such as major medical coverage and a health flexible spending arrangement) may synthesize the information into a single SBC, or provide multiple SBCs.
(4) Form. (i) An SBC provided by an issuer offering group health insurance coverage to a plan (or its sponsor), may be provided in paper form. Alternatively, the SBC may be provided electronically (such as by email or an Internet posting) if the following three conditions are satisfied—
(A) The format is readily accessible by the plan (or its sponsor);
(B) The SBC is provided in paper form free of charge upon request; and
(C) If the electronic form is an Internet posting, the issuer timely advises the plan (or its sponsor) in paper form or email that the documents are available on the Internet and provides the Internet address.
(ii) An SBC provided by a group health plan or health insurance issuer to a participant or beneficiary may be provided in paper form. Alternatively, the SBC may be provided electronically (such as by email or an Internet posting) if the requirements of this paragraph (a)(4)(ii) are met.
(A) With respect to participants and beneficiaries covered under the plan or coverage, the SBC may be provided electronically as described in this paragraph (a)(4)(ii)(A). However, in all cases, the plan or issuer must provide the SBC in paper form if paper form is requested.
(1) In accordance with the Department of Labor's disclosure regulations at 29 CFR 2520.104b-1;
(2) In connection with online enrollment or online renewal of coverage under the plan; or
(3) In response to an online request made by a participant or beneficiary for the SBC.
(B) With respect to participants and beneficiaries who are eligible but not enrolled for coverage, the SBC may be provided electronically if:
(1) The format is readily accessible;
(2) The SBC is provided in paper form free of charge upon request; and
(3) In a case in which the electronic form is an Internet posting, the plan or issuer timely notifies the individual in paper form (such as a postcard) or email that the documents are available on the Internet, provides the Internet address, and notifies the individual that the documents are available in paper form upon request.
(5) Language. A group health plan or health insurance issuer must provide the SBC in a culturally and linguistically appropriate manner. For purposes of this paragraph (a)(5), a plan or issuer is considered to provide the SBC in a culturally and linguistically appropriate manner if the thresholds and standards of 29 CFR 2590.715-2719(e) are met as applied to the SBC.
(b) Notice of modification. If a group health plan, or health insurance issuer offering group health insurance coverage, makes any material modification (as defined under section 102 of ERISA) in any of the terms of the plan or coverage that would affect the content of the SBC, that is not reflected in the most recently provided SBC, and that occurs other than in connection with a renewal or reissuance of coverage, the plan or issuer must provide notice of the modification to enrollees not later than 60 days prior to the date on which the modification will become effective. The notice of modification must be provided in a form that is consistent with the rules of paragraph (a)(4) of this section.
(c) Uniform glossary—(1) In general. A group health plan, and a health insurance issuer offering group health insurance coverage, must make available to participants and beneficiaries the uniform glossary described in paragraph (c)(2) of this section in accordance with the appearance and form and manner requirements of paragraphs (c)(3) and (4) of this section.
(2) Health-coverage-related terms and medical terms. The uniform glossary must provide uniform definitions, specified by the Secretary in guidance, of the following health-coverage-related terms and medical terms:
(i) Allowed amount, appeal, balance billing, co-insurance, complications of pregnancy, co-payment, deductible, durable medical equipment, emergency medical condition, emergency medical transportation, emergency room care, emergency services, excluded services, grievance, habilitation services, health insurance, home health care, hospice services, hospitalization, hospital outpatient care, in-network co-insurance, in-network co-payment, medically necessary, network, non-preferred provider, out-of-network co-insurance, out-of-network co-payment, out-of-pocket limit, physician services, plan, preauthorization, preferred provider, premium, prescription drug coverage, prescription drugs, primary care physician, primary care provider, provider, reconstructive surgery, rehabilitation services, skilled nursing care, specialist, usual customary and reasonable (UCR), and urgent care; and
(ii) Such other terms as the Secretary determines are important to define so that individuals and employers may compare and understand the terms of coverage and medical benefits (including any exceptions to those benefits), as specified in guidance.
(3) Appearance. A group health plan, and a health insurance issuer, must provide the uniform glossary with the appearance specified by the Secretary in guidance to ensure the uniform glossary is presented in a uniform format and uses terminology understandable by the average plan enrollee.
(4) Form and manner. A plan or issuer must make the uniform glossary described in this paragraph (c) available upon request, in either paper or electronic form (as requested), within seven business days after receipt of the request.
(d) Preemption. State laws that conflict with this section (including a state law that requires a health insurance issuer to provide an SBC that supplies less information than required under paragraph (a) of this section) are preempted.
(e) Failure to provide. A group health plan that willfully fails to provide information required under this section to a participant or beneficiary is subject to a fine of not more than $1,000 for each such failure. A failure with respect to each participant or beneficiary constitutes a separate offense for purposes of this paragraph (e). The Department will enforce this section using a process and procedure consistent with section 4980D of the Code.
(f) Applicability to Medicare Advantage benefits. The requirements of this section do not apply to a group health plan benefit package that provides Medicare Advantage benefits pursuant to or 42 U.S.C. Chapter 7, Subchapter XVIII, Part C.
(g) Applicability date. (1) This section is applicable to group health plans and group health insurance issuers in accordance with this paragraph (g). (See 29 CFR 2590.715-1251(d), providing that this section applies to grandfathered health plans.)
(i) For disclosures with respect to participants and beneficiaries who enroll or re-enroll through an open enrollment period (including re-enrollees and late enrollees), this section applies beginning on the first day of the first open enrollment period that begins on or after September 1, 2015; and
(ii) For disclosures with respect to participants and beneficiaries who enroll in coverage other than through an open enrollment period (including individuals who are newly eligible for coverage and special enrollees), this section applies beginning on the first day of the first plan year that begins on or after September 1, 2015.
(2) For disclosures with respect to plans, this section is applicable to health insurance issuers beginning September 1, 2015.
[T.D. 9724, 80 FR 34304, June 16, 2015]
§ 54.9815-2715A1 Transparency in coverage—definitions.
Link to an amendment published at 91 FR 63854, Oct. 6, 2026.
(a) Scope and definitions—(1) Scope. This section sets forth definitions for the price transparency requirements for group health plans and health insurance issuers offering group health insurance coverage established in this section and §§ 54.9815-2715A2 and 54.9815-2715A3.
(2) Definitions. For purposes of this section and §§ 54.9815-2715A2 and 54.9815-2715A3, the following definitions apply:
(i) Accumulated amounts means:
(A) The amount of financial responsibility a participant or beneficiary has incurred at the time a request for cost-sharing information is made, with respect to a deductible or out-of-pocket limit. If an individual is enrolled in other than self-only coverage, these accumulated amounts shall include the financial responsibility a participant or beneficiary has incurred toward meeting his or her individual deductible or out-of-pocket limit, as well as the amount of financial responsibility that all the individuals enrolled under the plan or coverage have incurred, in aggregate, toward meeting the other than self-only deductible or out-of-pocket limit, as applicable. Accumulated amounts include any expense that counts toward a deductible or out-of-pocket limit (such as a copayment or coinsurance), but exclude any expense that does not count toward a deductible or out-of-pocket limit (such as any premium payment, out-of-pocket expense for out-of-network services, or amount for items or services not covered under the group health plan or health insurance coverage); and
(B) To the extent a group health plan or health insurance issuer imposes a cumulative treatment limitation on a particular covered item or service (such as a limit on the number of items, days, units, visits, or hours covered in a defined time period) independent of individual medical necessity determinations, the amount that has accrued toward the limit on the item or service (such as the number of items, days, units, visits, or hours the participant or beneficiary, has used within that time period).
(ii) Beneficiary has the meaning given the term under section 3(8) of the Employee Retirement Income Security Act of 1974 (ERISA).
(iii) Billed charge means the total charges for an item or service billed to a group health plan or health insurance issuer by a provider.
(iv) Billing code means the code used by a group health plan or health insurance issuer or provider to identify health care items or services for purposes of billing, adjudicating, and paying claims for a covered item or service, including the Current Procedural Terminology (CPT) code, Healthcare Common Procedure Coding System (HCPCS) code, Diagnosis-Related Group (DRG) code, National Drug Code (NDC), or other common payer identifier.
(v) Bundled payment arrangement means a payment model under which a provider is paid a single payment for all covered items and services provided to a participant or beneficiary for a specific treatment or procedure.
(vi) Copayment assistance means the financial assistance a participant or beneficiary receives from a prescription drug or medical supply manufacturer towards the purchase of a covered item or service.
(vii) Cost-sharing liability means the amount a participant or beneficiary is responsible for paying for a covered item or service under the terms of the group health plan or health insurance coverage. Cost-sharing liability generally includes deductibles, coinsurance, and copayments, but does not include premiums, balance billing amounts by out-of-network providers, or the cost of items or services that are not covered under a group health plan or health insurance coverage.
(viii) Cost-sharing information means information related to any expenditure required by or on behalf of a participant or beneficiary with respect to health care benefits that are relevant to a determination of the participant's or beneficiary's cost-sharing liability for a particular covered item or service.
(ix) Covered items or services means those items or services, including prescription drugs, the costs for which are payable, in whole or in part, under the terms of a group health plan or health insurance coverage.
(x) Derived amount means the price that a group health plan or health insurance issuer assigns to an item or service for the purpose of internal accounting, reconciliation with providers, or submitting data in accordance with the requirements of 45 CFR 153.710(c).
(xi) Historical net price means the retrospective average amount a group health plan or health insurance issuer paid for a prescription drug, inclusive of any reasonably allocated rebates, discounts, chargebacks, fees, and any additional price concessions received by the plan or issuer with respect to the prescription drug. The allocation shall be determined by dollar value for non-product specific and product-specific rebates, discounts, chargebacks, fees, and other price concessions to the extent that the total amount of any such price concession is known to the group health plan or health insurance issuer at the time of publication of the historical net price in a machine-readable file in accordance with § 54.9815-2715A3. However, to the extent that the total amount of any non-product specific and product-specific rebates, discounts, chargebacks, fees, or other price concessions is not known to the group health plan or health insurance issuer at the time of file publication, then the plan or issuer shall allocate such rebates, discounts, chargebacks, fees, and other price concessions by using a good faith, reasonable estimate of the average price concessions based on the rebates, discounts, chargebacks, fees, and other price concessions received over a time period prior to the current reporting period and of equal duration to the current reporting period, as determined under § 54.9815-2715A3(b)(1)(iii)(D)(3).
(xii) In-network provider means any provider of any item or service with which a group health plan or health insurance issuer, or a third party for the plan or issuer, has a contract setting forth the terms and conditions on which a relevant item or service is provided to a participant or beneficiary.
(xiii) Items or services means all encounters, procedures, medical tests, supplies, prescription drugs, durable medical equipment, and fees (including facility fees), provided or assessed in connection with the provision of health care.
(xiv) Machine-readable file means a digital representation of data or information in a file that can be imported or read by a computer system for further processing without human intervention, while ensuring no semantic meaning is lost.
(xv) National Drug Code means the unique 10- or 11-digit 3-segment number assigned by the Food and Drug Administration, which provides a universal product identifier for drugs in the United States.
(xvi) Negotiated rate means the amount a group health plan or health insurance issuer has contractually agreed to pay an in-network provider, including an in-network pharmacy or other prescription drug dispenser, for covered items and services, whether directly or indirectly, including through a third-party administrator or pharmacy benefit manager.
(xvii) Out-of-network allowed amount means the maximum amount a group health plan or health insurance issuer will pay for a covered item or service furnished by an out-of-network provider.
(xviii) Out-of-network provider means a provider of any item or service that does not have a contract under a participant's or beneficiary's group health plan or health insurance coverage to provide items or services.
(xix) Out-of-pocket limit means the maximum amount that a participant or beneficiary is required to pay during a coverage period for his or her share of the costs of covered items and services under his or her group health plan or health insurance coverage, including for self-only and other than self-only coverage, as applicable.
(xx) Plain language means written and presented in a manner calculated to be understood by the average participant or beneficiary.
(xxi) Prerequisite means concurrent review, prior authorization, and step-therapy or fail-first protocols related to covered items and services that must be satisfied before a group health plan or health insurance issuer will cover the item or service. The term prerequisite does not include medical necessity determinations generally or other forms of medical management techniques.
(xxii) Underlying fee schedule rate means the rate for a covered item or service from a particular in-network provider, or providers that a group health plan or health insurance issuer uses to determine a participant's or beneficiary's cost-sharing liability for the item or service, when that rate is different from the negotiated rate or derived amount.
(b) [Reserved]
[T.D. 9922, 85 FR 72295, Nov. 12, 2020]
§ 54.9815-2715A2 Transparency in coverage—required disclosures to participants and beneficiaries.
Link to an amendment published at 91 FR 63854, Oct. 6, 2026.
(a) Scope and definitions—(1) Scope. This section establishes price transparency requirements for group health plans and health insurance issuers offering group health insurance coverage for the timely disclosure of information about costs related to covered items and services under a group plan or health insurance coverage.
(2) Definitions. For purposes of this section, the definitions in § 54.9815-2715A1 apply.
(b) Required disclosures to participants and beneficiaries. At the request of a participant or beneficiary who is enrolled in a group health plan, the plan must provide to the participant or beneficiary the information required under paragraph (b)(1) of this section, in accordance with the method and format requirements set forth in paragraph (b)(2) of this section.
(1) Required cost-sharing information. The information required under this paragraph (b)(1) is the following cost-sharing information, which is accurate at the time the request is made, with respect to a participant's or beneficiary's cost-sharing liability for covered items and services:
(i) An estimate of the participant's or beneficiary's cost-sharing liability for a requested covered item or service furnished by a provider or providers that is calculated based on the information described in paragraphs (b)(1)(ii) through (iv) of this section.
(A) If the request for cost-sharing information relates to items and services that are provided within a bundled payment arrangement, and the bundled payment arrangement includes items or services that have a separate cost-sharing liability, the group health plan or health insurance issuer must provide estimates of the cost-sharing liability for the requested covered item or service, as well as an estimate of the cost-sharing liability for each of the items and services in the bundled payment arrangement that have separate cost-sharing liabilities. While group health plans and health insurance issuers are not required to provide estimates of cost-sharing liability for a bundled payment arrangement where the cost-sharing is imposed separately for each item and service included in the bundled payment arrangement, nothing prohibits plans or issuers from providing estimates for multiple items and services in situations where such estimates could be relevant to participants or beneficiaries, as long as the plan or issuer also discloses information about the relevant items or services individually, as required in paragraph (b)(1)(v) of this section.
(B) For requested items and services that are recommended preventive services under section 2713 of the Public Health Service Act (PHS Act), if the group health plan or health insurance issuer cannot determine whether the request is for preventive or non-preventive purposes, the plan or issuer must display the cost-sharing liability that applies for non-preventive purposes. As an alternative, a group health plan or health insurance issuer may allow a participant or beneficiary to request cost-sharing information for the specific preventive or non-preventive item or service by including terms such as “preventive”, “non-preventive” or “diagnostic” as a means to request the most accurate cost-sharing information.
(ii) Accumulated amounts.
(iii) In-network rate, comprised of the following elements, as applicable to the group health plan's or health insurance issuer's payment model:
(A) Negotiated rate, reflected as a dollar amount, for an in-network provider or providers for the requested covered item or service; this rate must be disclosed even if it is not the rate the plan or issuer uses to calculate cost-sharing liability; and
(B) Underlying fee schedule rate, reflected as a dollar amount, for the requested covered item or service, to the extent that it is different from the negotiated rate.
(iv) Out-of-network allowed amount or any other rate that provides a more accurate estimate of an amount a group health plan or health insurance issuer will pay for the requested covered item or service, reflected as a dollar amount, if the request for cost-sharing information is for a covered item or service furnished by an out-of-network provider; provided, however, that in circumstances in which a plan or issuer reimburses an out-of-network provider a percentage of the billed charge for a covered item or service, the out-of-network allowed amount will be that percentage.
(v) If a participant or beneficiary requests information for an item or service subject to a bundled payment arrangement, a list of the items and services included in the bundled payment arrangement for which cost-sharing information is being disclosed.
(vi) If applicable, notification that coverage of a specific item or service is subject to a prerequisite.
(vii) A notice that includes the following information in plain language:
(A) A statement that out-of-network providers may bill participants or beneficiaries for the difference between a provider's billed charges and the sum of the amount collected from the group health plan or health insurance issuer and from the participant or beneficiary in the form of a copayment or coinsurance amount (the difference referred to as balance billing), and that the cost-sharing information provided pursuant to this paragraph (b)(1) does not account for these potential additional amounts. This statement is only required if balance billing is permitted under state law;
(B) A statement that the actual charges for a participant's or beneficiary's covered item or service may be different from an estimate of cost-sharing liability provided pursuant to paragraph (b)(1)(i) of this section, depending on the actual items or services the participant or beneficiary receives at the point of care;
(C) A statement that the estimate of cost-sharing liability for a covered item or service is not a guarantee that benefits will be provided for that item or service;
(D) A statement disclosing whether the plan counts copayment assistance and other third-party payments in the calculation of the participant's or beneficiary's deductible and out-of-pocket maximum;
(E) For items and services that are recommended preventive services under section 2713 of the PHS Act, a statement that an in-network item or service may not be subject to cost-sharing if it is billed as a preventive service if the group health plan or health insurance issuer cannot determine whether the request is for a preventive or non-preventive item or service; and
(F) Any additional information, including other disclaimers, that the group health plan or health insurance issuer determines is appropriate, provided the additional information does not conflict with the information required to be provided by this paragraph (b)(1).
(2) Required methods and formats for disclosing information to participants and beneficiaries. The methods and formats for the disclosure required under this paragraph (b) are as follows:
(i) Internet-based self-service tool. Information provided under this paragraph (b) must be made available in plain language, without subscription or other fee, through a self-service tool on an internet website that provides real-time responses based on cost-sharing information that is accurate at the time of the request. Group health plans and health insurance issuers must ensure that the self-service tool allows users to:
(A) Search for cost-sharing information for a covered item or service provided by a specific in-network provider or by all in-network providers by inputting:
(1) A billing code (such as CPT code 87804) or a descriptive term (such as “rapid flu test”), at the option of the user;
(2) The name of the in-network provider, if the user seeks cost-sharing information with respect to a specific in-network provider; and
(3) Other factors utilized by the plan or issuer that are relevant for determining the applicable cost-sharing information (such as location of service, facility name, or dosage).
(B) Search for an out-of-network allowed amount, percentage of billed charges, or other rate that provides a reasonably accurate estimate of the amount a group health plan or health insurance issuer will pay for a covered item or service provided by out-of-network providers by inputting:
(1) A billing code or descriptive term, at the option of the user; and
(2) Other factors utilized by the plan or issuer that are relevant for determining the applicable out-of-network allowed amount or other rate (such as the location in which the covered item or service will be sought or provided).
(C) Refine and reorder search results based on geographic proximity of in-network providers, and the amount of the participant's or beneficiary's estimated cost-sharing liability for the covered item or service, to the extent the search for cost-sharing information for covered items or services returns multiple results.
(ii) Paper method. Information provided under this paragraph (b) must be made available in plain language, without a fee, in paper form at the request of the participant or beneficiary. In responding to such a request, the group health plan or health insurance issuer may limit the number of providers with respect to which cost-sharing information for covered items and services is provided to no fewer than 20 providers per request. The group health plan or health insurance issuer is required to:
(A) Disclose the applicable provider-per-request limit to the participant or beneficiary;
(B) Provide the cost-sharing information in paper form pursuant to the individual's request, in accordance with the requirements in paragraphs (b)(2)(i)(A) through (C) of this section; and
(C) Mail the cost-sharing information in paper form no later than 2 business days after an individual's request is received.
(D) To the extent participants or beneficiaries request disclosure other than by paper (for example, by phone or email), plans and issuers may provide the disclosure through another means, provided the participant or beneficiary agrees that disclosure through such means is sufficient to satisfy the request and the request is fulfilled at least as rapidly as required for the paper method.
(3) Special rule to prevent unnecessary duplication—(i) Special rule for insured group health plans. To the extent coverage under a group health plan consists of group health insurance coverage, the plan satisfies the requirements of this paragraph (b) if the plan requires the health insurance issuer offering the coverage to provide the information required by this paragraph (b) in compliance with this section pursuant to a written agreement. Accordingly, if a health insurance issuer and a plan sponsor enter into a written agreement under which the issuer agrees to provide the information required under this paragraph (b) in compliance with this section, and the issuer fails to do so, then the issuer, but not the plan, violates the transparency disclosure requirements of this paragraph (b).
(ii) Other contractual arrangements. A group health plan or health insurance issuer may satisfy the requirements under this paragraph (b) by entering into a written agreement under which another party (such as a pharmacy benefit manager or other third-party) provides the information required by this paragraph (b) in compliance with this section. Notwithstanding the preceding sentence, if a group health plan or health insurance issuer chooses to enter into such an agreement and the party with which it contracts fails to provide the information in compliance with this paragraph (b), the plan or issuer violates the transparency disclosure requirements of this paragraph (b).
(c) Applicability. (1) The provisions of this section apply for plan years beginning on or after January 1, 2023 with respect to the 500 items and services to be posted on a publicly available website, and with respect to all covered items and services, for plan years beginning on or after January 1, 2024.
(2) As provided under § 54.9815-1251, this section does not apply to grandfathered health plans. This section also does not apply to health reimbursement arrangements or other account-based group health plans as defined in § 54.9815-2711(d)(6) or short-term, limited-duration insurance as defined in § 54.9801-2.
(3) Nothing in this section alters or otherwise affects a group health plan's or health insurance issuer's duty to comply with requirements under other applicable state or Federal laws, including those governing the accessibility, privacy, or security of information required to be disclosed under this section, or those governing the ability of properly authorized representatives to access participant or beneficiary information held by plans and issuers.
(4) A group health plan or health insurance issuer will not fail to comply with this section solely because it, acting in good faith and with reasonable diligence, makes an error or omission in a disclosure required under paragraph (b) of this section, provided that the plan or issuer corrects the information as soon as practicable.
(5) A group health plan or health insurance issuer will not fail to comply with this section solely because, despite acting in good faith and with reasonable diligence, its internet website is temporarily inaccessible, provided that the plan or issuer makes the information available as soon as practicable.
(6) To the extent compliance with this section requires a group health plan or health insurance issuer to obtain information from any other entity, the plan or issuer will not fail to comply with this section because it relied in good faith on information from the other entity, unless the plan or issuer knows, or reasonably should have known, that the information is incomplete or inaccurate.
(d) Severability. Any provision of this section held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, shall be severable from this section and shall not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.
[T.D. 9922, 85 FR 72295, Nov. 12, 2020]
§ 54.9815-2715A3 Transparency in coverage—requirements for public disclosure.
Link to an amendment published at 91 FR 63855, Oct. 6, 2026.
(a) Scope and definitions—(1) Scope. This section establishes price transparency requirements for group health plans and health insurance issuers offering group health insurance coverage for the timely disclosure of information about costs related to covered items and services under a group plan or health insurance coverage.
(2) Definitions. For purposes of this section, the definitions in § 54.9815-2715A1 apply.
(b) Requirements for public disclosure of in-network provider rates for covered items and services, out-of-network allowed amounts and billed charges for covered items and services, and negotiated rates and historical net prices for covered prescription drugs. A group health plan or health insurance issuer must make available on an internet website the information required under paragraph (b)(1) of this section in three machine-readable files, in accordance with the method and format requirements described in paragraph (b)(2) of this section, and that are updated as required under paragraph (b)(3) of this section.
(1) Required information. Machine-readable files required under this paragraph (b) that are made available to the public by a group health plan or health insurance issuer must include:
(i) An in-network rate machine-readable file that includes the required information under this paragraph (b)(1)(i) for all covered items and services, except for prescription drugs that are subject to a fee-for-service reimbursement arrangement, which must be reported in the prescription drug machine-readable file pursuant to paragraph (b)(1)(iii) of this section. The in-network rate machine-readable file must include:
(A) For each coverage option offered by a group health plan or health insurance issuer, the name and the 14-digit Health Insurance Oversight System (HIOS) identifier, or, if the 14-digit HIOS identifier is not available, the 5-digit HIOS identifier, or if no HIOS identifier is available, the Employer Identification Number (EIN);
(B) A billing code, which in the case of prescription drugs must be an NDC, and a plain language description for each billing code for each covered item or service under each coverage option offered by a plan or issuer; and
(C) All applicable rates, which may include one or more of the following: negotiated rates, underlying fee schedule rates, or derived amounts. If a group health plan or health insurance issuer does not use negotiated rates for provider reimbursement, then the plan or issuer should disclose derived amounts to the extent these amounts are already calculated in the normal course of business. If the group health plan or health insurance issuer uses underlying fee schedule rates for calculating cost sharing, then the plan or issuer should include the underlying fee schedule rates in addition to the negotiated rate or derived amount. Applicable rates, including for both individual items and services and items and services in a bundled payment arrangement, must be:
(1) Reflected as dollar amounts, with respect to each covered item or service that is furnished by an in-network provider. If the negotiated rate is subject to change based upon participant or beneficiary-specific characteristics, these dollar amounts should be reflected as the base negotiated rate applicable to the item or service prior to adjustments for participant or beneficiary-specific characteristics;
(2) Associated with the National Provider Identifier (NPI), Tax Identification Number (TIN), and Place of Service Code for each in-network provider;
(3) Associated with the last date of the contract term or expiration date for each provider-specific applicable rate that applies to each covered item or service; and
(4) Indicated with a notation where a reimbursement arrangement other than a standard fee-for-service model (such as capitation or a bundled payment arrangement) applies.
(ii) An out-of-network allowed amount machine-readable file, including:
(A) For each coverage option offered by a group health plan or health insurance issuer, the name and the 14-digit HIOS identifier, or, if the 14-digit HIOS identifier is not available, the 5-digit HIOS identifier, or, if no HIOS identifier is available, the EIN;
(B) A billing code, which in the case of prescription drugs must be an NDC, and a plain language description for each billing code for each covered item or service under each coverage option offered by a plan or issuer; and
(C) Unique out-of-network allowed amounts and billed charges with respect to covered items or services, furnished by out-of-network providers during the 90-day time period that begins 180 days prior to the publication date of the machine-readable file (except that a group health plan or health insurance issuer must omit such data in relation to a particular item or service and provider when compliance with this paragraph (b)(1)(ii)(C) would require the plan or issuer to report payment of out-of-network allowed amounts in connection with fewer than 20 different claims for payments under a single plan or coverage). Consistent with paragraph (c)(3) of this section, nothing in this paragraph (b)(1)(ii)(C) requires the disclosure of information that would violate any applicable health information privacy law. Each unique out-of-network allowed amount must be:
(1) Reflected as a dollar amount, with respect to each covered item or service that is furnished by an out-of-network provider; and
(2) Associated with the NPI, TIN, and Place of Service Code for each out-of-network provider.
(iii) A prescription drug machine-readable file, including:
(A) For each coverage option offered by a group health plan or health insurance issuer, the name and the 14-digit HIOS identifier, or, if the 14-digit HIOS identifier is not available, the 5-digit HIOS identifier, or, if no HIOS identifier is available, the EIN;
(B) The NDC and the proprietary and nonproprietary name assigned to the NDC by the Food and Drug Administration (FDA) for each covered item or service that is a prescription drug under each coverage option offered by a plan or issuer;
(C) The negotiated rates which must be:
(1) Reflected as a dollar amount, with respect to each NDC that is furnished by an in-network provider, including an in-network pharmacy or other prescription drug dispenser;
(2) Associated with the NPI, TIN, and Place of Service Code for each in-network provider, including each in-network pharmacy or other prescription drug dispenser; and
(3) Associated with the last date of the contract term for each provider-specific negotiated rate that applies to each NDC; and
(D) Historical net prices that are:
(1) Reflected as a dollar amount, with respect to each NDC that is furnished by an in-network provider, including an in-network pharmacy or other prescription drug dispenser;
(2) Associated with the NPI, TIN, and Place of Service Code for each in-network provider, including each in-network pharmacy or other prescription drug dispenser; and
(3) Associated with the 90-day time period that begins 180 days prior to the publication date of the machine-readable file for each provider-specific historical net price that applies to each NDC (except that a group health plan or health insurance issuer must omit such data in relation to a particular NDC and provider when compliance with this paragraph (b)(1)(iii)(D) would require the plan or issuer to report payment of historical net prices calculated using fewer than 20 different claims for payment). Consistent with paragraph (c)(3) of this section, nothing in this paragraph (b)(1)(iii)(D) requires the disclosure of information that would violate any applicable health information privacy law.
(2) Required method and format for disclosing information to the public. The machine-readable files described in this paragraph (b) must be available in a form and manner as specified in guidance issued by the Department of the Treasury, the Department of Labor, and the Department of Health and Human Services. The machine-readable files must be publicly available and accessible to any person free of charge and without conditions, such as establishment of a user account, password, or other credentials, or submission of personally identifiable information to access the file.
(3) Timing. A group health plan or health insurance issuer must update the machine-readable files and information required by this paragraph (b) monthly. The group health plan or health insurance issuer must clearly indicate the date that the files were most recently updated.
(4) Special rules to prevent unnecessary duplication—(i) Special rule for insured group health plans. To the extent coverage under a group health plan consists of group health insurance coverage, the plan satisfies the requirements of this paragraph (b) if the plan requires the health insurance issuer offering the coverage to provide the information pursuant to a written agreement. Accordingly, if a health insurance issuer and a group health plan sponsor enter into a written agreement under which the issuer agrees to provide the information required under this paragraph (b) in compliance with this section, and the issuer fails to do so, then the issuer, but not the plan, violates the transparency disclosure requirements of this paragraph (b).
(ii) Other contractual arrangements. A group health plan or health insurance issuer may satisfy the requirements under this paragraph (b) by entering into a written agreement under which another party (such as a third-party administrator or health care claims clearinghouse) will provide the information required by this paragraph (b) in compliance with this section. Notwithstanding the preceding sentence, if a group health plan or health insurance issuer chooses to enter into such an agreement and the party with which it contracts fails to provide the information in compliance with this paragraph (b), the plan or issuer violates the transparency disclosure requirements of this paragraph (b).
(iii) Aggregation permitted for out-of-network allowed amounts. Nothing in this section prohibits a group health plan or health insurance issuer from satisfying the disclosure requirement described in paragraph (b)(1)(ii) of this section by disclosing out-of-network allowed amounts made available by, or otherwise obtained from, an issuer, a service provider, or other party with which the plan or issuer has entered into a written agreement to provide the information, provided the minimum claim threshold described in paragraph (b)(1)(ii)(C) of this section is independently met for each item or service and for each plan or coverage included in an aggregated Allowed Amount File. Under such circumstances, health insurance issuers, service providers, or other parties with which the group health plan or issuer has contracted may aggregate out-of-network allowed amounts for more than one plan or insurance policy or contract. Additionally, nothing in this section prevents the Allowed Amount File from being hosted on a third-party website or prevents a plan administrator or issuer from contracting with a third party to post the file. However, if a plan or issuer chooses not to also host the file separately on its own website, it must provide a link on its own public website to the location where the file is made publicly available.
(c) Applicability. (1) The provisions of this section apply for plan years beginning on or after January 1, 2022.
(2) As provided under § 54.9815-1251, this section does not apply to grandfathered health plans. This section also does not apply to health reimbursement arrangements or other account-based group health plans as defined in § 54.9815-2711(d)(6) or short term limited duration insurance as defined in § 54.9801-2.
(3) Nothing in this section alters or otherwise affects a group health plan's or health insurance issuer's duty to comply with requirements under other applicable state or Federal laws, including those governing the accessibility, privacy, or security of information required to be disclosed under this section, or those governing the ability of properly authorized representatives to access participant, or beneficiary information held by plans and issuers.
(4) A group health plan or health insurance issuer will not fail to comply with this section solely because it, acting in good faith and with reasonable diligence, makes an error or omission in a disclosure required under paragraph (b) of this section, provided that the plan or issuer corrects the information as soon as practicable.
(5) A group health plan or health insurance issuer will not fail to comply with this section solely because, despite acting in good faith and with reasonable diligence, its internet website is temporarily inaccessible, provided that the plan or issuer makes the information available as soon as practicable.
(6) To the extent compliance with this section requires a group health plan or health insurance issuer to obtain information from any other entity, the plan or issuer will not fail to comply with this section because it relied in good faith on information from the other entity, unless the plan or issuer knows, or reasonably should have known, that the information is incomplete or inaccurate.
(d) Severability. Any provision of this section held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, shall be severable from this section and shall not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.
[T.D. 9922, 85 FR 72295, Nov. 12, 2020]
§ 54.9815-2719 Internal claims and appeals and external review processes.
(a) Scope and definitions-(1) Scope. This section sets forth requirements with respect to internal claims and appeals and external review processes for group health plans and health insurance issuers that are not grandfathered health plans under § 54.9815-1251. Paragraph (b) of this section provides requirements for internal claims and appeals processes. Paragraph (c) of this section sets forth rules governing the applicability of State external review processes. Paragraph (d) of this section sets forth a Federal external review process for plans and issuers not subject to an applicable State external review process. Paragraph (e) of this section prescribes requirements for ensuring that notices required to be provided under this section are provided in a culturally and linguistically appropriate manner. Paragraph (f) of this section describes the authority of the Secretary to deem certain external review processes in existence on March 23, 2010 as in compliance with paragraph (c) or (d) of this section.
(2) Definitions. For purposes of this section, the following definitions apply—
(i) Adverse benefit determination. An adverse benefit determination means an adverse benefit determination as defined in 29 CFR 2560.503-1, as well as any rescission of coverage, as described in § 54.9815-2712(a)(2) (whether or not, in connection with the rescission, there is an adverse effect on any particular benefit at that time).
(ii) Appeal (or internal appeal). An appeal or internal appeal means review by a plan or issuer of an adverse benefit determination, as required in paragraph (b) of this section.
(iii) Claimant. Claimant means an individual who makes a claim under this section. For purposes of this section, references to claimant include a claimant's authorized representative.
(iv) External review. External review means a review of an adverse benefit determination (including a final internal adverse benefit determination) conducted pursuant to an applicable State external review process described in paragraph (c) of this section or the Federal external review process of paragraph (d) of this section.
(v) Final internal adverse benefit determination. A final internal adverse benefit determination means an adverse benefit determination that has been upheld by a plan or issuer at the completion of the internal appeals process applicable under paragraph (b) of this section (or an adverse benefit determination with respect to which the internal appeals process has been exhausted under the deemed exhaustion rules of paragraph (b)(2)(ii)(F) of this section).
(vi) Final external review decision. A final external review decision means a determination by an independent review organization at the conclusion of an external review.
(vii) Independent review organization (or IRO). An independent review organization (or IRO) means an entity that conducts independent external reviews of adverse benefit determinations and final internal adverse benefit determinations pursuant to paragraph (c) or (d) of this section.
(viii) NAIC Uniform Model Act. The NAIC Uniform Model Act means the Uniform Health Carrier External Review Model Act promulgated by the National Association of Insurance Commissioners in place on July 23, 2010.
(b) Internal claims and appeals process—(1) In general. A group health plan and a health insurance issuer offering group health insurance coverage must implement an effective internal claims and appeals process, as described in this paragraph (b).
(2) Requirements for group health plans and group health insurance issuers. A group health plan and a health insurance issuer offering group health insurance coverage must comply with all the requirements of this paragraph (b)(2). In the case of health insurance coverage offered in connection with a group health plan, if either the plan or the issuer complies with the internal claims and appeals process of this paragraph (b)(2), then the obligation to comply with this paragraph (b)(2) is satisfied for both the plan and the issuer with respect to the health insurance coverage.
(i) Minimum internal claims and appeals standards. A group health plan and a health insurance issuer offering group health insurance coverage must comply with all the requirements applicable to group health plans under 29 CFR 2560.503-1, except to the extent those requirements are modified by paragraph (b)(2)(ii) of this section. Accordingly, under this paragraph (b), with respect to health insurance coverage offered in connection with a group health plan, the group health insurance issuer is subject to the requirements in 29 CFR 2560.503-1 to the same extent as the group health plan.
(ii) Additional standards. In addition to the requirements in paragraph (b)(2)(i) of this section, the internal claims and appeals processes of a group health plan and a health insurance issuer offering group health insurance coverage must meet the requirements of this paragraph (b)(2)(ii).
(A) Clarification of meaning of adverse benefit determination. For purposes of this paragraph (b)(2), an “adverse benefit determination” includes an adverse benefit determination as defined in paragraph (a)(2)(i) of this section. Accordingly, in complying with 29 CFR 2560.503-1, as well as the other provisions of this paragraph (b)(2), a plan or issuer must treat a rescission of coverage (whether or not the rescission has an adverse effect on any particular benefit at that time) as an adverse benefit determination. (Rescissions of coverage are subject to the requirements of § 54.9815-2712.)
(B) Expedited notification of benefit determinations involving urgent care. The requirements of 29 CFR 2560.503-1(f)(2)(i) (which generally provide, among other things, in the case of urgent care claims for notification of the plan's benefit determination (whether adverse or not) as soon as possible, taking into account the medical exigencies, but not later than 72 hours after the receipt of the claim) continue to apply to the plan and issuer. For purposes of this paragraph (b)(2)(ii)(B), a claim involving urgent care has the meaning given in 29 CFR 2560.503-1(m)(1), as determined by the attending provider, and the plan or issuer shall defer to such determination of the attending provider.
(C) Full and fair review. A plan and issuer must allow a claimant to review the claim file and to present evidence and testimony as part of the internal claims and appeals process. Specifically, in addition to complying with the requirements of 29 CFR 2560.503-1(h)(2)—
(1) The plan or issuer must provide the claimant, free of charge, with any new or additional evidence considered, relied upon, or generated by the plan or issuer (or at the direction of the plan or issuer) in connection with the claim; such evidence must be provided as soon as possible and sufficiently in advance of the date on which the notice of final internal adverse benefit determination is required to be provided under 29 CFR 2560.503-1(i) to give the claimant a reasonable opportunity to respond prior to that date; and
(2) Before the plan or issuer can issue a final internal adverse benefit determination based on a new or additional rationale, the claimant must be provided, free of charge, with the rationale; the rationale must be provided as soon as possible and sufficiently in advance of the date on which the notice of final internal adverse benefit determination is required to be provided under 29 CFR 2560.503-1(i) to give the claimant a reasonable opportunity to respond prior to that date. Notwithstanding the rules of 29 CFR 2560.503-1(i), if the new or additional evidence is received so late that it would be impossible to provide it to the claimant in time for the claimant to have a reasonable opportunity to respond, the period for providing a notice of final internal adverse benefit determination is tolled until such time as the claimant has a reasonable opportunity to respond. After the claimant responds, or has a reasonable opportunity to respond but fails to do so, the plan administrator shall notify the claimant of the plan's benefit determination as soon as a plan acting in a reasonable and prompt fashion can provide the notice, taking into account the medical exigencies.
(D) Avoiding conflicts of interest. In addition to the requirements of 29 CFR 2560.503-1(b) and (h) regarding full and fair review, the plan and issuer must ensure that all claims and appeals are adjudicated in a manner designed to ensure the independence and impartiality of the persons involved in making the decision. Accordingly, decisions regarding hiring, compensation, termination, promotion, or other similar matters with respect to any individual (such as a claims adjudicator or medical expert) must not be made based upon the likelihood that the individual will support the denial of benefits.
(E) Notice. A plan and issuer must provide notice to individuals, in a culturally and linguistically appropriate manner (as described in paragraph (e) of this section) that complies with the requirements of 29 CFR 2560.503-1(g) and (j). The plan and issuer must also comply with the additional requirements of this paragraph (b)(2)(ii)(E).
(1) The plan and issuer must ensure that any notice of adverse benefit determination or final internal adverse benefit determination includes information sufficient to identify the claim involved (including the date of service, the health care provider, the claim amount (if applicable), and a statement describing the availability, upon request, of the diagnosis code and its corresponding meaning, and the treatment code and its corresponding meaning).
(2) The plan and issuer must provide to participants and beneficiaries, as soon as practicable, upon request, the diagnosis code and its corresponding meaning, and the treatment code and its corresponding meaning, associated with any adverse benefit determination or final internal adverse benefit determination. The plan or issuer must not consider a request for such diagnosis and treatment information, in itself, to be a request for an internal appeal under this paragraph (b) or an external review under paragraphs (c) and (d) of this section.
(3) The plan and issuer must ensure that the reason or reasons for the adverse benefit determination or final internal adverse benefit determination includes the denial code and its corresponding meaning, as well as a description of the plan's or issuer's standard, if any, that was used in denying the claim. In the case of a notice of final internal adverse benefit determination, this description must include a discussion of the decision.
(4) The plan and issuer must provide a description of available internal appeals and external review processes, including information regarding how to initiate an appeal.
(5) The plan and issuer must disclose the availability of, and contact information for, any applicable office of health insurance consumer assistance or ombudsman established under PHS Act section 2793 to assist individuals with the internal claims and appeals and external review processes.
(F) Deemed exhaustion of internal claims and appeals processes—(1) In the case of a plan or issuer that fails to strictly adhere to all the requirements of this paragraph (b)(2) with respect to a claim, the claimant is deemed to have exhausted the internal claims and appeals process of this paragraph (b), except as provided in paragraph (b)(2)(ii)(F)(2) of this section. Accordingly the claimant may initiate an external review under paragraph (c) or (d) of this section, as applicable. The claimant is also entitled to pursue any available remedies under section 502(a) of ERISA or under State law, as applicable, on the basis that the plan or issuer has failed to provide a reasonable internal claims and appeals process that would yield a decision on the merits of the claim. If a claimant chooses to pursue remedies under section 502(a) of ERISA under such circumstances, the claim or appeal is deemed denied on review without the exercise of discretion by an appropriate fiduciary.
(2) Notwithstanding paragraph (b)(2)(ii)(F)(1) of this section, the internal claims and appeals process of this paragraph (b) will not be deemed exhausted based on de minimis violations that do not cause, and are not likely to cause, prejudice or harm to the claimant so long as the plan or issuer demonstrates that the violation was for good cause or due to matters beyond the control of the plan or issuer and that the violation occurred in the context of an ongoing, good faith exchange of information between the plan and the claimant. This exception is not available if the violation is part of a pattern or practice of violations by the plan or issuer. The claimant may request a written explanation of the violation from the plan or issuer, and the plan or issuer must provide such explanation within 10 days, including a specific description of its bases, if any, for asserting that the violation should not cause the internal claims and appeals process of this paragraph (b) to be deemed exhausted. If an external reviewer or a court rejects the claimant's request for immediate review under paragraph (b)(2)(ii)(F)(1) of this section on the basis that the plan met the standards for the exception under this paragraph (b)(2)(ii)(F)(2), the claimant has the right to resubmit and pursue the internal appeal of the claim. In such a case, within a reasonable time after the external reviewer or court rejects the claim for immediate review (not to exceed 10 days), the plan shall provide the claimant with notice of the opportunity to resubmit and pursue the internal appeal of the claim. Time periods for re-filing the claim shall begin to run upon claimant's receipt of such notice.
(iii) Requirement to provide continued coverage pending the outcome of an appeal. A plan and issuer subject to the requirements of this paragraph (b)(2) are required to provide continued coverage pending the outcome of an appeal. For this purpose, the plan and issuer must comply with the requirements of 29 CFR 2560.503-1(f)(2)(ii), which generally provides that benefits for an ongoing course of treatment cannot be reduced or terminated without providing advance notice and an opportunity for advance review.
(c) State standards for external review—(1) In general. (i) If a State external review process that applies to and is binding on a health insurance issuer offering group health insurance coverage includes at a minimum the consumer protections in the NAIC Uniform Model Act, then the issuer must comply with the applicable State external review process and is not required to comply with the Federal external review process of paragraph (d) of this section. In such a case, to the extent that benefits under a group health plan are provided through health insurance coverage, the group health plan is not required to comply with either this paragraph (c) or the Federal external review process of paragraph (d) of this section.
(ii) To the extent that a group health plan provides benefits other than through health insurance coverage (that is, the plan is self-insured) and is subject to a State external review process that applies to and is binding on the plan (for example, is not preempted by ERISA) and the State external review process includes at a minimum the consumer protections in the NAIC Uniform Model Act, then the plan must comply with the applicable State external review process and is not required to comply with the Federal external review process of paragraph (d) of this section. Where a self-insured plan is not subject to an applicable State external review process, but the State has chosen to expand access to its process for plans that are not subject to the applicable State laws, the plan may choose to comply with either the applicable State external review process or the Federal external review process of paragraph (d) of this section.
(iii) If a plan or issuer is not required under paragraph (c)(1)(i) or (c)(1)(ii) of this section to comply with the requirements of this paragraph (c), then the plan or issuer must comply with the Federal external review process of paragraph (d) of this section, except to the extent, in the case of a plan, the plan is not required under paragraph (c)(1)(i) of this section to comply with paragraph (d) of this section.
(2) Minimum standards for State external review processes. An applicable State external review process must meet all the minimum consumer protections in this paragraph (c)(2). The Department of Health and Human Services will determine whether State external review processes meet these requirements.
(i) The State process must provide for the external review of adverse benefit determinations (including final internal adverse benefit determinations) by issuers (or, if applicable, plans) that are based on the issuer's (or plan's) requirements for medical necessity, appropriateness, health care setting, level of care, or effectiveness of a covered benefit.
(ii) The State process must require issuers (or, if applicable, plans) to provide effective written notice to claimants of their rights in connection with an external review for an adverse benefit determination.
(iii) To the extent the State process requires exhaustion of an internal claims and appeals process, exhaustion must be unnecessary where the issuer (or, if applicable, the plan) has waived the requirement; the issuer (or the plan) is considered to have exhausted the internal claims and appeals process under applicable law (including by failing to comply with any of the requirements for the internal appeal process, as outlined in paragraph (b)(2) of this section); or the claimant has applied for expedited external review at the same time as applying for an expedited internal appeal.
(iv) The State process provides that the issuer (or, if applicable, the plan) against which a request for external review is filed must pay the cost of the IRO for conducting the external review. Notwithstanding this requirement, a State external review process that expressly authorizes, as of November 18, 2015, a nominal filing fee may continue to permit such fees. For this purpose, to be considered nominal, a filing fee must not exceed $25; it must be refunded to the claimant if the adverse benefit determination (or final internal adverse benefit determination) is reversed through external review; it must be waived if payment of the fee would impose an undue financial hardship; and the annual limit on filing fees for any claimant within a single plan year must not exceed $75.
(v) The State process may not impose a restriction on the minimum dollar amount of a claim for it to be eligible for external review. Thus, the process may not impose, for example, a $500 minimum claims threshold.
(vi) The State process must allow at least four months after the receipt of a notice of an adverse benefit determination or final internal adverse benefit determination for a request for an external review to be filed.
(vii) The State process must provide that IROs will be assigned on a random basis or another method of assignment that assures the independence and impartiality of the assignment process (such as rotational assignment) by a State or independent entity, and in no event selected by the issuer, plan, or the individual.
(viii) The State process must provide for maintenance of a list of approved IROs qualified to conduct the external review based on the nature of the health care service that is the subject of the review. The State process must provide for approval only of IROs that are accredited by a nationally recognized private accrediting organization.
(ix) The State process must provide that any approved IRO has no conflicts of interest that will influence its independence. Thus, the IRO may not own or control, or be owned or controlled by a health insurance issuer, a group health plan, the sponsor of a group health plan, a trade association of plans or issuers, or a trade association of health care providers. The State process must further provide that the IRO and the clinical reviewer assigned to conduct an external review may not have a material professional, familial, or financial conflict of interest with the issuer or plan that is the subject of the external review; the claimant (and any related parties to the claimant) whose treatment is the subject of the external review; any officer, director, or management employee of the issuer; the plan administrator, plan fiduciaries, or plan employees; the health care provider, the health care provider's group, or practice association recommending the treatment that is subject to the external review; the facility at which the recommended treatment would be provided; or the developer or manufacturer of the principal drug, device, procedure, or other therapy being recommended.
(x) The State process allows the claimant at least five business days to submit to the IRO in writing additional information that the IRO must consider when conducting the external review, and it requires that the claimant is notified of the right to do so. The process must also require that any additional information submitted by the claimant to the IRO must be forwarded to the issuer (or, if applicable, the plan) within one business day of receipt by the IRO.
(xi) The State process must provide that the decision is binding on the plan or issuer, as well as the claimant except to the extent the other remedies are available under State or Federal law, and except that the requirement that the decision be binding shall not preclude the plan or issuer from making payment on the claim or otherwise providing benefits at any time, including after a final external review decision that denies the claim or otherwise fails to require such payment or benefits. For this purpose, the plan or issuer must provide benefits (including by making payment on the claim) pursuant to the final external review decision without delay, regardless of whether the plan or issuer intends to seek judicial review of the external review decision and unless or until there is a judicial decision otherwise.
(xii) The State process must require, for standard external review, that the IRO provide written notice to the issuer (or, if applicable, the plan) and the claimant of its decision to uphold or reverse the adverse benefit determination (or final internal adverse benefit determination) within no more than 45 days after the receipt of the request for external review by the IRO.
(xiii) The State process must provide for an expedited external review if the adverse benefit determination (or final internal adverse benefit determination) concerns an admission, availability of care, continued stay, or health care service for which the claimant received emergency services, but has not been discharged from a facility; or involves a medical condition for which the standard external review time frame would seriously jeopardize the life or health of the claimant or jeopardize the claimant's ability to regain maximum function. As expeditiously as possible but within no more than 72 hours after the receipt of the request for expedited external review by the IRO, the IRO must make its decision to uphold or reverse the adverse benefit determination (or final internal adverse benefit determination) and notify the claimant and the issuer (or, if applicable, the plan) of the determination. If the notice is not in writing, the IRO must provide written confirmation of the decision within 48 hours after the date of the notice of the decision.
(xiv) The State process must require that issuers (or, if applicable, plans) include a description of the external review process in or attached to the summary plan description, policy, certificate, membership booklet, outline of coverage, or other evidence of coverage it provides to participants, beneficiaries, or enrollees, substantially similar to what is set forth in section 17 of the NAIC Uniform Model Act.
(xv) The State process must require that IROs maintain written records and make them available upon request to the State, substantially similar to what is set forth in section 15 of the NAIC Uniform Model Act.
(xvi) The State process follows procedures for external review of adverse benefit determinations (or final internal adverse benefit determinations) involving experimental or investigational treatment, substantially similar to what is set forth in section 10 of the NAIC Uniform Model Act.
(3) Transition period for external review processes—(i) Through December 31, 2017, an applicable State external review process applicable to a health insurance issuer or group health plan is considered to meet the requirements of PHS Act section 2719(b). Accordingly, through December 31, 2017, an applicable State external review process will be considered binding on the issuer or plan (in lieu of the requirements of the Federal external review process). If there is no applicable State external review process, the issuer or plan is required to comply with the requirements of the Federal external review process in paragraph (d) of this section.
(ii) An applicable State external review process must apply for final internal adverse benefit determinations (or, in the case of simultaneous internal appeal and external review, adverse benefit determinations) provided on or after January 1, 2018. The Federal external review process will apply to such internal adverse benefit determinations unless the Department of Health and Human Services determines that a State law meets all the minimum standards of paragraph (c)(2) of this section. Through December 31, 2017, a State external review process applicable to a health insurance issuer or group health plan may be considered to meet the minimum standards of paragraph (c)(2) of this section, if it meets the temporary standards established by the Secretary in guidance for a process similar to the NAIC Uniform Model Act.
(d) Federal external review process. A plan or issuer not subject to an applicable State external review process under paragraph (c) of this section must provide an effective Federal external review process in accordance with this paragraph (d) (except to the extent, in the case of a plan, the plan is described in paragraph (c)(1)(i) of this section as not having to comply with this paragraph (d)). In the case of health insurance coverage offered in connection with a group health plan, if either the plan or the issuer complies with the Federal external review process of this paragraph (d), then the obligation to comply with this paragraph (d) is satisfied for both the plan and the issuer with respect to the health insurance coverage. A Multi State Plan or MSP, as defined by 45 CFR 800.20, must provide an effective Federal external review process in accordance with this paragraph (d). In such circumstances, the requirement to provide external review under this paragraph (d) is satisfied when a Multi State Plan or MSP complies with standards established by the Office of Personnel Management.
(1) Scope—(i) In general. The Federal external review process established pursuant to this paragraph (d) applies to the following:
(A) An adverse benefit determination (including a final internal adverse benefit determination) by a plan or issuer that involves medical judgment (including, but not limited to, those based on the plan's or issuer's requirements for medical necessity, appropriateness, health care setting, level of care, or effectiveness of a covered benefit; its determination that a treatment is experimental or investigational; its determination whether a participant or beneficiary is entitled to a reasonable alternative standard for a reward under a wellness program; or its determination whether a plan or issuer is complying with the nonquantitative treatment limitation provisions of Code section 9812 and § 54.9812, which generally require, among other things, parity in the application of medical management techniques), as determined by the external reviewer. (A denial, reduction, termination, or a failure to provide payment for a benefit based on a determination that a participant or beneficiary fails to meet the requirements for eligibility under the terms of a group health plan or health insurance coverage is not eligible for the Federal external review process under this paragraph (d)); and
(B) A rescission of coverage (whether or not the rescission has any effect on any particular benefit at that time).
(ii) Examples. The rules of paragraph (d)(1)(i) of this section are illustrated by the following examples:
Example 1. (i) Facts. A group health plan provides coverage for 30 physical therapy visits generally. After the 30th visit, coverage is provided only if the service is preauthorized pursuant to an approved treatment plan that takes into account medical necessity using the plan's definition of the term. Individual A seeks coverage for a 31st physical therapy visit. A's health care provider submits a treatment plan for approval, but it is not approved by the plan, so coverage for the 31st visit is not preauthorized. With respect to the 31st visit, A receives a notice of final internal adverse benefit determination stating that the maximum visit limit is exceeded.
(ii) Conclusion. In this Example 1, the plan's denial of benefits is based on medical necessity and involves medical judgment. Accordingly, the claim is eligible for external review under paragraph (d)(1)(i) of this section. Moreover, the plan's notification of final internal adverse benefit determination is inadequate under paragraphs (b)(2)(i) and (b)(2)(ii)(E)(3) of this section because it fails to make clear that the plan will pay for more than 30 visits if the service is preauthorized pursuant to an approved treatment plan that takes into account medical necessity using the plan's definition of the term. Accordingly, the notice of final internal adverse benefit determination should refer to the plan provision governing the 31st visit and should describe the plan's standard for medical necessity, as well as how the treatment fails to meet the plan's standard.
Example 2. (i) Facts. A group health plan does not provide coverage for services provided out of network, unless the service cannot effectively be provided in network. Individual B seeks coverage for a specialized medical procedure from an out-of-network provider because B believes that the procedure cannot be effectively provided in network. B receives a notice of final internal adverse benefit determination stating that the claim is denied because the provider is out-of-network.
(ii) Conclusion. In this Example 2, the plan's denial of benefits is based on whether a service can effectively be provided in network and, therefore, involves medical judgment. Accordingly, the claim is eligible for external review under paragraph (d)(1)(i) of this section. Moreover, the plan's notice of final internal adverse benefit determination is inadequate under paragraphs (b)(2)(i) and (b)(2)(ii)(E)(3) of this section because the plan does provide benefits for services on an out-of-network basis if the services cannot effectively be provided in network. Accordingly, the notice of final internal adverse benefit determination is required to refer to the exception to the out-of-network exclusion and should describe the plan's standards for determining effectiveness of services, as well as how services available to the claimant within the plan's network meet the plan's standard for effectiveness of services.
(2) External review process standards. The Federal external review process established pursuant to this paragraph (d) is considered similar to the process set forth in the NAIC Uniform Model Act and, therefore satisfies the requirements of paragraph (d)(2), if such process provides the following.
(i) Request for external review. A group health plan or health insurance issuer must allow a claimant to file a request for an external review with the plan or issuer if the request is filed within four months after the date of receipt of a notice of an adverse benefit determination or final internal adverse benefit determination. If there is no corresponding date four months after the date of receipt of such a notice, then the request must be filed by the first day of the fifth month following the receipt of the notice. For example, if the date of receipt of the notice is October 30, because there is no February 30, the request must be filed by March 1. If the last filing date would fall on a Saturday, Sunday, or Federal holiday, the last filing date is extended to the next day that is not a Saturday, Sunday, or Federal holiday.
(ii) Preliminary review—(A) In general. Within five business days following the date of receipt of the external review request, the group health plan or health insurance issuer must complete a preliminary review of the request to determine whether:
(1) The claimant is or was covered under the plan or coverage at the time the health care item or service was requested or, in the case of a retrospective review, was covered under the plan or coverage at the time the health care item or service was provided;
(2) The adverse benefit determination or the final adverse benefit determination does not relate to the claimant's failure to meet the requirements for eligibility under the terms of the group health plan or health insurance coverage (e.g., worker classification or similar determination);
(3) The claimant has exhausted the plan's or issuer's internal appeal process unless the claimant is not required to exhaust the internal appeals process under paragraph (b)(1) of this section; and
(4) The claimant has provided all the information and forms required to process an external review.
(B) Within one business day after completion of the preliminary review, the plan or issuer must issue a notification in writing to the claimant. If the request is complete but not eligible for external review, such notification must include the reasons for its ineligibility and current contact information, including the phone number, for the Employee Benefits Security Administration. If the request is not complete, such notification must describe the information or materials needed to make the request complete, and the plan or issuer must allow a claimant to perfect the request for external review within the four-month filing period or within the 48 hour period following the receipt of the notification, whichever is later.
(iii) Referral to Independent Review Organization—(A) In general. The group health plan or health insurance issuer must assign an IRO that is accredited by URAC or by similar nationally-recognized accrediting organization to conduct the external review. The IRO referral process must provide for the following:
(1) The plan or issuer must ensure that the IRO process is not biased and ensures independence;
(2) The plan or issuer must contract with at least three (3) IROs for assignments under the plan or coverage and rotate claims assignments among them (or incorporate other independent, unbiased methods for selection of IROs, such as random selection); and
(3) The IRO may not be eligible for any financial incentives based on the likelihood that the IRO will support the denial of benefits.
(4) The IRO process may not impose any costs, including filing fees, on the claimant requesting the external review.
(B) IRO contracts. A group health plan or health insurance issuer must include the following standards in the contract between the plan or issuer and the IRO:
(1) The assigned IRO will utilize legal experts where appropriate to make coverage determinations under the plan or coverage.
(2) The assigned IRO will timely notify a claimant in writing whether the request is eligible for external review. This notice will include a statement that the claimant may submit in writing to the assigned IRO, within ten business days following the date of receipt of the notice, additional information. This additional information must be considered by the IRO when conducting the external review. The IRO is not required to, but may, accept and consider additional information submitted after ten business days.
(3) Within five business days after the date of assignment of the IRO, the plan or issuer must provide to the assigned IRO the documents and any information considered in making the adverse benefit determination or final internal adverse benefit determination. Failure by the plan or issuer to timely provide the documents and information must not delay the conduct of the external review. If the plan or issuer fails to timely provide the documents and information, the assigned IRO may terminate the external review and make a decision to reverse the adverse benefit determination or final internal adverse benefit determination. Within one business day after making the decision, the IRO must notify the claimant and the plan.
(4) Upon receipt of any information submitted by the claimant, the assigned IRO must within one business day forward the information to the plan or issuer. Upon receipt of any such information, the plan or issuer may reconsider its adverse benefit determination or final internal adverse benefit determination that is the subject of the external review. Reconsideration by the plan or issuer must not delay the external review. The external review may be terminated as a result of the reconsideration only if the plan decides, upon completion of its reconsideration, to reverse its adverse benefit determination or final internal adverse benefit determination and provide coverage or payment. Within one business day after making such a decision, the plan must provide written notice of its decision to the claimant and the assigned IRO. The assigned IRO must terminate the external review upon receipt of the notice from the plan or issuer.
(5) The IRO will review all of the information and documents timely received. In reaching a decision, the assigned IRO will review the claim de novo and not be bound by any decisions or conclusions reached during the plan's or issuer's internal claims and appeals process applicable under paragraph (b). In addition to the documents and information provided, the assigned IRO, to the extent the information or documents are available and the IRO considers them appropriate, will consider the following in reaching a decision:
(i) The claimant's medical records;
(ii) The attending health care professional's recommendation;
(iii) Reports from appropriate health care professionals and other documents submitted by the plan or issuer, claimant, or the claimant's treating provider;
(iv) The terms of the claimant's plan or coverage to ensure that the IRO's decision is not contrary to the terms of the plan or coverage, unless the terms are inconsistent with applicable law;
(v) Appropriate practice guidelines, which must include applicable evidence-based standards and may include any other practice guidelines developed by the Federal government, national or professional medical societies, boards, and associations;
(vi) Any applicable clinical review criteria developed and used by the plan or issuer, unless the criteria are inconsistent with the terms of the plan or coverage or with applicable law; and
(vii) To the extent the final IRO decision maker is different from the IRO's clinical reviewer, the opinion of such clinical reviewer, after considering information described in this notice, to the extent the information or documents are available and the clinical reviewer or reviewers consider such information or documents appropriate.
(6) The assigned IRO must provide written notice of the final external review decision within 45 days after the IRO receives the request for the external review. The IRO must deliver the notice of the final external review decision to the claimant and the plan or issuer.
(7) The assigned IRO's written notice of the final external review decision must contain the following:
(i) A general description of the reason for the request for external review, including information sufficient to identify the claim (including the date or dates of service, the health care provider, the claim amount (if applicable), and a statement describing the availability, upon request, of the diagnosis code and its corresponding meaning, the treatment code and its corresponding meaning, and the reason for the plan's or issuer's denial);
(ii) The date the IRO received the assignment to conduct the external review and the date of the IRO decision;
(iii) References to the evidence or documentation, including the specific coverage provisions and evidence-based standards, considered in reaching its decision;
(iv) A discussion of the principal reason or reasons for its decision, including the rationale for its decision and any evidence-based standards that were relied on in making its decision;
(v) A statement that the IRO's determination is binding except to the extent that other remedies may be available under State or Federal law to either the group health plan or health insurance issuer or to the claimant, or to the extent the health plan or health insurance issuer voluntarily makes payment on the claim or otherwise provides benefits at any time, including after a final external review decision that denies the claim or otherwise fails to require such payment or benefits;
(vi) A statement that judicial review may be available to the claimant; and
(vii) Current contact information, including phone number, for any applicable office of health insurance consumer assistance or ombudsman established under PHS Act section 2793.
(viii) After a final external review decision, the IRO must maintain records of all claims and notices associated with the external review process for six years. An IRO must make such records available for examination by the claimant, plan, issuer, or State or Federal oversight agency upon request, except where such disclosure would violate State or Federal privacy laws.
(iv) Reversal of plan's or issuer's decision. Upon receipt of a notice of a final external review decision reversing the adverse benefit determination or final adverse benefit determination, the plan or issuer immediately must provide coverage or payment (including immediately authorizing care or immediately paying benefits) for the claim.
(3) Expedited external review. A group health plan or health insurance issuer must comply with the following standards with respect to an expedited external review:
(i) Request for external review. A group health plan or health insurance issuer must allow a claimant to make a request for an expedited external review with the plan or issuer at the time the claimant receives:
(A) An adverse benefit determination if the adverse benefit determination involves a medical condition of the claimant for which the timeframe for completion of an expedited internal appeal under paragraph (b) of this section would seriously jeopardize the life or health of the claimant or would jeopardize the claimant's ability to regain maximum function and the claimant has filed a request for an expedited internal appeal; or
(B) A final internal adverse benefit determination, if the claimant has a medical condition where the timeframe for completion of a standard external review would seriously jeopardize the life or health of the claimant or would jeopardize the claimant's ability to regain maximum function, or if the final internal adverse benefit determination concerns an admission, availability of care, continued stay, or health care item or service for which the claimant received emergency services, but has not been discharged from the facility.
(ii) Preliminary review. Immediately upon receipt of the request for expedited external review, the plan or issuer must determine whether the request meets the reviewability requirements set forth in paragraph (d)(2)(ii) of this section for standard external review. The plan or issuer must immediately send a notice that meets the requirements set forth in paragraph (d)(2)(ii)(B) for standard review to the claimant of its eligibility determination.
(iii) Referral to independent review organization. (A) Upon a determination that a request is eligible for expedited external review following the preliminary review, the plan or issuer will assign an IRO pursuant to the requirements set forth in paragraph (d)(2)(iii) of this section for standard review. The plan or issuer must provide or transmit all necessary documents and information considered in making the adverse benefit determination or final internal adverse benefit determination to the assigned IRO electronically or by telephone or facsimile or any other available expeditious method.
(B) The assigned IRO, to the extent the information or documents are available and the IRO considers them appropriate, must consider the information or documents described above under the procedures for standard review. In reaching a decision, the assigned IRO must review the claim de novo and is not bound by any decisions or conclusions reached during the plan's or issuer's internal claims and appeals process.
(iv) Notice of final external review decision. The plan's or issuer's contract with the assigned IRO must require the IRO to provide notice of the final external review decision, in accordance with the requirements set forth in paragraph (d)(2)(iii)(B) of this section, as expeditiously as the claimant's medical condition or circumstances require, but in no event more than 72 hours after the IRO receives the request for an expedited external review. If the notice is not in writing, within 48 hours after the date of providing that notice, the assigned IRO must provide written confirmation of the decision to the claimant and the plan or issuer.
(4) Alternative, Federally-administered external review process. Insured coverage not subject to an applicable State external review process under paragraph (c) of this section may elect to use either the Federal external review process, as set forth under paragraph (d) of this section or the Federally-administered external review process, as set forth by HHS in guidance. In such circumstances, the requirement to provide external review under this paragraph (d) is satisfied.
(e) Form and manner of notice—(1) In general. For purposes of this section, a group health plan and a health insurance issuer offering group health insurance coverage are considered to provide relevant notices in a culturally and linguistically appropriate manner if the plan or issuer meets all the requirements of paragraph (e)(2) of this section with respect to the applicable non-English languages described in paragraph (e)(3) of this section.
(2) Requirements. (i) The plan or issuer must provide oral language services (such as a telephone customer assistance hotline) that includes answering questions in any applicable non-English language and providing assistance with filing claims and appeals (including external review) in any applicable non-English language;
(ii) The plan or issuer must provide, upon request, a notice in any applicable non-English language; and
(iii) The plan or issuer must include in the English versions of all notices, a statement prominently displayed in any applicable non-English language clearly indicating how to access the language services provided by the plan or issuer.
(3) Applicable non-English language. With respect to an address in any United States county to which a notice is sent, a non-English language is an applicable non-English language if ten percent or more of the population residing in the county is literate only in the same non-English language, as determined in guidance published by the Secretary.
(f) Secretarial authority. The Secretary may determine that the external review process of a group health plan or health insurance issuer, in operation as of March 23, 2010, is considered in compliance with the applicable process established under paragraph (c) or (d) of this section if it substantially meets the requirements of paragraph (c) or (d) of this section, as applicable.
(g) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2017. Until the applicability date for this regulation, plans and issuers are required to continue to comply with the interim final regulations promulgated by the Department of Labor at 29 CFR part 2590, contained in the 29 CFR, parts 1927 to end, edition revised as of July 1, 2015.
[T.D. 9744, 80 FR 72246, Nov. 18, 2015]
§ 54.9815-2719T Internal claims and appeals and external review processes (temporary).
(a) Scope and definitions—(1) Scope—(i) In general. This section sets forth requirements with respect to internal claims and appeals and external review processes for group health plans and health insurance issuers. Paragraph (b) of this section provides requirements for internal claims and appeals processes. Paragraph (c) of this section sets forth rules governing the applicability of State external review processes. Paragraph (d) of this section sets forth a Federal external review process for plans and issuers not subject to an applicable State external review process. Paragraph (e) of this section prescribes requirements for ensuring that notices required to be provided under this section are provided in a culturally and linguistically appropriate manner. Paragraph (f) of this section describes the authority of the Secretary to deem certain external review processes in existence on March 23, 2010, as in compliance with paragraph (c) or (d) of this section.
(ii) Application to grandfathered health plans and health insurance coverage. The provisions of this section generally do not apply to coverage offered by health insurance issuers and group health plans that are grandfathered health plans, as defined under § 54.9815-1251. However, the external review process requirements under paragraphs (c) and (d) of this section, and related notice requirements under paragraph (e) of this section, apply to grandfathered health plans or coverage with respect to adverse benefit determinations involving items and services within the scope of the requirements for out-of-network emergency services, nonemergency services performed by nonparticipating providers at participating facilities, and air ambulance services furnished by nonparticipating providers of air ambulance services under sections 9816 and 9817 and §§ 54.9816-4T through 54.9816-5T and 54.9817-1T.
(2) Definitions. For purposes of this section, the following definitions apply—
(i) Adverse benefit determination. An adverse benefit determination means an adverse benefit determination as defined in 29 CFR 2560.503-1, as well as any rescission of coverage, as described in § 54.9815-2712(a)(2) (whether or not, in connection with the rescission, there is an adverse effect on any particular benefit at that time).
(ii) Appeal (or internal appeal). An appeal or internal appeal means review by a plan or issuer of an adverse benefit determination, as required in paragraph (b) of this section.
(iii) Claimant. Claimant means an individual who makes a claim under this section. For purposes of this section, references to claimant include a claimant's authorized representative.
(iv) External review. External review means a review of an adverse benefit determination (including a final internal adverse benefit determination) conducted pursuant to an applicable State external review process described in paragraph (c) of this section or the Federal external review process of paragraph (d) of this section.
(v) Final internal adverse benefit determination. A final internal adverse benefit determination means an adverse benefit determination that has been upheld by a plan or issuer at the completion of the internal appeals process applicable under paragraph (b) of this section (or an adverse benefit determination with respect to which the internal appeals process has been exhausted under the deemed exhaustion rules of paragraph (b)(2)(ii)(F) of this section).
(vi) Final external review decision. A final external review decision means a determination by an independent review organization at the conclusion of an external review.
(vii) Independent review organization (or IRO). An independent review organization (or IRO) means an entity that conducts independent external reviews of adverse benefit determinations and final internal adverse benefit determinations pursuant to paragraph (c) or (d) of this section.
(viii) NAIC Uniform Model Act. The NAIC Uniform Model Act means the Uniform Health Carrier External Review Model Act promulgated by the National Association of Insurance Commissioners in place on July 23, 2010.
(b) Internal claims and appeals process—(1) In general. A group health plan and a health insurance issuer offering group health insurance coverage must implement an effective internal claims and appeals process, as described in this paragraph (b).
(2) Requirements for group health plans and group health insurance issuers. A group health plan and a health insurance issuer offering group health insurance coverage must comply with all the requirements of this paragraph (b)(2). In the case of health insurance coverage offered in connection with a group health plan, if either the plan or the issuer complies with the internal claims and appeals process of this paragraph (b)(2), then the obligation to comply with this paragraph (b)(2) is satisfied for both the plan and the issuer with respect to the health insurance coverage.
(i) Minimum internal claims and appeals standards. A group health plan and a health insurance issuer offering group health insurance coverage must comply with all the requirements applicable to group health plans under 29 CFR 2560.503-1, except to the extent those requirements are modified by paragraph (b)(2)(ii) of this section. Accordingly, under this paragraph (b), with respect to health insurance coverage offered in connection with a group health plan, the group health insurance issuer is subject to the requirements in 29 CFR 2560.503-1 to the same extent as the group health plan.
(ii) Additional standards. In addition to the requirements in paragraph (b)(2)(i) of this section, the internal claims and appeals processes of a group health plan and a health insurance issuer offering group health insurance coverage must meet the requirements of this paragraph (b)(2)(ii).
(A) Clarification of meaning of adverse benefit determination. For purposes of this paragraph (b)(2), an “adverse benefit determination” includes an adverse benefit determination as defined in paragraph (a)(2)(i) of this section. Accordingly, in complying with 29 CFR 2560.503-1, as well as the other provisions of this paragraph (b)(2), a plan or issuer must treat a rescission of coverage (whether or not the rescission has an adverse effect on any particular benefit at that time) as an adverse benefit determination. (Rescissions of coverage are subject to the requirements of § 54.9815-2712.)
(B) Expedited notification of benefit determinations involving urgent care. The requirements of 29 CFR 2560.503-1(f)(2)(i) (which generally provide, among other things, in the case of urgent care claims for notification of the plan's benefit determination (whether adverse or not) as soon as possible, taking into account the medical exigencies, but not later than 72 hours after the receipt of the claim) continue to apply to the plan and issuer. For purposes of this paragraph (b)(2)(ii)(B), a claim involving urgent care has the meaning given in 29 CFR 2560.503-1(m)(1), as determined by the attending provider, and the plan or issuer shall defer to such determination of the attending provider.
(C) Full and fair review. A plan and issuer must allow a claimant to review the claim file and to present evidence and testimony as part of the internal claims and appeals process. Specifically, in addition to complying with the requirements of 29 CFR 2560.503-1(h)(2)—
(1) The plan or issuer must provide the claimant, free of charge, with any new or additional evidence considered, relied upon, or generated by the plan or issuer (or at the direction of the plan or issuer) in connection with the claim; such evidence must be provided as soon as possible and sufficiently in advance of the date on which the notice of final internal adverse benefit determination is required to be provided under 29 CFR 2560.503-1(i) to give the claimant a reasonable opportunity to respond prior to that date; and
(2) Before the plan or issuer can issue a final internal adverse benefit determination based on a new or additional rationale, the claimant must be provided, free of charge, with the rationale; the rationale must be provided as soon as possible and sufficiently in advance of the date on which the notice of final internal adverse benefit determination is required to be provided under 29 CFR 2560.503-1(i) to give the claimant a reasonable opportunity to respond prior to that date. Notwithstanding the rules of 29 CFR 2560.503-1(i), if the new or additional evidence is received so late that it would be impossible to provide it to the claimant in time for the claimant to have a reasonable opportunity to respond, the period for providing a notice of final internal adverse benefit determination is tolled until such time as the claimant has a reasonable opportunity to respond. After the claimant responds, or has a reasonable opportunity to respond but fails to do so, the plan administrator shall notify the claimant of the plan's benefit determination as soon as a plan acting in a reasonable and prompt fashion can provide the notice, taking into account the medical exigencies.
(D) Avoiding conflicts of interest. In addition to the requirements of 29 CFR 2560.503-1(b) and (h) regarding full and fair review, the plan and issuer must ensure that all claims and appeals are adjudicated in a manner designed to ensure the independence and impartiality of the persons involved in making the decision. Accordingly, decisions regarding hiring, compensation, termination, promotion, or other similar matters with respect to any individual (such as a claims adjudicator or medical expert) must not be made based upon the likelihood that the individual will support the denial of benefits.
(E) Notice. A plan and issuer must provide notice to individuals, in a culturally and linguistically appropriate manner (as described in paragraph (e) of this section) that complies with the requirements of 29 CFR 2560.503-1(g) and (j). The plan and issuer must also comply with the additional requirements of this paragraph (b)(2)(ii)(E).
(1) The plan and issuer must ensure that any notice of adverse benefit determination or final internal adverse benefit determination includes information sufficient to identify the claim involved (including the date of service, the health care provider, the claim amount (if applicable), and a statement describing the availability, upon request, of the diagnosis code and its corresponding meaning, and the treatment code and its corresponding meaning).
(2) The plan and issuer must provide to participants and beneficiaries, as soon as practicable, upon request, the diagnosis code and its corresponding meaning, and the treatment code and its corresponding meaning, associated with any adverse benefit determination or final internal adverse benefit determination. The plan or issuer must not consider a request for such diagnosis and treatment information, in itself, to be a request for an internal appeal under this paragraph (b) or an external review under paragraphs (c) and (d) of this section.
(3) The plan and issuer must ensure that the reason or reasons for the adverse benefit determination or final internal adverse benefit determination includes the denial code and its corresponding meaning, as well as a description of the plan's or issuer's standard, if any, that was used in denying the claim. In the case of a notice of final internal adverse benefit determination, this description must include a discussion of the decision.
(4) The plan and issuer must provide a description of available internal appeals and external review processes, including information regarding how to initiate an appeal.
(5) The plan and issuer must disclose the availability of, and contact information for, any applicable office of health insurance consumer assistance or ombudsman established under PHS Act section 2793 to assist individuals with the internal claims and appeals and external review processes.
(F) Deemed exhaustion of internal claims and appeals processes. (1) In the case of a plan or issuer that fails to strictly adhere to all the requirements of this paragraph (b)(2) with respect to a claim, the claimant is deemed to have exhausted the internal claims and appeals process of this paragraph (b), except as provided in paragraph (b)(2)(ii)(F)(2) of this section. Accordingly the claimant may initiate an external review under paragraph (c) or (d) of this section, as applicable. The claimant is also entitled to pursue any available remedies under section 502(a) of ERISA or under State law, as applicable, on the basis that the plan or issuer has failed to provide a reasonable internal claims and appeals process that would yield a decision on the merits of the claim. If a claimant chooses to pursue remedies under section 502(a) of ERISA under such circumstances, the claim or appeal is deemed denied on review without the exercise of discretion by an appropriate fiduciary.
(2) Notwithstanding paragraph (b)(2)(ii)(F)(1) of this section, the internal claims and appeals process of this paragraph (b) will not be deemed exhausted based on de minimis violations that do not cause, and are not likely to cause, prejudice or harm to the claimant so long as the plan or issuer demonstrates that the violation was for good cause or due to matters beyond the control of the plan or issuer and that the violation occurred in the context of an ongoing, good faith exchange of information between the plan and the claimant. This exception is not available if the violation is part of a pattern or practice of violations by the plan or issuer. The claimant may request a written explanation of the violation from the plan or issuer, and the plan or issuer must provide such explanation within 10 days, including a specific description of its bases, if any, for asserting that the violation should not cause the internal claims and appeals process of this paragraph (b) to be deemed exhausted. If an external reviewer or a court rejects the claimant's request for immediate review under paragraph (b)(2)(ii)(F)(1) of this section on the basis that the plan met the standards for the exception under this paragraph (b)(2)(ii)(F)(2), the claimant has the right to resubmit and pursue the internal appeal of the claim. In such a case, within a reasonable time after the external reviewer or court rejects the claim for immediate review (not to exceed 10 days), the plan shall provide the claimant with notice of the opportunity to resubmit and pursue the internal appeal of the claim. Time periods for re-filing the claim shall begin to run upon claimant's receipt of such notice.
(iii) Requirement to provide continued coverage pending the outcome of an appeal. A plan and issuer subject to the requirements of this paragraph (b)(2) are required to provide continued coverage pending the outcome of an appeal. For this purpose, the plan and issuer must comply with the requirements of 29 CFR 2560.503-1(f)(2)(ii), which generally provides that benefits for an ongoing course of treatment cannot be reduced or terminated without providing advance notice and an opportunity for advance review.
(c) State standards for external review—(1) In general. (i) If a State external review process that applies to and is binding on a health insurance issuer offering group health insurance coverage includes at a minimum the consumer protections in the NAIC Uniform Model Act, then the issuer must comply with the applicable State external review process and is not required to comply with the Federal external review process of paragraph (d) of this section. In such a case, to the extent that benefits under a group health plan are provided through health insurance coverage, the group health plan is not required to comply with either this paragraph (c) or the Federal external review process of paragraph (d) of this section.
(ii) To the extent that a group health plan provides benefits other than through health insurance coverage (that is, the plan is self-insured) and is subject to a State external review process that applies to and is binding on the plan (for example, is not preempted by ERISA) and the State external review process includes at a minimum the consumer protections in the NAIC Uniform Model Act, then the plan must comply with the applicable State external review process and is not required to comply with the Federal external review process of paragraph (d) of this section. Where a self-insured plan is not subject to an applicable State external review process, but the State has chosen to expand access to its process for plans that are not subject to the applicable State laws, the plan may choose to comply with either the applicable State external review process or the Federal external review process of paragraph (d) of this section.
(iii) If a plan or issuer is not required under paragraph (c)(1)(i) or (ii) of this section to comply with the requirements of this paragraph (c), then the plan or issuer must comply with the Federal external review process of paragraph (d) of this section, except to the extent, in the case of a plan, the plan is not required under paragraph (c)(1)(i) of this section to comply with paragraph (d) of this section.
(2) Minimum standards for State external review processes. An applicable State external review process must meet all the minimum consumer protections in this paragraph (c)(2). The Department of Health and Human Services will determine whether State external review processes meet these requirements.
(i) The State process must provide for the external review of adverse benefit determinations (including final internal adverse benefit determinations) by issuers (or, if applicable, plans) that are based on the issuer's (or plan's) requirements for medical necessity, appropriateness, health care setting, level of care, or effectiveness of a covered benefit, as well as a consideration of whether a plan or issuer is complying with the surprise billing and cost-sharing protections under sections 9816 and 9817 and §§ 54.9816-1T through 54.9816-6T and 54.9817-1T.
(ii) The State process must require issuers (or, if applicable, plans) to provide effective written notice to claimants of their rights in connection with an external review for an adverse benefit determination.
(iii) To the extent the State process requires exhaustion of an internal claims and appeals process, exhaustion must be unnecessary where the issuer (or, if applicable, the plan) has waived the requirement; the issuer (or the plan) is considered to have exhausted the internal claims and appeals process under applicable law (including by failing to comply with any of the requirements for the internal appeal process, as outlined in paragraph (b)(2) of this section), or the claimant has applied for expedited external review at the same time as applying for an expedited internal appeal.
(iv) The State process provides that the issuer (or, if applicable, the plan) against which a request for external review is filed must pay the cost of the IRO for conducting the external review. Notwithstanding this requirement, a State external review process that expressly authorizes, as of November 18, 2015, a nominal filing fee may continue to permit such fees. For this purpose, to be considered nominal, a filing fee must not exceed $25; it must be refunded to the claimant if the adverse benefit determination (or final internal adverse benefit determination) is reversed through external review; it must be waived if payment of the fee would impose an undue financial hardship; and the annual limit on filing fees for any claimant within a single plan year must not exceed $75.
(v) The State process may not impose a restriction on the minimum dollar amount of a claim for it to be eligible for external review. Thus, the process may not impose, for example, a $500 minimum claims threshold.
(vi) The State process must allow at least four months after the receipt of a notice of an adverse benefit determination or final internal adverse benefit determination for a request for an external review to be filed.
(vii) The State process must provide that IROs will be assigned on a random basis or another method of assignment that assures the independence and impartiality of the assignment process (such as rotational assignment) by a State or independent entity, and in no event selected by the issuer, plan, or the individual.
(viii) The State process must provide for maintenance of a list of approved IROs qualified to conduct the external review based on the nature of the health care service that is the subject of the review. The State process must provide for approval only of IROs that are accredited by a nationally recognized private accrediting organization.
(ix) The State process must provide that any approved IRO has no conflicts of interest that will influence its independence. Thus, the IRO may not own or control, or be owned or controlled by a health insurance issuer, a group health plan, the sponsor of a group health plan, a trade association of plans or issuers, or a trade association of health care providers. The State process must further provide that the IRO and the clinical reviewer assigned to conduct an external review may not have a material professional, familial, or financial conflict of interest with the issuer or plan that is the subject of the external review; the claimant (and any related parties to the claimant) whose treatment is the subject of the external review; any officer, director, or management employee of the issuer; the plan administrator, plan fiduciaries, or plan employees; the health care provider, the health care provider's group, or practice association recommending the treatment that is subject to the external review; the facility at which the recommended treatment would be provided; or the developer or manufacturer of the principal drug, device, procedure, or other therapy being recommended.
(x) The State process allows the claimant at least five business days to submit to the IRO in writing additional information that the IRO must consider when conducting the external review, and it requires that the claimant is notified of the right to do so. The process must also require that any additional information submitted by the claimant to the IRO must be forwarded to the issuer (or, if applicable, the plan) within one business day of receipt by the IRO.
(xi) The State process must provide that the decision is binding on the plan or issuer, as well as the claimant except to the extent the other remedies are available under State or Federal law, and except that the requirement that the decision be binding shall not preclude the plan or issuer from making payment on the claim or otherwise providing benefits at any time, including after a final external review decision that denies the claim or otherwise fails to require such payment or benefits. For this purpose, the plan or issuer must provide benefits (including by making payment on the claim) pursuant to the final external review decision without delay, regardless of whether the plan or issuer intends to seek judicial review of the external review decision and unless or until there is a judicial decision otherwise.
(xii) The State process must require, for standard external review, that the IRO provide written notice to the issuer (or, if applicable, the plan) and the claimant of its decision to uphold or reverse the adverse benefit determination (or final internal adverse benefit determination) within no more than 45 days after the receipt of the request for external review by the IRO.
(xiii) The State process must provide for an expedited external review if the adverse benefit determination (or final internal adverse benefit determination) concerns an admission, availability of care, continued stay, or health care service for which the claimant received emergency services, but has not been discharged from a facility; or involves a medical condition for which the standard external review time frame would seriously jeopardize the life or health of the claimant or jeopardize the claimant's ability to regain maximum function. As expeditiously as possible but within no more than 72 hours after the receipt of the request for expedited external review by the IRO, the IRO must make its decision to uphold or reverse the adverse benefit determination (or final internal adverse benefit determination) and notify the claimant and the issuer (or, if applicable, the plan) of the determination. If the notice is not in writing, the IRO must provide written confirmation of the decision within 48 hours after the date of the notice of the decision.
(xiv) The State process must require that issuers (or, if applicable, plans) include a description of the external review process in or attached to the summary plan description, policy, certificate, membership booklet, outline of coverage, or other evidence of coverage it provides to participants, beneficiaries, or enrollees, substantially similar to what is set forth in section 17 of the NAIC Uniform Model Act.
(xv) The State process must require that IROs maintain written records and make them available upon request to the State, substantially similar to what is set forth in section 15 of the NAIC Uniform Model Act.
(xvi) The State process follows procedures for external review of adverse benefit determinations (or final internal adverse benefit determinations) involving experimental or investigational treatment, substantially similar to what is set forth in section 10 of the NAIC Uniform Model Act.
(3) Transition period for external review processes. (i) Through December 31, 2017, an applicable State external review process applicable to a health insurance issuer or group health plan is considered to meet the requirements of PHS Act section 2719(b). Accordingly, through December 31, 2017, an applicable State external review process will be considered binding on the issuer or plan (in lieu of the requirements of the Federal external review process). If there is no applicable State external review process, the issuer or plan is required to comply with the requirements of the Federal external review process in paragraph (d) of this section.
(ii) An applicable State external review process must apply for final internal adverse benefit determinations (or, in the case of simultaneous internal appeal and external review, adverse benefit determinations) provided on or after January 1, 2018. The Federal external review process will apply to such internal adverse benefit determinations unless the Department of Health and Human Services determines that a State law meets all the minimum standards of paragraph (c)(2) of this section. Through December 31, 2017, a State external review process applicable to a health insurance issuer or group health plan may be considered to meet the minimum standards of paragraph (c)(2), if it meets the temporary standards established by the Secretary in guidance for a process similar to the NAIC Uniform Model Act.
(d) Federal external review process. A plan or issuer not subject to an applicable State external review process under paragraph (c) of this section must provide an effective Federal external review process in accordance with this paragraph (d) (except to the extent, in the case of a plan, the plan is described in paragraph (c)(1)(i) of this section as not having to comply with this paragraph (d)). In the case of health insurance coverage offered in connection with a group health plan, if either the plan or the issuer complies with the Federal external review process of this paragraph (d), then the obligation to comply with this paragraph (d) is satisfied for both the plan and the issuer with respect to the health insurance coverage. A Multi State Plan or MSP, as defined by 45 CFR 800.20, must provide an effective Federal external review process in accordance with this paragraph (d). In such circumstances, the requirement to provide external review under this paragraph (d) is satisfied when a Multi State Plan or MSP complies with standards established by the Office of Personnel Management.
(1) Scope—(i) In general. The Federal external review process established pursuant to this paragraph (d) applies to the following:
(A) An adverse benefit determination (including a final internal adverse benefit determination) by a plan or issuer that involves medical judgment (including, but not limited to, those based on the plan's or issuer's requirements for medical necessity, appropriateness, health care setting, level of care, or effectiveness of a covered benefit; its determination that a treatment is experimental or investigational; its determination whether a participant or beneficiary is entitled to a reasonable alternative standard for a reward under a wellness program; its determination whether a plan or issuer is complying with the nonquantitative treatment limitation provisions of Code section 9812 and § 54.9812-1, which generally require, among other things, parity in the application of medical management techniques), as determined by the external reviewer. (A denial, reduction, termination, or a failure to provide payment for a benefit based on a determination that a participant or beneficiary fails to meet the requirements for eligibility under the terms of a group health plan or health insurance coverage is not eligible for the Federal external review process under this paragraph (d));
(B) An adverse benefit determination that involves consideration of whether a plan or issuer is complying with the surprise billing and cost-sharing protections set forth in sections 9816 and 9817 and §§ 54.9816-4T through 54.9816-5T and 54.9817-1T; and
(C) A rescission of coverage (whether or not the rescission has any effect on any particular benefit at that time).
(ii) Examples. The rules of paragraph (d)(1)(i) of this section are illustrated by the following examples:
(A) Example 1—(1) Facts. A group health plan provides coverage for 30 physical therapy visits generally. After the 30th visit, coverage is provided only if the service is preauthorized pursuant to an approved treatment plan that takes into account medical necessity using the plan's definition of the term. Individual A seeks coverage for a 31st physical therapy visit. A's health care provider submits a treatment plan for approval, but it is not approved by the plan, so coverage for the 31st visit is not preauthorized. With respect to the 31st visit, A receives a notice of final internal adverse benefit determination stating that the maximum visit limit is exceeded.
(2) Conclusion. In this Example 1, the plan's denial of benefits is based on medical necessity and involves medical judgment. Accordingly, the claim is eligible for external review under paragraph (d)(1)(i) of this section. Moreover, the plan's notification of final internal adverse benefit determination is inadequate under paragraphs (b)(2)(i) and (b)(2)(ii)(E)(3) of this section because it fails to make clear that the plan will pay for more than 30 visits if the service is preauthorized pursuant to an approved treatment plan that takes into account medical necessity using the plan's definition of the term. Accordingly, the notice of final internal adverse benefit determination should refer to the plan provision governing the 31st visit and should describe the plan's standard for medical necessity, as well as how the treatment fails to meet the plan's standard.
(B) Example 2—(1) Facts. A group health plan does not provide coverage for services provided out of network, unless the service cannot effectively be provided in network. Individual B seeks coverage for a specialized medical procedure from an out-of-network provider because B believes that the procedure cannot be effectively provided in network. B receives a notice of final internal adverse benefit determination stating that the claim is denied because the provider is out-of-network.
(2) Conclusion. In this Example 2, the plan's denial of benefits is based on whether a service can effectively be provided in network and, therefore, involves medical judgment. Accordingly, the claim is eligible for external review under paragraph (d)(1)(i) of this section. Moreover, the plan's notice of final internal adverse benefit determination is inadequate under paragraphs (b)(2)(i) and (b)(2)(ii)(E)(3) of this section because the plan does provide benefits for services on an out-of-network basis if the services cannot effectively be provided in network. Accordingly, the notice of final internal adverse benefit determination is required to refer to the exception to the out-of-network exclusion and should describe the plan's standards for determining effectiveness of services, as well as how services available to the claimant within the plan's network meet the plan's standard for effectiveness of services.
(C) Example 3—(1) Facts. A group health plan generally provides benefits for services in an emergency department of a hospital or independent freestanding emergency department. Individual C receives pre-stabilization emergency treatment in an out-of-network emergency department of a hospital. The group health plan determines that protections for emergency services under § 54.9816-4T do not apply because the treatment did not involve “emergency services” within the meaning of § 54.9816-4T(c)(2)(i). C receives an adverse benefit determination, and the plan imposes cost-sharing requirements that are greater than the requirements that would apply if the same services were provided in an in-network emergency department.
(2) Conclusion. In this Example 3, the plan's determination that treatment received by C did not include emergency services involves medical judgment and consideration of whether the plan complied with § 54.9816-4T. Accordingly, the claim is eligible for external review under paragraph (d)(1)(i) of this section.
(D) Example 4—(1) Facts. A group health plan generally provides benefits for anesthesiology services. Individual D undergoes a surgery at an in-network health care facility and during the course of the surgery, receives anesthesiology services from an out-of-network provider. The plan decides the claim for these services without regard to the protections related to items and services furnished by out-of-network providers at in-network facilities under § 54.9816-5T. As a result, D receives an adverse benefit determination for the services and is subject to cost-sharing liability that is greater than it would be if cost sharing had been calculated in a manner consistent with the requirements of § 54.9816-5T.
(2) Conclusion. In this Example 4, whether the plan was required to decide the claim in a manner consistent with the requirements of § 54.9816-5T involves considering whether the plan complied with § 54.9816-5T, as well as medical judgment, because it requires consideration of the health care setting and level of care. Accordingly, the claim is eligible for external review under paragraph (d)(1)(i) of this section.
(E) Example 5—(1) Facts. A group health plan generally provides benefits for services in an emergency department of a hospital or independent freestanding emergency department. Individual E receives emergency services in an out-of-network emergency department of a hospital, including certain post-stabilization services. The plan processes the claim for the post-stabilization services as not being for emergency services under § 54.9816-4T(c)(2)(ii) based on representations made by the treating provider that E was in a condition to receive notice from the provider about cost-sharing and surprise billing protections for these services, and subsequently gave informed consent to waive those protections. E receives an adverse benefit determination and is subject to cost-sharing requirements that are greater than the cost-sharing requirements that would apply if the services were processed in a manner consistent with § 54.9816-4T.
(2) Conclusion. In this Example 5, whether E was in a condition to receive notice about the availability of cost-sharing and surprise billing protections and give informed consent to waive those protections involves medical judgment and consideration of whether the plan complied with the requirements under § 54.9816-4T(c)(2)(ii). Accordingly, the claim is eligible for external review under paragraph (d)(1)(i) of this section.
(F) Example 6—(1) Facts. Individual F gives birth to a baby at an in-network hospital. The baby is born prematurely and receives certain neonatology services from a nonparticipating provider during the same visit as the birth. F was given notice about cost-sharing and surprise billing protections for these services, and subsequently gave informed consent to waive those protections. The claim for the neonatology services is coded as a claim for routine post-natal services and the plan decides the claim without regard to the requirements under § 54.9816-5T(a) and the fact that those protections may not be waived for neonatology services under § 54.9816-5T(b).
(2) Conclusion. In this Example 6, medical judgment is necessary to determine whether the correct code was used and compliance with § 54.9816-5T(a) and (b) must also be considered. Accordingly, the claim is eligible for external review under paragraph (d)(1)(i) of this section. The Departments also note that, to the extent the nonparticipating provider balance bills Individual F for the outstanding amounts not paid by the plan for the neonatology services, such provider would be in violation of PHS Act section 2799B-2 and its implementing regulations at 45 CFR 149.420(a).
(G) Example 7—(1) Facts. A group health plan generally provides benefits to cover knee replacement surgery. Individual G receives a knee replacement surgery at an in-network facility and, after receiving proper notice about the availability of cost-sharing and surprise billing protections, provides informed consent to waive those protections. However, during the surgery, certain anesthesiology services are provided by an out-of-network nurse anesthetist. The claim for these anesthesiology services is decided by the plan without regard to the requirements under § 54.9816-5T(a) or to the fact that those protections may not be waived for ancillary services such as anesthesiology services provided by an out-of-network provider at an in-network facility under § 54.9816-5T(b). G receives an adverse benefit determination and is subject to cost-sharing requirements that are greater than the cost-sharing requirements that would apply if the services were provided in a manner consistent with § 54.9816-5T(a) and (b).
(2) Conclusion. In this Example 7, consideration of whether the plan complied with the requirements in § 54.9816-5T(a) and (b) is necessary to determine whether cost-sharing requirements were applied appropriately. Accordingly, the claim is eligible for external review under paragraph (d)(1)(i) of this section.
(2) External review process standards. The Federal external review process established pursuant to this paragraph (d) is considered similar to the process set forth in the NAIC Uniform Model Act and, therefore satisfies the requirements of paragraph (d)(2) if such process provides the following.
(i) Request for external review. A group health plan or health insurance issuer must allow a claimant to file a request for an external review with the plan or issuer if the request is filed within four months after the date of receipt of a notice of an adverse benefit determination or final internal adverse benefit determination. If there is no corresponding date four months after the date of receipt of such a notice, then the request must be filed by the first day of the fifth month following the receipt of the notice. For example, if the date of receipt of the notice is October 30, because there is no February 30, the request must be filed by March 1. If the last filing date would fall on a Saturday, Sunday, or Federal holiday, the last filing date is extended to the next day that is not a Saturday, Sunday, or Federal holiday.
(ii) Preliminary review—(A) In general. Within five business days following the date of receipt of the external review request, the group health plan or health insurance issuer must complete a preliminary review of the request to determine whether:
(1) The claimant is or was covered under the plan or coverage at the time the health care item or service was requested or, in the case of a retrospective review, was covered under the plan or coverage at the time the health care item or service was provided;
(2) The adverse benefit determination or the final adverse benefit determination does not relate to the claimant's failure to meet the requirements for eligibility under the terms of the group health plan or health insurance coverage (e.g., worker classification or similar determination);
(3) The claimant has exhausted the plan's or issuer's internal appeal process unless the claimant is not required to exhaust the internal appeals process under paragraph (b)(1) of this section; and
(4) The claimant has provided all the information and forms required to process an external review.
(B) Within one business day after completion of the preliminary review, the plan or issuer must issue a notification in writing to the claimant. If the request is complete but not eligible for external review, such notification must include the reasons for its ineligibility and current contact information, including the phone number, for the Employee Benefits Security Administration. If the request is not complete, such notification must describe the information or materials needed to make the request complete, and the plan or issuer must allow a claimant to perfect the request for external review within the four-month filing period or within the 48 hour period following the receipt of the notification, whichever is later.
(iii) Referral to Independent Review Organization—(A) In general. The group health plan or health insurance issuer must assign an IRO that is accredited by URAC or by similar nationally-recognized accrediting organization to conduct the external review. The IRO referral process must provide for the following:
(1) The plan or issuer must ensure that the IRO process is not biased and ensures independence;
(2) The plan or issuer must contract with at least three (3) IROs for assignments under the plan or coverage and rotate claims assignments among them (or incorporate other independent, unbiased methods for selection of IROs, such as random selection); and
(3) The IRO may not be eligible for any financial incentives based on the likelihood that the IRO will support the denial of benefits.
(4) The IRO process may not impose any costs, including filing fees, on the claimant requesting the external review.
(B) IRO contracts. A group health plan or health insurance issuer must include the following standards in the contract between the plan or issuer and the IRO:
(1) The assigned IRO will utilize legal experts where appropriate to make coverage determinations under the plan or coverage.
(2) The assigned IRO will timely notify a claimant in writing whether the request is eligible for external review. This notice will include a statement that the claimant may submit in writing to the assigned IRO, within ten business days following the date of receipt of the notice, additional information. This additional information must be considered by the IRO when conducting the external review. The IRO is not required to, but may, accept and consider additional information submitted after ten business days.
(3) Within five business days after the date of assignment of the IRO, the plan or issuer must provide to the assigned IRO the documents and any information considered in making the adverse benefit determination or final internal adverse benefit determination. Failure by the plan or issuer to timely provide the documents and information must not delay the conduct of the external review. If the plan or issuer fails to timely provide the documents and information, the assigned IRO may terminate the external review and make a decision to reverse the adverse benefit determination or final internal adverse benefit determination. Within one business day after making the decision, the IRO must notify the claimant and the plan.
(4) Upon receipt of any information submitted by the claimant, the assigned IRO must within one business day forward the information to the plan or issuer. Upon receipt of any such information, the plan or issuer may reconsider its adverse benefit determination or final internal adverse benefit determination that is the subject of the external review. Reconsideration by the plan or issuer must not delay the external review. The external review may be terminated as a result of the reconsideration only if the plan decides, upon completion of its reconsideration, to reverse its adverse benefit determination or final internal adverse benefit determination and provide coverage or payment. Within one business day after making such a decision, the plan must provide written notice of its decision to the claimant and the assigned IRO. The assigned IRO must terminate the external review upon receipt of the notice from the plan or issuer.
(5) The IRO will review all of the information and documents timely received. In reaching a decision, the assigned IRO will review the claim de novo and not be bound by any decisions or conclusions reached during the plan's or issuer's internal claims and appeals process applicable under paragraph (b) of this section. In addition to the documents and information provided, the assigned IRO, to the extent the information or documents are available and the IRO considers them appropriate, will consider the following in reaching a decision:
(i) The claimant's medical records;
(ii) The attending health care professional's recommendation;
(iii) Reports from appropriate health care professionals and other documents submitted by the plan or issuer, claimant, or the claimant's treating provider;
(iv) The terms of the claimant's plan or coverage to ensure that the IRO's decision is not contrary to the terms of the plan or coverage, unless the terms are inconsistent with applicable law;
(v) Appropriate practice guidelines, which must include applicable evidence-based standards and may include any other practice guidelines developed by the Federal Government, national or professional medical societies, boards, and associations;
(vi) Any applicable clinical review criteria developed and used by the plan or issuer, unless the criteria are inconsistent with the terms of the plan or coverage or with applicable law; and
(vii) To the extent the final IRO decision maker is different from the IRO's clinical reviewer, the opinion of such clinical reviewer, after considering information described in this notice, to the extent the information or documents are available and the clinical reviewer or reviewers consider such information or documents appropriate.
(6) The assigned IRO must provide written notice of the final external review decision within 45 days after the IRO receives the request for the external review. The IRO must deliver the notice of the final external review decision to the claimant and the plan or issuer.
(7) The assigned IRO's written notice of the final external review decision must contain the following:
(i) A general description of the reason for the request for external review, including information sufficient to identify the claim (including the date or dates of service, the health care provider, the claim amount (if applicable), and a statement describing the availability, upon request, of the diagnosis code and its corresponding meaning, the treatment code and its corresponding meaning, and the reason for the plan's or issuer's denial);
(ii) The date the IRO received the assignment to conduct the external review and the date of the IRO decision;
(iii) References to the evidence or documentation, including the specific coverage provisions and evidence-based standards, considered in reaching its decision;
(iv) A discussion of the principal reason or reasons for its decision, including the rationale for its decision and any evidence-based standards that were relied on in making its decision;
(v) A statement that the IRO's determination is binding except to the extent that other remedies may be available under State or Federal law to either the group health plan or health insurance issuer or to the claimant, or to the extent the health plan or health insurance issuer voluntarily makes payment on the claim or otherwise provides benefits at any time, including after a final external review decision that denies the claim or otherwise fails to require such payment or benefits;
(vi) A statement that judicial review may be available to the claimant; and
(vii) Current contact information, including phone number, for any applicable office of health insurance consumer assistance or ombudsman established under PHS Act section 2793.
(viii) After a final external review decision, the IRO must maintain records of all claims and notices associated with the external review process for six years. An IRO must make such records available for examination by the claimant, plan, issuer, or State or Federal oversight agency upon request, except where such disclosure would violate State or Federal privacy laws.
(iv) Reversal of plan's or issuer's decision. Upon receipt of a notice of a final external review decision reversing the adverse benefit determination or final adverse benefit determination, the plan or issuer immediately must provide coverage or payment (including immediately authorizing care or immediately paying benefits) for the claim.
(3) Expedited external review. A group health plan or health insurance issuer must comply with the following standards with respect to an expedited external review:
(i) Request for external review. A group health plan or health insurance issuer must allow a claimant to make a request for an expedited external review with the plan or issuer at the time the claimant receives:
(A) An adverse benefit determination if the adverse benefit determination involves a medical condition of the claimant for which the timeframe for completion of an expedited internal appeal under paragraph (b) of this section would seriously jeopardize the life or health of the claimant or would jeopardize the claimant's ability to regain maximum function and the claimant has filed a request for an expedited internal appeal; or
(B) A final internal adverse benefit determination, if the claimant has a medical condition where the timeframe for completion of a standard external review would seriously jeopardize the life or health of the claimant or would jeopardize the claimant's ability to regain maximum function, or if the final internal adverse benefit determination concerns an admission, availability of care, continued stay, or health care item or service for which the claimant received emergency services, but has not been discharged from the facility.
(ii) Preliminary review. Immediately upon receipt of the request for expedited external review, the plan or issuer must determine whether the request meets the reviewability requirements set forth in paragraph (d)(2)(ii) of this section for standard external review. The plan or issuer must immediately send a notice that meets the requirements set forth in paragraph (d)(2)(ii)(B) for standard review to the claimant of its eligibility determination.
(iii) Referral to independent review organization. (A) Upon a determination that a request is eligible for expedited external review following the preliminary review, the plan or issuer will assign an IRO pursuant to the requirements set forth in paragraph (d)(2)(iii) of this section for standard review. The plan or issuer must provide or transmit all necessary documents and information considered in making the adverse benefit determination or final internal adverse benefit determination to the assigned IRO electronically or by telephone or facsimile or any other available expeditious method.
(B) The assigned IRO, to the extent the information or documents are available and the IRO considers them appropriate, must consider the information or documents described above under the procedures for standard review. In reaching a decision, the assigned IRO must review the claim de novo and is not bound by any decisions or conclusions reached during the plan's or issuer's internal claims and appeals process.
(iv) Notice of final external review decision. The plan's or issuer's contract with the assigned IRO must require the IRO to provide notice of the final external review decision, in accordance with the requirements set forth in paragraph (d)(2)(iii)(B) of this section, as expeditiously as the claimant's medical condition or circumstances require, but in no event more than 72 hours after the IRO receives the request for an expedited external review. If the notice is not in writing, within 48 hours after the date of providing that notice, the assigned IRO must provide written confirmation of the decision to the claimant and the plan or issuer.
(4) Alternative, federally-administered external review process. Insured coverage not subject to an applicable State external review process under paragraph (c) of this section may elect to use either the Federal external review process, as set forth under paragraph (d) of this section or the federally-administered external review process, as set forth by HHS in guidance. In such circumstances, the requirement to provide external review under this paragraph (d) is satisfied.
(e) Form and manner of notice—(1) In general. For purposes of this section, a group health plan and a health insurance issuer offering group health insurance coverage are considered to provide relevant notices in a culturally and linguistically appropriate manner if the plan or issuer meets all the requirements of paragraph (e)(2) of this section with respect to the applicable non-English languages described in paragraph (e)(3) of this section.
(2) Requirements. (i) The plan or issuer must provide oral language services (such as a telephone customer assistance hotline) that includes answering questions in any applicable non-English language and providing assistance with filing claims and appeals (including external review) in any applicable non-English language;
(ii) The plan or issuer must provide, upon request, a notice in any applicable non-English language; and
(iii) The plan or issuer must include in the English versions of all notices, a statement prominently displayed in any applicable non-English language clearly indicating how to access the language services provided by the plan or issuer.
(3) Applicable non-English language. With respect to an address in any United States county to which a notice is sent, a non-English language is an applicable non-English language if ten percent or more of the population residing in the county is literate only in the same non-English language, as determined in guidance published by the Secretary.
(f) Secretarial authority. The Secretary may determine that the external review process of a group health plan or health insurance issuer, in operation as of March 23, 2010, is considered in compliance with the applicable process established under paragraph (c) or (d) of this section if it substantially meets the requirements of paragraph (c) or (d) of this section, as applicable.
(g) Applicability date. The provisions of this section generally are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2017. The external review scope provision at paragraph (d)(1)(i)(B) of this section is applicable for plan years beginning on or after January 1, 2022. The external review provisions described in paragraphs (c) and (d) of this section are applicable to grandfathered health plans, with respect to the types of claims specified under paragraph (a)(1)(ii) of this section, for plan years beginning on or after January 1, 2022.
[T.D. 9955, 86 FR 56092, Oct. 7, 2021]
§ 54.9815-2719A Patient protections.
(a) Choice of health care professional—(1) Designation of primary care provider—(i) In general. If a group health plan, or a health insurance issuer offering group health insurance coverage, requires or provides for designation by a participant or beneficiary of a participating primary care provider, then the plan or issuer must permit each participant or beneficiary to designate any participating primary care provider who is available to accept the participant or beneficiary. In such a case, the plan or issuer must comply with the rules of paragraph (a)(4) of this section by informing each participant of the terms of the plan or health insurance coverage regarding designation of a primary care provider.
(ii) Construction. Nothing in paragraph (a)(1)(i) of this section is to be construed to prohibit the application of reasonable and appropriate geographic limitations with respect to the selection of primary care providers, in accordance with the terms of the plan or coverage, the underlying provider contracts, and applicable State law.
(iii) Example. The rules of this paragraph (a)(1) are illustrated by the following example:
Example. (i) Facts. A group health plan requires individuals covered under the plan to designate a primary care provider. The plan permits each individual to designate any primary care provider participating in the plan's network who is available to accept the individual as the individual's primary care provider. If an individual has not designated a primary care provider, the plan designates one until one has been designated by the individual. The plan provides a notice that satisfies the requirements of paragraph (a)(4) of this section regarding the ability to designate a primary care provider.
(ii) Conclusion. In this Example, the plan has satisfied the requirements of paragraph (a) of this section.
(2) Designation of pediatrician as primary care provider—(i) In general. If a group health plan, or a health insurance issuer offering group health insurance coverage, requires or provides for the designation of a participating primary care provider for a child by a participant or beneficiary, the plan or issuer must permit the participant or beneficiary to designate a physician (allopathic or osteopathic) who specializes in pediatrics (including pediatric subspecialties, based on the scope of that provider's license under applicable State law) as the child's primary care provider if the provider participates in the network of the plan or issuer and is available to accept the child. In such a case, the plan or issuer must comply with the rules of paragraph (a)(4) of this section by informing each participant of the terms of the plan or health insurance coverage regarding designation of a pediatrician as the child's primary care provider.
(ii) Construction. Nothing in paragraph (a)(2)(i) of this section is to be construed to waive any exclusions of coverage under the terms and conditions of the plan or health insurance coverage with respect to coverage of pediatric care.
(iii) Examples. The rules of this paragraph (a)(2) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan's HMO designates for each participant a physician who specializes in internal medicine to serve as the primary care provider for the participant and any beneficiaries. Participant A requests that Pediatrician B be designated as the primary care provider for A's child. B is a participating provider in the HMO's network and is available to accept the child.
(ii) Conclusion. In this Example 1, the HMO must permit A's designation of B as the primary care provider for A's child in order to comply with the requirements of this paragraph (a)(2).
Example 2. (i) Facts. Same facts as Example 1, except that A takes A's child to B for treatment of the child's severe shellfish allergies. B wishes to refer A's child to an allergist for treatment. The HMO, however, does not provide coverage for treatment of food allergies, nor does it have an allergist participating in its network, and it therefore refuses to authorize the referral.
(ii) Conclusion. In this Example 2, the HMO has not violated the requirements of this paragraph (a)(2) because the exclusion of treatment for food allergies is in accordance with the terms of A's coverage.
(3) Patient access to obstetrical and gynecological care—(i) General rights—(A) Direct access. A group health plan, or a health insurance issuer offering group health insurance coverage, described in paragraph (a)(3)(ii) of this section may not require authorization or referral by the plan, issuer, or any person (including a primary care provider) in the case of a female participant or beneficiary who seeks coverage for obstetrical or gynecological care provided by a participating health care professional who specializes in obstetrics or gynecology. In such a case, the plan or issuer must comply with the rules of paragraph (a)(4) of this section by informing each participant that the plan may not require authorization or referral for obstetrical or gynecological care by a participating health care professional who specializes in obstetrics or gynecology. The plan or issuer may require such a professional to agree to otherwise adhere to the plan's or issuer's policies and procedures, including procedures regarding referrals and obtaining prior authorization and providing services pursuant to a treatment plan (if any) approved by the plan or issuer. For purposes of this paragraph (a)(3), a health care professional who specializes in obstetrics or gynecology is any individual (including a person other than a physician) who is authorized under applicable State law to provide obstetrical or gynecological care.
(B) Obstetrical and gynecological care. A group health plan or health insurance issuer described in paragraph (a)(3)(ii) of this section must treat the provision of obstetrical and gynecological care, and the ordering of related obstetrical and gynecological items and services, pursuant to the direct access described under paragraph (a)(3)(i)(A) of this section, by a participating health care professional who specializes in obstetrics or gynecology as the authorization of the primary care provider.
(ii) Application of paragraph. A group health plan, or a health insurance issuer offering group health insurance coverage, is described in this paragraph (a)(3) if the plan or issuer—
(A) Provides coverage for obstetrical or gynecological care; and
(B) Requires the designation by a participant or beneficiary of a participating primary care provider.
(iii) Construction. Nothing in paragraph (a)(3)(i) of this section is to be construed to—
(A) Waive any exclusions of coverage under the terms and conditions of the plan or health insurance coverage with respect to coverage of obstetrical or gynecological care; or
(B) Preclude the group health plan or health insurance issuer involved from requiring that the obstetrical or gynecological provider notify the primary care health care professional or the plan or issuer of treatment decisions.
(iv) Examples. The rules of this paragraph (a)(3) are illustrated by the following examples:
Example 1. (i) Facts. A group health plan requires each participant to designate a physician to serve as the primary care provider for the participant and the participant's family. Participant A, a female, requests a gynecological exam with Physician B, an in-network physician specializing in gynecological care. The group health plan requires prior authorization from A's designated primary care provider for the gynecological exam.
(ii) Conclusion. In this Example 1, the group health plan has violated the requirements of this paragraph (a)(3) because the plan requires prior authorization from A's primary care provider prior to obtaining gynecological services.
Example 2. (i) Facts. Same facts as Example 1 except that A seeks gynecological services from C, an out-of-network provider.
(ii) Conclusion. In this Example 2, the group health plan has not violated the requirements of this paragraph (a)(3) by requiring prior authorization because C is not a participating health care provider.
Example 3. (i) Facts. Same facts as Example 1 except that the group health plan only requires B to inform A's designated primary care physician of treatment decisions.
(ii) Conclusion. In this Example 3, the group health plan has not violated the requirements of this paragraph (a)(3) because A has direct access to B without prior authorization. The fact that the group health plan requires notification of treatment decisions to the designated primary care physician does not violate this paragraph (a)(3).
Example 4. (i) Facts. A group health plan requires each participant to designate a physician to serve as the primary care provider for the participant and the participant's family. The group health plan requires prior authorization before providing benefits for uterine fibroid embolization.
(ii) Conclusion. In this Example 4, the plan requirement for prior authorization before providing benefits for uterine fibroid embolization does not violate the requirements of this paragraph (a)(3) because, though the prior authorization requirement applies to obstetrical services, it does not restrict access to any providers specializing in obstetrics or gynecology.
(4) Notice of right to designate a primary care provider—(i) In general. If a group health plan or health insurance issuer requires the designation by a participant or beneficiary of a primary care provider, the plan or issuer must provide a notice informing each participant of the terms of the plan or health insurance coverage regarding designation of a primary care provider and of the rights—
(A) Under paragraph (a)(1)(i) of this section, that any participating primary care provider who is available to accept the participant or beneficiary can be designated;
(B) Under paragraph (a)(2)(i) of this section, with respect to a child, that any participating physician who specializes in pediatrics can be designated as the primary care provider; and
(C) Under paragraph (a)(3)(i) of this section, that the plan may not require authorization or referral for obstetrical or gynecological care by a participating health care professional who specializes in obstetrics or gynecology.
(ii) Timing. The notice described in paragraph (a)(4)(i) of this section must be included whenever the plan or issuer provides a participant with a summary plan description or other similar description of benefits under the plan or health insurance coverage.
(iii) Model language. The following model language can be used to satisfy the notice requirement described in paragraph (a)(4)(i) of this section:
(A) For plans and issuers that require or allow for the designation of primary care providers by participants or beneficiaries, insert:
[Name of group health plan or health insurance issuer] generally [requires/allows] the designation of a primary care provider. You have the right to designate any primary care provider who participates in our network and who is available to accept you or your family members. [If the plan or health insurance coverage designates a primary care provider automatically, insert: Until you make this designation, [name of group health plan or health insurance issuer] designates one for you.] For information on how to select a primary care provider, and for a list of the participating primary care providers, contact the [plan administrator or issuer] at [insert contact information].
(B) For plans and issuers that require or allow for the designation of a primary care provider for a child, add:
For children, you may designate a pediatrician as the primary care provider.
(C) For plans and issuers that provide coverage for obstetric or gynecological care and require the designation by a participant or beneficiary of a primary care provider, add:
You do not need prior authorization from [name of group health plan or issuer] or from any other person (including a primary care provider) in order to obtain access to obstetrical or gynecological care from a health care professional in our network who specializes in obstetrics or gynecology. The health care professional, however, may be required to comply with certain procedures, including obtaining prior authorization for certain services, following a pre-approved treatment plan, or procedures for making referrals. For a list of participating health care professionals who specialize in obstetrics or gynecology, contact the [plan administrator or issuer] at [insert contact information].
(b) Coverage of emergency services—(1) Scope. If a group health plan, or a health insurance issuer offering group health insurance coverage, provides any benefits with respect to services in an emergency department of a hospital, the plan or issuer must cover emergency services (as defined in paragraph (b)(4)(ii) of this section) consistent with the rules of this paragraph (b).
(2) General rules. A plan or issuer subject to the requirements of this paragraph (b) must provide coverage for emergency services in the following manner—
(i) Without the need for any prior authorization determination, even if the emergency services are provided on an out-of-network basis;
(ii) Without regard to whether the health care provider furnishing the emergency services is a participating network provider with respect to the services;
(iii) If the emergency services are provided out of network, without imposing any administrative requirement or limitation on coverage that is more restrictive than the requirements or limitations that apply to emergency services received from in-network providers;
(iv) If the emergency services are provided out of network, by complying with the cost-sharing requirements of paragraph (b)(3) of this section; and
(v) Without regard to any other term or condition of the coverage, other than—
(A) The exclusion of or coordination of benefits;
(B) An affiliation or waiting period permitted under part 7 of ERISA, part A of title XXVII of the PHS Act, or chapter 100 of the Internal Revenue Code; or
(C) Applicable cost sharing.
(3) Cost-sharing requirements—(i) Copayments and coinsurance. Any cost-sharing requirement expressed as a copayment amount or coinsurance rate imposed with respect to a participant or beneficiary for out-of-network emergency services cannot exceed the cost-sharing requirement imposed with respect to a participant or beneficiary if the services were provided in-network. However, a participant or beneficiary may be required to pay, in addition to the in-network cost sharing, the excess of the amount the out-of-network provider charges over the amount the plan or issuer is required to pay under this paragraph (b)(3)(i). A group health plan or health insurance issuer complies with the requirements of this paragraph (b)(3) if it provides benefits with respect to an emergency service in an amount at least equal to the greatest of the three amounts specified in paragraphs (b)(3)(i)(A), (B), and (C) of this section (which are adjusted for in-network cost-sharing requirements).
(A) The amount negotiated with in-network providers for the emergency service furnished, excluding any in-network copayment or coinsurance imposed with respect to the participant or beneficiary. If there is more than one amount negotiated with in-network providers for the emergency service, the amount described under this paragraph (b)(3)(i)(A) is the median of these amounts, excluding any in-network copayment or coinsurance imposed with respect to the participant or beneficiary. In determining the median described in the preceding sentence, the amount negotiated with each in-network provider is treated as a separate amount (even if the same amount is paid to more than one provider). If there is no per-service amount negotiated with in-network providers (such as under a capitation or other similar payment arrangement), the amount under this paragraph (b)(3)(i)(A) is disregarded.
(B) The amount for the emergency service calculated using the same method the plan generally uses to determine payments for out-of-network services (such as the usual, customary, and reasonable amount), excluding any in-network copayment or coinsurance imposed with respect to the participant or beneficiary. The amount in this paragraph (b)(3)(i)(B) is determined without reduction for out-of-network cost sharing that generally applies under the plan or health insurance coverage with respect to out-of-network services. Thus, for example, if a plan generally pays 70 percent of the usual, customary, and reasonable amount for out-of-network services, the amount in this paragraph (b)(3)(i)(B) for an emergency service is the total (that is, 100 percent) of the usual, customary, and reasonable amount for the service, not reduced by the 30 percent coinsurance that would generally apply to out-of-network services (but reduced by the in-network copayment or coinsurance that the individual would be responsible for if the emergency service had been provided in-network).
(C) The amount that would be paid under Medicare (part A or part B of title XVIII of the Social Security Act, 42 U.S.C. 1395 et seq.) for the emergency service, excluding any in-network copayment or coinsurance imposed with respect to the participant or beneficiary.
(ii) Other cost sharing. Any cost-sharing requirement other than a copayment or coinsurance requirement (such as a deductible or out-of-pocket maximum) may be imposed with respect to emergency services provided out of network if the cost-sharing requirement generally applies to out-of-network benefits. A deductible may be imposed with respect to out-of-network emergency services only as part of a deductible that generally applies to out-of-network benefits. If an out-of-pocket maximum generally applies to out-of-network benefits, that out-of-pocket maximum must apply to out-of-network emergency services.
(iii) Special rules regarding out-of-network minimum payment standards—(A) The minimum payment standards set forth under paragraph (b)(3) of this section do not apply in cases where State law prohibits a participant or beneficiary from being required to pay, in addition to the in-network cost sharing, the excess of the amount the out-of-network provider charges over the amount the plan or issuer provides in benefits, or where a group health plan or health insurance issuer is contractually responsible for such amounts. Nonetheless, in such cases, a plan or issuer may not impose any copayment or coinsurance requirement for out-of-network emergency services that is higher than the copayment or coinsurance requirement that would apply if the services were provided in network.
(B) A group health plan and health insurance issuer must provide a participant or beneficiary adequate and prominent notice of their lack of financial responsibility with respect to the amounts described under this paragraph (b)(3)(iii), to prevent inadvertent payment by the participant or beneficiary.
(iv) Examples. The rules of this paragraph (b)(3) are illustrated by the following examples. In all of these examples, the group health plan covers benefits with respect to emergency services.
Example 1. (i) Facts. A group health plan imposes a 25% coinsurance responsibility on individuals who are furnished emergency services, whether provided in network or out of network. If a covered individual notifies the plan within two business days after the day an individual receives treatment in an emergency department, the plan reduces the coinsurance rate to 15%.
(ii) Conclusion. In this Example 1, the requirement to notify the plan in order to receive a reduction in the coinsurance rate does not violate the requirement that the plan cover emergency services without the need for any prior authorization determination. This is the result even if the plan required that it be notified before or at the time of receiving services at the emergency department in order to receive a reduction in the coinsurance rate.
Example 2. (i) Facts. A group health plan imposes a $60 copayment on emergency services without preauthorization, whether provided in network or out of network. If emergency services are preauthorized, the plan waives the copayment, even if it later determines the medical condition was not an emergency medical condition.
(ii) Conclusion. In this Example 2, by requiring an individual to pay more for emergency services if the individual does not obtain prior authorization, the plan violates the requirement that the plan cover emergency services without the need for any prior authorization determination. (By contrast, if, to have the copayment waived, the plan merely required that it be notified rather than a prior authorization, then the plan would not violate the requirement that the plan cover emergency services without the need for any prior authorization determination.)
Example 3. (i) Facts. A group health plan covers individuals who receive emergency services with respect to an emergency medical condition from an out-of-network provider. The plan has agreements with in-network providers with respect to a certain emergency service. Each provider has agreed to provide the service for a certain amount. Among all the providers for the service: One has agreed to accept $85, two have agreed to accept $100, two have agreed to accept $110, three have agreed to accept $120, and one has agreed to accept $150. Under the agreement, the plan agrees to pay the providers 80% of the agreed amount, with the individual receiving the service responsible for the remaining 20%.
(ii) Conclusion. In this Example 3, the values taken into account in determining the median are $85, $100, $100, $110, $110, $120, $120, $120, and $150. Therefore, the median amount among those agreed to for the emergency service is $110, and the amount under paragraph (b)(3)(i)(A) of this section is 80% of $110 ($88).
Example 4. (i) Facts. Same facts as Example 3. Subsequently, the plan adds another provider to its network, who has agreed to accept $150 for the emergency service.
(ii) Conclusion. In this Example 4, the median amount among those agreed to for the emergency service is $115. (Because there is no one middle amount, the median is the average of the two middle amounts, $110 and $120.) Accordingly, the amount under paragraph (b)(3)(i)(A) of this section is 80% of $115 ($92).
Example 5. (i) Facts. Same facts as Example 4. An individual covered by the plan receives the emergency service from an out-of-network provider, who charges $125 for the service. With respect to services provided by out-of-network providers generally, the plan reimburses covered individuals 50% of the reasonable amount charged by the provider for medical services. For this purpose, the reasonable amount for any service is based on information on charges by all providers collected by a third party, on a zip code by zip code basis, with the plan treating charges at a specified percentile as reasonable. For the emergency service received by the individual, the reasonable amount calculated using this method is $116. The amount that would be paid under Medicare for the emergency service, excluding any copayment or coinsurance for the service, is $80.
(ii) Conclusion. In this Example 5, the plan is responsible for paying $92.80, 80% of $116. The median amount among those agreed to for the emergency service is $115 and the amount the plan would pay is $92 (80% of $115); the amount calculated using the same method the plan uses to determine payments for out-of-network services—$116—excluding the in-network 20% coinsurance, is $92.80; and the Medicare payment is $80. Thus, the greatest amount is $92.80. The individual is responsible for the remaining $32.20 charged by the out-of-network provider.
Example 6. (i) Facts. Same facts as Example 5. The group health plan generally imposes a $250 deductible for in-network health care. With respect to all health care provided by out-of-network providers, the plan imposes a $500 deductible. (Covered in-network claims are credited against the deductible.) The individual has incurred and submitted $260 of covered claims prior to receiving the emergency service out of network.
(ii) Conclusion. In this Example 6, the plan is not responsible for paying anything with respect to the emergency service furnished by the out-of-network provider because the covered individual has not satisfied the higher deductible that applies generally to all health care provided out of network. However, the amount the individual is required to pay is credited against the deductible.
(4) Definitions. The definitions in this paragraph (b)(4) govern in applying the provisions of this paragraph (b).
(i) Emergency medical condition. The term emergency medical condition means a medical condition manifesting itself by acute symptoms of sufficient severity (including severe pain) so that a prudent layperson, who possesses an average knowledge of health and medicine, could reasonably expect the absence of immediate medical attention to result in a condition described in clause (i), (ii), or (iii) of section 1867(e)(1)(A) of the Social Security Act (42 U.S.C. 1395dd(e)(1)(A)). (In that provision of the Social Security Act, clause (i) refers to placing the health of the individual (or, with respect to a pregnant woman, the health of the woman or her unborn child) in serious jeopardy; clause (ii) refers to serious impairment to bodily functions; and clause (iii) refers to serious dysfunction of any bodily organ or part.)
(ii) Emergency services. The term emergency services means, with respect to an emergency medical condition—
(A) A medical screening examination (as required under section 1867 of the Social Security Act, 42 U.S.C. 1395dd) that is within the capability of the emergency department of a hospital, including ancillary services routinely available to the emergency department to evaluate such emergency medical condition, and
(B) Such further medical examination and treatment, to the extent they are within the capabilities of the staff and facilities available at the hospital, as are required under section 1867 of the Social Security Act (42 U.S.C. 1395dd) to stabilize the patient.
(iii) Stabilize. The term to stabilize, with respect to an emergency medical condition (as defined in paragraph (b)(4)(i) of this section) has the meaning given in section 1867(e)(3) of the Social Security Act (42 U.S.C. 1395dd(e)(3)).
(c) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning on or after January 1, 2017. Until the applicability date for this regulation, plans and issuers are required to continue to comply with the interim final regulations promulgated by the Department of Labor at 29 CFR part 2590, contained in the 29 CFR, parts 1927 to end, edition revised as of July 1, 2015.
[T.D. 9744, 80 FR 72252, Nov. 18, 2015]
§ 54.9815-2719AT Patient protections (temporary).
(a)-(b) [Reserved]
(c) Applicability date. The provisions of this section are applicable to group health plans and health insurance issuers for plan years beginning before January 1, 2022. See also §§ 54.9816-4T through 54.9816-7T, 54.9817-1T, and 54.9822-1T for rules applicable with respect to plan years beginning on or after January 1, 2022.
[T.D. 9951, 86 FR 36950, July 13, 2021]
§ 54.9816-1T Basis and scope (temporary).
(a) Basis. This section and §§ 54.9816-2T through 54.9816-8T, 54.9817-1T, 54.9817-2T, and 54.9822-1T implement subchapter B of chapter 100 of the Internal Revenue Code of 1986.
(b) Scope. This part establishes standards for group health plans with respect to surprise medical bills, transparency in health care coverage, and additional patient protections. This part also establishes an independent dispute resolution process and standards for certifying independent dispute resolution entities.
[T.D. 9955, 86 FR 56099, Oct. 7, 2021]
§ 54.9816-2T Applicability (temporary).
(a) In general. (1) The requirements in §§ 54.9816-4T through 54.9816-7T, 54.9817-1T, and 54.9822-1T apply to group health plans (including grandfathered health plans as defined in § 54.9815-1251), except as specified in paragraph (b) of this section.
(2) The requirements in §§ 54.9816-8T and 54.9817-2T apply to certified IDR entities and group health plans (including grandfathered health plans as defined in § 54.9815-1251) except as specified in paragraph (b) of this section.
(b) Exceptions. The requirements in §§ 54.9816-4T through 54.9816-8T, 54.9817-1T, 54.9817-2T, and 54.9822-1T do not apply to the following:
(1) Excepted benefits as described in § 54.9831-1(c).
(2) Short-term, limited-duration insurance as defined in § 54.9801-2.
(3) Health reimbursement arrangements or other account-based group health plans as described in § 54.9815-2711(d).
[T.D. 9951, 86 FR 36950, July 13, 2021, as amended by T.D. 9955, 86 FR 56100, Oct. 7, 2021]
§ 54.9816-3 Definitions.
(a) The definitions in § 54.9801-2 apply to §§ 54.9816-4 through 54.9816-9, 54.9817-1, 54.9817-2, and 54.9822-1, unless otherwise specified. In addition, for purposes of §§ 54.9816-4 through 54.9816-9, 54.9817-1, 54.9817-2, and 54.9822-1, the following definition applies:
Bundled payment arrangement means an arrangement under which—
(1) A provider, facility, or provider of air ambulance services bills for multiple items or services furnished to a single patient under a single service code that represents multiple items or services (for example, a Diagnosis-Related Group (DRG) code); or
(2) A plan or issuer makes an initial payment or notice of denial of payment to a provider, facility, or provider of air ambulance services under a single service code that represents multiple items or services furnished to a single patient (for example, a DRG code).
(b) For further guidance, see 29 CFR 2590.716-3.
[T.D. 10049, 91 FR 34047, June 4, 2026]
§ 54.9816-3T Definitions (temporary).
The definitions in § 54.9801-2T apply to §§ 54.9816-4T through 54.9816-7T, 54.9817-1T, and 54.9822-1T unless otherwise specified. In addition, for purposes of §§ 54.9816-4T through 54.9816-7T, 54.9817-1T, and 54.9822-1T, the following definitions apply:
Air ambulance service means medical transport by a rotary wing air ambulance, as defined in 42 CFR 414.605, or fixed wing air ambulance, as defined in 42 CFR 414.605, for patients.
Cost sharing means the amount a participant, beneficiary, or enrollee is responsible for paying for a covered item or service under the terms of the group health plan or health insurance coverage. Cost sharing generally includes copayments, coinsurance, and amounts paid towards deductibles, but does not include amounts paid towards premiums, balance billing by out-of-network providers, or the cost of items or services that are not covered under a group health plan or health insurance coverage.
Emergency department of a hospital includes a hospital outpatient department that provides emergency services.
Emergency medical condition has the meaning given the term in § 54.9816-4T(c)(1).
Emergency services has the meaning given the term in § 54.9816-4T(c)(2).
Health care facility, with respect to a group health plan, in the context of non-emergency services, is each of the following:
(1) A hospital (as defined in section 1861(e) of the Social Security Act);
(2) A hospital outpatient department;
(3) A critical access hospital (as defined in section 1861(mm)(1) of the Social Security Act); and
(4) An ambulatory surgical center described in section 1833(i)(1)(A) of the Social Security Act.
Independent freestanding emergency department means a health care facility (not limited to those described in the definition of health care facility with respect to non-emergency services) that—
(1) Is geographically separate and distinct and licensed separately from a hospital under applicable State law; and
(2) Provides any emergency services as described in § 54.9816-4T(c)(2)(i).
Nonparticipating emergency facility means an emergency department of a hospital, or an independent freestanding emergency department (or a hospital, with respect to services that pursuant to § 54.9816-4T(c)(2)(ii) are included as emergency services), that does not have a contractual relationship directly or indirectly with a group health plan, with respect to the furnishing of an item or service under the plan.
Nonparticipating provider means any physician or other health care provider who does not have a contractual relationship directly or indirectly with a group health plan, with respect to the furnishing of an item or service under the plan.
Notice of denial of payment means, with respect to an item or service for which benefits subject to the protections of §§ 54.9816-4T, 54.9816-5T, and 54.9817-1T are provided or covered, a written notice from the plan to the health care provider, facility, or provider of air ambulance services, as applicable, that payment for such item or service will not be made by the plan and which explains the reason for denial. The term notice of denial of payment does not include a notice of benefit denial due to an adverse benefit determination as defined in 29 CFR 2560.503-1.
Out-of-network rate means, with respect to an item or service furnished by a nonparticipating provider, nonparticipating emergency facility, or nonparticipating provider of air ambulance services—
(1) Subject to paragraph (3) of this definition, in a State that has in effect a specified State law, the amount determined in accordance with such law;
(2) Subject to paragraph (3) of this definition, in a State that does not have in effect a specified State law—
(i) Subject to paragraph (2)(ii) of this definition, if the nonparticipating provider or nonparticipating emergency facility and the plan agree on an amount of payment (including if the amount agreed upon is the initial payment sent by the plan under § 54.9816-4T(b)(3)(iv)(A), § 54.9816-5T(c)(3), or § 54.9817-1T(b)(4)(i); 29 CFR 2590.716-4(b)(3)(iv)(A), 2590.716-5(c)(3), or 2590.717-1(b)(4)(i); or 45 CFR 149.110(b)(3)(iv)(A), 149.120(c)(3), or 149.130(b)(4)(i), as applicable, or is agreed on through negotiations with respect to such item or service), such agreed on amount; or
(ii) If the nonparticipating provider or nonparticipating emergency facility and the plan enter into the independent dispute resolution (IDR) process under section 9816(c) or 9817(b) of the Internal Revenue Code, section 716(c) or 717(b) of ERISA, or section 2799A-1(c) or 2799A-2(b) of the PHS Act, as applicable, and do not agree before the date on which a certified IDR entity makes a determination with respect to such item or service under such subsection, the amount of such determination; or
(3) In a State that has an All-Payer Model Agreement under section 1115A of the Social Security Act that applies with respect to the plan; the nonparticipating provider or nonparticipating emergency facility; and the item or service, the amount that the State approves under the All-Payer Model Agreement for the item or service.
Participating emergency facility means any emergency department of a hospital, or an independent freestanding emergency department (or a hospital, with respect to services that pursuant to § 54.9816-4T(c)(2)(ii) are included as emergency services), that has a contractual relationship directly or indirectly with a group health plan setting forth the terms and conditions on which a relevant item or service is provided to a participant or beneficiary under the plan. A single case agreement between an emergency facility and a plan that is used to address unique situations in which a participant or beneficiary requires services that typically occur out-of-network constitutes a contractual relationship for purposes of this definition, and is limited to the parties to the agreement.
Participating health care facility means any health care facility described in this section that has a contractual relationship directly or indirectly with a group health plan setting forth the terms and conditions on which a relevant item or service is provided to a participant or beneficiary under the plan. A single case agreement between a health care facility and a plan that is used to address unique situations in which a participant or beneficiary requires services that typically occur out-of-network constitutes a contractual relationship for purposes of this definition, and is limited to the parties to the agreement.
Participating provider means any physician or other health care provider who has a contractual relationship directly or indirectly with a group health plan setting forth the terms and conditions on which a relevant item or service is provided to a participant or beneficiary under the plan.
Physician or health care provider means a physician or other health care provider who is acting within the scope of practice of that provider's license or certification under applicable State law, but does not include a provider of air ambulance services.
Provider of air ambulance services means an entity that is licensed under applicable State and Federal law to provide air ambulance services.
Same or similar item or service has the meaning given the term in § 54.9816-6T(a)(13).
Service code has the meaning given the term in § 54.9816-6T(a)(14).
Qualifying payment amount has the meaning given the term in § 54.9816-6T(a)(16).
Recognized amount means, with respect to an item or service furnished by a nonparticipating provider or nonparticipating emergency facility—
(1) Subject to paragraph (3) of this definition, in a State that has in effect a specified State law, the amount determined in accordance with such law.
(2) Subject to paragraph (3) of this definition, in a State that does not have in effect a specified State law, the lesser of—
(i) The amount that is the qualifying payment amount (as determined in accordance with § 54.9816-6T); or
(ii) The amount billed by the provider or facility.
(3) In a State that has an All-Payer Model Agreement under section 1115A of the Social Security Act that applies with respect to the plan; the nonparticipating provider or nonparticipating emergency facility; and the item or service, the amount that the State approves under the All-Payer Model Agreement for the item or service.
Specified State law means a State law that provides for a method for determining the total amount payable under a group health plan to the extent such State law applies for an item or service furnished by a nonparticipating provider or nonparticipating emergency facility (including where it applies because the State has allowed a plan that is not otherwise subject to applicable State law an opportunity to opt in, subject to section 514 of the Employee Retirement Income Security Act of 1974). A group health plan that opts into such a specified State law must do so for all items and services to which the specified State law applies and in a manner determined by the applicable State authority, and must prominently display in its plan materials describing the coverage of out-of-network services a statement that the plan has opted into the specified State law, identify the relevant State (or States), and include a general description of the items and services provided by nonparticipating facilities and providers that are covered by the specified State law.
State means each of the 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands.
Treating provider is a physician or health care provider who has evaluated the individual.
Visit, with respect to items and services furnished to an individual at a health care facility, includes, in addition to items and services furnished by a provider at the facility, equipment and devices, telemedicine services, imaging services, laboratory services, and preoperative and postoperative services, regardless of whether the provider furnishing such items or services is at the facility.
[T.D. 9951, 86 FR 36950, July 13, 2021]
§ 54.9816-4T Preventing surprise medical bills for emergency services (temporary).
(a) In general. If a group health plan provides or covers any benefits with respect to services in an emergency department of a hospital or with respect to emergency services in an independent freestanding emergency department, the plan must cover emergency services, as defined in paragraph (c)(2) of this section, and this coverage must be provided in accordance with paragraph (b) of this section.
(b) Coverage requirements. A plan described in paragraph (a) of this section must provide coverage for emergency services in the following manner—
(1) Without the need for any prior authorization determination, even if the services are provided on an out-of-network basis.
(2) Without regard to whether the health care provider furnishing the emergency services is a participating provider or a participating emergency facility, as applicable, with respect to the services.
(3) If the emergency services are provided by a nonparticipating provider or a nonparticipating emergency facility—
(i) Without imposing any administrative requirement or limitation on coverage that is more restrictive than the requirements or limitations that apply to emergency services received from participating providers and participating emergency facilities.
(ii) Without imposing cost-sharing requirements that are greater than the requirements that would apply if the services were provided by a participating provider or a participating emergency facility.
(iii) By calculating the cost-sharing requirement as if the total amount that would have been charged for the services by such participating provider or participating emergency facility were equal to the recognized amount for such services.
(iv) The plan—
(A) Not later than 30 calendar days after the bill for the services is transmitted by the provider or facility (or, in cases where the recognized amount is determined by a specified State law or All-Payer Model Agreement, such other timeframe as specified by the State law or All-Payer Model Agreement), determines whether the services are covered under the plan and, if the services are covered, sends to the provider or facility, as applicable, an initial payment or a notice of denial of payment. For purposes of this paragraph (b)(3)(iv)(A), the 30-calendar-day period begins on the date the plan receives the information necessary to decide a claim for payment for the services.
(B) Pays a total plan payment directly to the nonparticipating provider or nonparticipating facility that is equal to the amount by which the out-of-network rate for the services exceeds the cost-sharing amount for the services (as determined in accordance with paragraphs (b)(3)(ii) and (iii) of this section), less any initial payment amount made under paragraph (b)(3)(iv)(A) of this section. The total plan payment must be made in accordance with the timing requirement described in section 9816(c)(6), or in cases where the out-of-network rate is determined under a specified State law or All-Payer Model Agreement, such other timeframe as specified by the State law or All-Payer Model Agreement.
(v) By counting any cost-sharing payments made by the participant or beneficiary with respect to the emergency services toward any in-network deductible or in-network out-of-pocket maximums (including the annual limitation on cost sharing under section 2707(b) of the Public Health Service Act) (as applicable) applied under the plan (and the in-network deductible and in-network out-of-pocket maximums must be applied) in the same manner as if the cost-sharing payments were made with respect to emergency services furnished by a participating provider or a participating emergency facility.
(4) Without limiting what constitutes an emergency medical condition (as defined in paragraph (c)(1) of this section) solely on the basis of diagnosis codes.
(5) Without regard to any other term or condition of the coverage, other than—
(i) The exclusion or coordination of benefits (to the extent not inconsistent with benefits for an emergency medical condition, as defined in paragraph (c)(1) of this section).
(ii) An affiliation or waiting period (each as defined in § 54.9801-2).
(iii) Applicable cost sharing.
(c) Definitions. In this section—
(1) Emergency medical condition means a medical condition, including a mental health condition or substance use disorder, manifesting itself by acute symptoms of sufficient severity (including severe pain) such that a prudent layperson, who possesses an average knowledge of health and medicine, could reasonably expect the absence of immediate medical attention to result in a condition described in clause (i), (ii), or (iii) of section 1867(e)(1)(A) of the Social Security Act (42 U.S.C. 1395dd(e)(1)(A)). (In that provision of the Social Security Act, clause (i) refers to placing the health of the individual (or, with respect to a pregnant woman, the health of the woman or her unborn child) in serious jeopardy; clause (ii) refers to serious impairment to bodily functions; and clause (iii) refers to serious dysfunction of any bodily organ or part.)
(2) Emergency services means, with respect to an emergency medical condition—
(i) In general. (A) An appropriate medical screening examination (as required under section 1867 of the Social Security Act (42 U.S.C. 1395dd) or as would be required under such section if such section applied to an independent freestanding emergency department) that is within the capability of the emergency department of a hospital or of an independent freestanding emergency department, as applicable, including ancillary services routinely available to the emergency department to evaluate such emergency medical condition; and
(B) Within the capabilities of the staff and facilities available at the hospital or the independent freestanding emergency department, as applicable, such further medical examination and treatment as are required under section 1867 of the Social Security Act (42 U.S.C. 1395dd), or as would be required under such section if such section applied to an independent freestanding emergency department, to stabilize the patient (regardless of the department of the hospital in which such further examination or treatment is furnished).
(ii) Inclusion of additional services. (A) Subject to paragraph (c)(2)(ii)(B) of this section, items and services—
(1) For which benefits are provided or covered under the plan; and
(2) That are furnished by a nonparticipating provider or nonparticipating emergency facility (regardless of the department of the hospital in which such items or services are furnished) after the participant or beneficiary is stabilized and as part of outpatient observation or an inpatient or outpatient stay with respect to the visit in which the services described in paragraph (c)(2)(i) of this section are furnished.
(B) Items and services described in paragraph (c)(2)(ii)(A) of this section are not included as emergency services if all of the conditions in 45 CFR 149.410(b) are met.
(3) To stabilize, with respect to an emergency medical condition, has the meaning given such term in section 1867(e)(3) of the Social Security Act (42 U.S.C. 1395dd(e)(3)).
(d) Applicability date. The provisions of this section are applicable with respect to plan years beginning on or after January 1, 2022.
[T.D. 9951, 86 FR 36950, July 13, 2021]
§ 54.9816-5T Preventing surprise medical bills for non-emergency services performed by nonparticipating providers at certain participating facilities (temporary).
(a) In general. If a group health plan provides or covers any benefits with respect to items and services described in paragraph (b) of this section, the plan must cover the items and services when furnished by a nonparticipating provider in accordance with paragraph (c) of this section.
(b) Items and services described. The items and services described in this paragraph (b) are items and services (other than emergency services) furnished to a participant or beneficiary by a nonparticipating provider with respect to a visit at a participating health care facility, unless the provider has satisfied the notice and consent criteria of 45 CFR 149.420(c) through (i) with respect to such items and services.
(c) Coverage requirements. In the case of items and services described in paragraph (b) of this section, the plan—
(1) Must not impose a cost-sharing requirement for the items and services that is greater than the cost-sharing requirement that would apply if the items or services had been furnished by a participating provider.
(2) Must calculate the cost-sharing requirements as if the total amount that would have been charged for the items and services by such participating provider were equal to the recognized amount for the items and services.
(3) Not later than 30 calendar days after the bill for the items or services is transmitted by the provider (or in cases where the recognized amount is determined by a specified State law or All-Payer Model Agreement, such other timeframe as specified under the State law or All-Payer Model Agreement), must determine whether the items and services are covered under the plan and, if the items and services are covered, send to the provider an initial payment or a notice of denial of payment. For purposes of this paragraph (c)(3), the 30-calendar-day period begins on the date the plan receives the information necessary to decide a claim for payment for the items or services.
(4) Must pay a total plan payment directly to the nonparticipating provider that is equal to the amount by which the out-of-network rate for the items and services involved exceeds the cost-sharing amount for the items and services (as determined in accordance with paragraphs (c)(1) and (2) of this section), less any initial payment amount made under paragraph (c)(3) of this section. The total plan payment must be made in accordance with the timing requirement described in section 9816(c)(6) or in cases where the out-of-network rate is determined under a specified State law or All-Payer Model Agreement, such other timeframe as specified by the State law or All-Payer Model Agreement.
(5) Must count any cost-sharing payments made by the participant or beneficiary toward any in-network deductible and in-network out-of-pocket maximums (including the annual limitation on cost sharing under section 2707(b) of the Public Health Service Act) (as applicable) applied under the plan (and the in-network deductible and out-of-pocket maximums must be applied) in the same manner as if such cost-sharing payments were made with respect to items and services furnished by a participating provider.
(d) Applicability date. The provisions of this section are applicable with respect to plan years beginning on or after January 1, 2022.
[T.D. 9951, 86 FR 36950, July 13, 2021]
§ 54.9816-6 Methodology for calculating qualifying payment amount.
(a) Definitions. For further guidance, see 29 CFR 2590.716-6(a) introductory text through (a)(17).
(1)-(17) [Reserved]
(18) Downcode means the alteration by a plan or issuer of a service code to another service code, or the alteration, addition, or removal by a plan or issuer of a modifier, if the changed code or modifier is associated with a lower qualifying payment amount than the service code or modifier billed by the provider, facility, or provider of air ambulance services.
(b) Methodology for calculation of median contracted rate. For further guidance, see 29 CFR 2590.716-6(b).
(c) Methodology for calculation of the qualifying payment amount. For further guidance, see 29 CFR 2590.716-6(c).
(d) Information to be shared about the qualifying payment amount. In cases in which the recognized amount, for an item or service furnished by a nonparticipating provider or nonparticipating emergency facility, is the qualifying payment amount or the amount billed by the provider or facility, or if the amount on which cost sharing is based for air ambulance services furnished by a nonparticipating provider of air ambulance services is the qualifying payment amount or the amount billed by the provider of air ambulance services, the plan or issuer must provide to the provider, facility, or provider of air ambulance services, as applicable, in writing, in paper or electronic form—
(1) With an initial payment or notice of denial of payment under § 54.9816-4, § 9816-5, or § 54.9817:
(i) For further guidance, see 29 CFR 2590.716-6(d)(1)(i);
(ii) If the qualifying payment amount is based on a downcoded service code or modifier—
(A) A statement that the service code or modifier billed by the provider, facility, or provider of air ambulance services was downcoded;
(B) An explanation of why the claim was downcoded, which must include a description of which service codes were altered, if any, and a description of which modifiers were altered, added, or removed, if any; and
(C) The amount that would have been the qualifying payment amount had the service code or modifier not been downcoded;
(iii) For further guidance, see 29 CFR 2590.716-6(d)(1)(iii);
(iv) A statement that—
(A) If the provider, facility, or provider of air ambulance services, as applicable, wishes to initiate a 30-business-day open negotiation period for purposes of determining the out-of-network rate, the provider, facility, or provider of air ambulance services must:
(1) Contact the appropriate person or office to initiate open negotiation generally within 30 business days of receiving the initial payment or notice of denial of payment, and
(2) For disclosures required to be provided on or after the later of August 3, 2026 and the date that the open negotiation notice can be submitted through the Federal independent dispute resolution (IDR) portal, notify the Secretary of the Treasury (Secretary) as described under § 54.9816-8(b)(1)(i); and
(B) If the 30-business-day open negotiation period does not result in an agreement on the amount of payment, the provider, facility, or provider of air ambulance services may generally initiate the Federal IDR process within 4 business days after the end of the 30-business-day open negotiation period;
(v) For disclosures required to be provided on or after August 3, 2026, the legal business name (if any) of the self-insured group health plan, FEHB Program carrier, or issuer and, if applicable, the legal business name of the self-insured group health plan sponsor, and the registration number assigned to the plan or issuer, as required under § 54.9816-9.
(vi) For further guidance, see 29 CFR 2590.716-6(d)(1)(vi).
(2) In a timely manner upon the request of the provider, facility, or provider of air ambulance services:
(i) For further guidance, see 29 CFR 2590.716-6(d)(2)(i).
(ii) For further guidance, see 29 CFR 2590.716-6(d)(2)(ii).
(iii) For further guidance, see 29 CFR 2590.716-6(d)(2)(iii).
(iv) For further guidance, see 29 CFR 2590.716-6(d)(2)(iv).
(e) For further guidance, see 29 CFR 2590.716-6(e).
(f) For further guidance, see 29 CFR 2590.716-6(f).
(g) Applicability date. The provisions of this section are applicable for plan years beginning on or after January 1, 2022, except that paragraph (a)(18) of this section regarding the definition of the term “downcode” and paragraph (d)(1)(ii) of this section regarding additional information that must be provided if the qualifying payment amount is based on a downcoded service code or modifier are applicable with respect to items or services provided or furnished on or after October 25, 2022, for plan years beginning on or after January 1, 2022.
(h) Severability. (1) Any provision of this section held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, will be construed so as to continue to give maximum effect to the provision permitted by law, unless such holding is one of utter invalidity or unenforceability, in which event the provision will be severable from this section and will not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.
(2) The provisions in this section are intended to be severable from the provisions in §§ 54.9816-6A, 54.9816-8, and 54.9816-9, from any grant of forbearance from removal resulting from this subpart, and from any provision referenced in §§ 54.9816-6A, 54.9816-8, and 54.9816-9.
[T.D. 9965, 87 FR 52644, Aug. 26, 2022, as amended by T.D. 10049, 91 FR 34047, June 4, 2026; 91 FR 55464, Aug. 28, 2026]
§ 54.9816-6T Methodology for calculating qualifying payment amount (temporary).
(a) Definitions. For purposes of this section, the following definitions apply:
(1) Contracted rate means the total amount (including cost sharing) that a group health plan has contractually agreed to pay a participating provider, facility, or provider of air ambulance services for covered items and services, whether directly or indirectly, including through a third-party administrator or pharmacy benefit manager. Solely for purposes of this definition, a single case agreement, letter of agreement, or other similar arrangement between a provider, facility, or air ambulance provider and a plan, used to supplement the network of the plan for a specific participant or beneficiary in unique circumstances, does not constitute a contract.
(2) Derived amount has the meaning given the term in § 54.9815-2715A1.
(3) Eligible database means—
(i) A State all-payer claims database; or
(ii) Any third-party database which—
(A) Is not affiliated with, or owned or controlled by, any health insurance issuer, or a health care provider, facility, or provider of air ambulance services (or any member of the same controlled group as, or under common control with, such an entity). For purposes of this paragraph (a)(3)(ii)(A), the term controlled group means a group of two or more persons that is treated as a single employer under sections 52(a), 52(b), 414(m), or 414(o) of the Internal Revenue Code of 1986, as amended;
(B) Has sufficient information reflecting in-network amounts paid by group health plans or health insurance issuers offering group or individual health insurance coverage to providers, facilities, or providers of air ambulance services for relevant items and services furnished in the applicable geographic region; and
(C) Has the ability to distinguish amounts paid to participating providers and facilities by commercial payers, such as group health plans and health insurance issuers offering group or individual health insurance coverage, from all other claims data, such as amounts billed by nonparticipating providers or facilities and amounts paid by public payers, including the Medicare program under title XVIII of the Social Security Act, the Medicaid program under title XIX of the Social Security Act (or a demonstration project under title XI of the Social Security Act), or the Children's Health Insurance Program under title XXI of the Social Security Act.
(4) Facility of the same or similar facility type means, with respect to emergency services, either—
(i) An emergency department of a hospital; or
(ii) An independent freestanding emergency department.
(5) First coverage year means, with respect to an item or service for which coverage is not offered in 2019 under a group health plan, the first year after 2019 for which coverage for such item or service is offered under that plan.
(6) First sufficient information year means, with respect to a group health plan—
(i) In the case of an item or service for which the plan does not have sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section in 2019, the first year after 2022 for which the plan has sufficient information to calculate the median of such contracted rates in the year immediately preceding that first year after 2022; and
(ii) In the case of a newly covered item or service, the first year after the first coverage year for such item or service with respect to such plan for which the plan has sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section in the year immediately preceding that first year.
(7) Geographic region means—
(i) For items and services other than air ambulance services—
(A) Subject to paragraphs (a)(7)(i)(B) and (C) of this section, one region for each metropolitan statistical area, as described by the U.S. Office of Management and Budget and published by the U.S. Census Bureau, in a State, and one region consisting of all other portions of the State.
(B) If a plan does not have sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section for an item or service provided in a geographic region described in paragraph (a)(7)(i)(A) of this section, one region consisting of all metropolitan statistical areas, as described by the U.S. Office of Management and Budget and published by the U.S. Census Bureau, in the State, and one region consisting of all other portions of the State.
(C) If a plan does not have sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section for an item or service provided in a geographic region described in paragraph (a)(7)(i)(B) of this section, one region consisting of all metropolitan statistical areas, as described by the U.S. Office of Management and Budget and published by the U.S. Census Bureau, in each Census division and one region consisting of all other portions of the Census division, as described by the U.S. Census Bureau.
(ii) For air ambulance services—
(A) Subject to paragraph (a)(7)(ii)(B) of this section, one region consisting of all metropolitan statistical areas, as described by the U.S. Office of Management and Budget and published by the U.S. Census Bureau, in the State, and one region consisting of all other portions of the State, determined based on the point of pick-up (as defined in 42 CFR 414.605).
(B) If a plan does not have sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section for an air ambulance service provided in a geographic region described in paragraph (a)(7)(ii)(A) of this section, one region consisting of all metropolitan statistical areas, as described by the U.S. Office of Management and Budget and published by the U.S. Census Bureau, in each Census division and one region consisting of all other portions of the Census division, as described by the U.S. Census Bureau, determined based on the point of pick-up (as defined in 42 CFR 414.605).
(8) Insurance market is, irrespective of the State, one of the following:
(i) The individual market (other than short-term, limited-duration insurance or individual health insurance coverage that consists solely of excepted benefits).
(ii) The large group market (other than coverage that consists solely of excepted benefits).
(iii) The small group market (other than coverage that consists solely of excepted benefits).
(iv) In the case of a self-insured group health plan, all self-insured group health plans (other than account-based plans, as defined in § 54.9815-2711(d)(6)(i), and plans that consist solely of excepted benefits) of the same plan sponsor, or at the option of the plan sponsor, all self-insured group health plans administered by the same entity (including a third-party administrator contracted by the plan), to the extent otherwise permitted by law, that is responsible for calculating the qualifying payment amount on behalf of the plan.
(9) Modifiers mean codes applied to the service code that provide a more specific description of the furnished item or service and that may adjust the payment rate or affect the processing or payment of the code billed.
(10) Newly covered item or service means an item or service for which coverage was not offered in 2019 under a group health plan, but that is offered under the plan in a year after 2019.
(11) New service code means a service code that was created or substantially revised in a year after 2019.
(12) Provider in the same or similar specialty means the practice specialty of a provider, as identified by the plan consistent with the plan's usual business practice, except that, with respect to air ambulance services, all providers of air ambulance services are considered to be a single provider specialty.
(13) Same or similar item or service means a health care item or service billed under the same service code, or a comparable code under a different procedural code system.
(14) Service code means the code that describes an item or service using the Current Procedural Terminology (CPT) code, Healthcare Common Procedure Coding System (HCPCS), or Diagnosis-Related Group (DRG) codes.
(15) Sufficient information means, for purposes of determining whether a group health plan has sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section—
(i) The plan has at least three contracted rates on January 31, 2019, to calculate the median of the contracted rates in accordance with paragraph (b) of this section; or
(ii) For an item or service furnished during a year after 2022 that is used to determine the first sufficient information year—
(A) The plan has at least three contracted rates on January 31 of the year immediately preceding that year to calculate the median of the contracted rates in accordance with paragraph (b) of this section; and
(B) The contracted rates under paragraph (a)(15)(ii)(A) of this section account (or are reasonably expected to account) for at least 25 percent of the total number of claims paid for that item or service for that year with respect to all plans of the sponsor (or the administering entity as provided in paragraph (a)(8)(iv) of this section, if applicable) that are offered in the same insurance market.
(16) Qualifying payment amount means, with respect to a sponsor of a group health plan, the amount calculated using the methodology described in paragraph (c) of this section.
(17) Underlying fee schedule rate means the rate for a covered item or service from a particular participating provider, providers, or facility that a group health plan uses to determine a participant's or beneficiary's cost-sharing liability for the item or service, when that rate is different from the contracted rate.
(18) For further guidance see § 54.9816-6(a)(18).
(b) Methodology for calculation of median contracted rate—(1) In general. The median contracted rate for an item or service is calculated by arranging in order from least to greatest the contracted rates of all group health plans of the plan sponsor (or the administering entity as provided in paragraph (a)(8)(iv) of this section, if applicable) in the same insurance market for the same or similar item or service that is provided by a provider in the same or similar specialty or facility of the same or similar facility type and provided in the geographic region in which the item or service is furnished and selecting the middle number. If there are an even number of contracted rates, the median contracted rate is the average of the middle two contracted rates. In determining the median contracted rate, the amount negotiated under each contract is treated as a separate amount. If a plan or issuer has a contract with a provider group or facility, the rate negotiated with that provider group or facility under the contract is treated as a single contracted rate if the same amount applies with respect to all providers of such provider group or facility under the single contract. However, if a plan or issuer has a contract with multiple providers, with separate negotiated rates with each particular provider, each unique contracted rate with an individual provider constitutes a single contracted rate. Further, if a plan or issuer has separate contracts with individual providers, the contracted rate under each such contract constitutes a single contracted rate (even if the same amount is paid to multiple providers under separate contracts).
(2) Calculation rules. In calculating the median contracted rate, a plan must:
(i) Calculate the median contracted rate with respect to all plans of such sponsor (or the administering entity as provided in paragraph (a)(8)(iv) of this section, if applicable) that are offered in the same insurance market;
(ii) Calculate the median contracted rate using the full contracted rate applicable to the service code, except that the plan must—
(A) Calculate separate median contracted rates for CPT code modifiers “26” (professional component) and “TC” (technical component);
(B) For anesthesia services, calculate a median contracted rate for the anesthesia conversion factor for each service code;
(C) For air ambulance services, calculate a median contracted rate for the air mileage service codes (A0435 and A0436); and
(D) Where contracted rates otherwise vary based on applying a modifier code, calculate a separate median contracted rate for each such service code-modifier combination;
(iii) In the case of payments made by a plan that are not on a fee-for-service basis (such as bundled or capitation payments), calculate a median contracted rate for each item or service using the underlying fee schedule rates for the relevant items or services. If the plan does not have an underlying fee schedule rate for the item or service, it must use the derived amount to calculate the median contracted rate; and
(iv) Exclude risk sharing, bonus, penalty, or other incentive-based or retrospective payments or payment adjustments.
(3) Provider specialties; facility types. (i) If a plan has contracted rates that vary based on provider specialty for a service code, the median contracted rate is calculated separately for each provider specialty, as applicable.
(ii) If a plan has contracted rates for emergency services that vary based on facility type for a service code, the median contracted rate is calculated separately for each facility of the same or similar facility type.
(c) Methodology for calculation of the qualifying payment amount—(1) In general. (i) For an item or service (other than items or services described in paragraphs (c)(1)(iii) through (vii) of this section) furnished during 2022, the plan must calculate the qualifying payment amount by increasing the median contracted rate (as determined in accordance with paragraph (b) of this section) for the same or similar item or service under such plans, on January 31, 2019, by the combined percentage increase as published by the Department of the Treasury and the Internal Revenue Service to reflect the percentage increase in the CPI-U over 2019, such percentage increase over 2020, and such percentage increase over 2021.
(A) The combined percentage increase for 2019, 2020, and 2021 will be published in guidance by the Internal Revenue Service. The Department of the Treasury and the Internal Revenue Service will calculate the percentage increase using the CPI-U published by the Bureau of Labor Statistics of the Department of Labor.
(B) For purposes of this paragraph (c)(1)(i), the CPI-U for each calendar year is the average of the CPI-U as of the close of the 12-month period ending on August 31 of the calendar year, rounded to 10 decimal places.
(C) The combined percentage increase for 2019, 2020, and 2021 will be calculated as:
(CPI-U 2019/CPI-U 2018) × (CPI-U 2020/CPI-U 2019) × (CPI-U 2021/CPI-U 2020)
(ii) For an item or service (other than items or services described in paragraphs (c)(1)(iii) through (vii) of this section) furnished during 2023 or a subsequent year, the plan must calculate the qualifying payment amount by increasing the qualifying payment amount determined under paragraph (c)(1)(i) of this section, for such an item or service furnished in the immediately preceding year, by the percentage increase as published by the Department of the Treasury and the Internal Revenue Service.
(A) The percentage increase for any year after 2022 will be published in guidance by the Internal Revenue Service. The Department of the Treasury and Internal Revenue Service will calculate the percentage increase using the CPI-U published by the Bureau of Labor Statistics of the Department of Labor.
(B) For purposes of this paragraph (c)(1)(ii), the CPI-U for each calendar year is the average of the CPI-U as of the close of the 12-month period ending on August 31 of the calendar year, rounded to 10 decimal places.
(C) The combined percentage increase for any year will be calculated as CPI-U present year/CPI-U prior year.
(iii) For anesthesia services furnished during 2022, the plan must calculate the qualifying payment amount by first increasing the median contracted rate for the anesthesia conversion factor (as determined in accordance with paragraph (b) of this section) for the same or similar item or service under such plans, on January 31, 2019, in accordance with paragraph (c)(1)(i) of this section (referred to in this section as the indexed median contracted rate for the anesthesia conversion factor). The plan must then multiply the indexed median contracted rate for the anesthesia conversion factor by the sum of the base unit, time unit, and physical status modifier units of the participant or beneficiary to whom anesthesia services are furnished to determine the qualifying payment amount.
(A) The base units for an anesthesia service code are the base units for that service code specified in the most recent edition (as of the date of service) of the American Society of Anesthesiologists Relative Value Guide.
(B) The time unit is measured in 15-minute increments or a fraction thereof.
(C) The physical status modifier on a claim is a standard modifier describing the physical status of the patient and is used to distinguish between various levels of complexity of the anesthesia services provided, and is expressed as a unit with a value between zero (0) and three (3).
(D) The anesthesia conversion factor is expressed in dollars per unit and is a contracted rate negotiated with the plan.
(iv) For anesthesia services furnished during 2023 or a subsequent year, the plan must calculate the qualifying payment amount by first increasing the indexed median contracted rate for the anesthesia conversion factor, determined under paragraph (c)(1)(iii) of this section for such services furnished in the immediately preceding year, in accordance with paragraph (c)(1)(ii) of this section. The plan must then multiply that amount by the sum of the base unit, time unit, and physical status modifier units for the participant or beneficiary to whom anesthesia services are furnished to determine the qualifying payment amount.
(v) For air ambulance services billed using the air mileage service codes (A0435 and A0436) that are furnished during 2022, the plan must calculate the qualifying payment amount for services billed using the air mileage service codes by first increasing the median contracted rate (as determined in accordance with paragraph (b) of this section), in accordance with paragraph (c)(1)(i) of this section (referred to in this section as the indexed median air mileage rate). The plan must then multiply the indexed median air mileage rate by the number of loaded miles provided to the participant or beneficiary to determine the qualifying payment amount.
(A) The air mileage rate is expressed in dollars per loaded mile flown, is expressed in statute miles (not nautical miles), and is a contracted rate negotiated with the plan.
(B) The number of loaded miles is the number of miles a patient is transported in the air ambulance vehicle.
(C) The qualifying payment amount for other service codes associated with air ambulance services is calculated in accordance with paragraphs (c)(1)(i) and (ii) of this section.
(vi) For air ambulance services billed using the air mileage service codes (A0435 and A0436) that are furnished during 2023 or a subsequent year, the plan must calculate the qualifying payment amount by first increasing the indexed median air mileage rate, determined under paragraph (c)(1)(v) of this section for such services furnished in the immediately preceding year, in accordance with paragraph (c)(1)(ii) of this section. The plan must then multiply the indexed median air mileage rate by the number of loaded miles provided to the participant or beneficiary to determine the qualifying payment amount.
(vii) For any other items or services for which a plan generally determines payment for the same or similar items or services by multiplying a contracted rate by another unit value, the plan must calculate the qualifying payment amount using a methodology that is similar to the methodology required under paragraphs (c)(1)(iii) through (vi) of this section and reasonably reflects the payment methodology for same or similar items or services.
(2) New plans. With respect to a sponsor of a group health plan in a geographic region in which the sponsor did not offer any group health plan during 2019—
(i) For the first year in which the group health plan is offered in such region—
(A) If the plan has sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section, the plan must calculate the qualifying payment amount in accordance with paragraph (c)(1) of this section for items and services that are covered by the plan and furnished during the first year; and
(B) If the plan does not have sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section for an item or service provided in a geographic region, the plan must determine the qualifying payment amount for the item or service in accordance with paragraph (c)(3)(i) of this section.
(ii) For each subsequent year the group health plan is offered in the region, the plan must calculate the qualifying payment amount by increasing the qualifying payment amount determined under this paragraph (c)(2) for the items and services furnished in the immediately preceding year, in accordance with paragraph (c)(1)(ii), (iv), or (vi) of this section, as applicable.
(3) Insufficient information; newly covered items and services. In the case of a plan that does not have sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section in 2019 (or, in the case of a newly covered item or service, in the first coverage year for such item or service with respect to such plan or coverage if the plan does not have sufficient information) for an item or service provided in a geographic region—
(i) For an item or service furnished during 2022 (or, in the case of a newly covered item or service, during the first coverage year for the item or service with respect to the plan or coverage), the plan must calculate the qualifying payment amount by first identifying the rate that is equal to the median of the in-network allowed amounts for the same or similar item or service provided in the geographic region in the year immediately preceding the year in which the item or service is furnished (or, in the case of a newly covered item or service, the year immediately preceding such first coverage year) determined by the plan through use of any eligible database, and then increasing that rate by the percentage increase in the CPI-U over such preceding year. For purposes of this section, in cases in which an eligible database is used to determine the qualifying payment amount with respect to an item or service furnished during a calendar year, the plan must use the same database for determining the qualifying payment amount for that item or service furnished through the last day of the calendar year, and if a different database is selected for some items or services, the basis for that selection must be one or more factors not directly related to the rate of those items or services (such as sufficiency of data for those items or services).
(ii) For an item or service furnished in a subsequent year (before the first sufficient information year for such item or service with respect to such plan), the plan must calculate the qualifying payment amount by increasing the qualifying payment amount determined under paragraph (c)(3)(i) of this section or this paragraph (c)(3)(ii), as applicable, for such item or service for the year immediately preceding such subsequent year, by the percentage increase in CPI-U over such preceding year;
(iii) For an item or service furnished in the first sufficient information year for such item or service with respect to such plan, the plan must calculate the qualifying payment amount in accordance with paragraph (c)(1)(i), (iii), or (v) of this section, as applicable, except that in applying such paragraph to such item or service, the reference to 'furnished during 2022' is treated as a reference to furnished during such first sufficient information year, the reference to 'in 2019' is treated as a reference to such sufficient information year, and the increase described in such paragraph is not applied; and
(iv) For an item or service furnished in any year subsequent to the first sufficient information year for such item or service with respect to such plan, the plan must calculate the qualifying payment amount in accordance with paragraph (c)(1)(ii), (iv), or (vi) of this section, as applicable, except that in applying such paragraph to such item or service, the reference to 'furnished during 2023 or a subsequent year' is treated as a reference to furnished during the year after such first sufficient information year or a subsequent year.
(4) New service codes. In the case of a plan that does not have sufficient information to calculate the median of the contracted rates described in paragraph (b) of this section and determine the qualifying payment amount under paragraphs (c)(1) through (3) of this section because the item or service furnished is billed under a new service code—
(i) For an item or service furnished during 2022 (or, in the case of a newly covered item or service, during the first coverage year for the item or service with respect to the plan), the plan must identify a reasonably related service code that existed in the immediately preceding year and—
(A) If the Centers for Medicare & Medicaid Services has established a Medicare payment rate for the item or service billed under the new service code, the plan must calculate the qualifying payment amount by first calculating the ratio of the rate that Medicare pays for the item or service billed under the new service code compared to the rate that Medicare pays for the item or service billed under the related service code, and then multiplying the ratio by the qualifying payment amount for an item or service billed under the related service code for the year in which the item or service is furnished.
(B) If the Centers for Medicare & Medicaid Services has not established a Medicare payment rate for the item or service billed under the new service code, the plan must calculate the qualifying payment amount by first calculating the ratio of the rate that the plan reimburses for the item or service billed under the new service code compared to the rate that the plan reimburses for the item or service billed under the related service code, and then multiplying the ratio by the qualifying payment amount for an item or service billed under the related service code.
(ii) For an item or service furnished in a subsequent year (before the first sufficient information year for such item or service with respect to such plan or coverage or before the first year for which an eligible database has sufficient information to a calculate a rate under paragraph (c)(3)(i) of this section in the immediately preceding year), the plan must calculate the qualifying payment amount by increasing the qualifying payment amount determined under paragraph (c)(4)(i) of this section or this paragraph (c)(4)(ii), as applicable, for such item or service for the year immediately preceding such subsequent year, by the percentage increase in CPI-U over such preceding year;
(iii) For an item or service furnished in the first sufficient information year for such item or service with respect to such plan or the first year for which an eligible database has sufficient information to calculate a rate under paragraph (c)(3)(i) of this section in the immediately preceding year, the plan or issuer must calculate the qualifying payment amount in accordance with paragraph (c)(3) of this section.
(d) Information to be shared about qualifying payment amount. In cases in which the recognized amount with respect to an item or service furnished by a nonparticipating provider, nonparticipating emergency facility, or nonparticipating provider of air ambulance services is the qualifying payment amount, the plan must provide in writing, in paper or electronic form, to the provider or facility, as applicable—
(1) With an initial payment or notice of denial of payment under § 54.9816-4T, § 54.9816-5T, or § 54.9817-1T:
(i) The qualifying payment amount for each item or service involved;
(ii) For further guidance see § 54.9816-6(d)(1)(ii);
(iii) A statement to certify that, based on the determination of the plan—
(A) The qualifying payment amount applies for purposes of the recognized amount (or, in the case of air ambulance services, for calculating the participant's, beneficiary's, or enrollee's cost sharing); and
(B) Each qualifying payment amount shared with the provider or facility was determined in compliance with this section;
(iv) A statement that if the provider or facility, as applicable, wishes to initiate a 30-day open negotiation period for purposes of determining the amount of total payment, the provider or facility may contact the appropriate person or office to initiate open negotiation, and that if the 30-day negotiation period does not result in a determination, generally, the provider or facility may initiate the independent dispute resolution process within 4 days after the end of the open negotiation period; and
(v) Contact information, including a telephone number and email address, for the appropriate person or office to initiate open negotiations for purposes of determining an amount of payment (including cost sharing) for such item or service.
(2) In a timely manner upon request of the provider or facility:
(i) Information about whether the qualifying payment amount for items and services involved included contracted rates that were not on a fee-for-service basis for those specific items and services and whether the qualifying payment amount for those items and services was determined using underlying fee schedule rates or a derived amount;
(ii) If a plan uses an eligible database under paragraph (c)(3) of this section to determine the qualifying payment amount, information to identify which database was used; and
(iii) If a related service code was used to determine the qualifying payment amount for an item or service billed under a new service code under paragraph (c)(4)(i) or (ii) of this section, information to identify the related service code; and
(iv) If applicable, a statement that the plan's contracted rates include risk-sharing, bonus, penalty, or other incentive-based or retrospective payments or payment adjustments for the items and services involved (as applicable) that were excluded for purposes of calculating the qualifying payment amount.
(e) Certain access fees to databases. In the case of a plan that, pursuant to this section, uses an eligible database to determine the qualifying payment amount for an item or service, the plan is responsible for any costs associated with accessing such database.
(f) Audits. See 45 CFR 149.140(f) for audit procedures that apply with respect to ensuring that a plan is in compliance with the requirement of applying a qualifying payment amount under §§ 54.9816-4T, 54.9816-5T, 54.9817-1T, and this section, and ensuring that such amount so applied satisfies the requirements under this section, as applicable.
(g) Applicability date. The provisions of this section are applicable with respect to plan years beginning on or after January 1, 2022.
[T.D. 9951, 86 FR 36950, July 13, 2021, as amended by T.D. 9965, 87 FR 52645, Aug. 26, 2022]
§ 54.9816-6A Use of claim adjustment reason codes and remittance advice remark codes.
(a) In general. When providing any remittance advice (including in paper or electronic form) to an entity (other than a participant, beneficiary, or enrollee) that does not have a contractual relationship, directly or indirectly, with a group health plan or a health insurance issuer offering group or individual health insurance coverage for the furnishing of an item or service under the plan or coverage, in response to a claim for payment for health care items and services furnished by that entity, the plan or issuer must use claim adjustment reason codes (CARCs) and remittance advice remark codes (RARCs) (as those terms are described in standards and operating rules adopted at 45 CFR part 162) in the manner and timeframe specified in guidance issued by the Secretaries of the Treasury, Labor, and Health and Human Services, or as required under any applicable adopted standards and operating rules under 45 CFR part 162, to communicate information related to whether the claim is or is not subject to the provisions of this part and 45 CFR 149 subparts E and F.
(b) Severability—(1) Any provision of this section held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, will be construed so as to continue to give maximum effect to the provision permitted by law, unless such holding is one of utter invalidity or unenforceability, in which event the provision will be severable from this section and will not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.
(2) The provisions in this section are intended to be severable from the provisions in §§ 54.9816-6, 54.9816-8, and 54.9816-9, from any grant of forbearance from removal resulting from this subpart, and from any provision referenced in §§ 54.9816-6, 54.9816-8, and 54.9816-9.
[T.D. 10049, 91 FR 34047, June 4, 2026]
§ 54.9816-7T Complaints process for surprise medical bills regarding group health plans (temporary).
See 45 CFR 149.150 for the process to receive and resolve complaints that a specific group health plan may be failing to meet the requirement of applying a qualifying payment amount under §§ 54.9816-4T, 54.9816-5T, 54.9816-6T, and 54.9817-1T, which may warrant an investigation.
[T.D. 9951, 86 FR 36950, July 13, 2021]
§ 54.9816-8 Independent dispute resolution process.
(a) Scope and Definitions—(1) Scope. For further guidance, see 29 CFR 2590.716-8(a)(1).
(2) Definitions. For further guidance, see 29 CFR 2590.7160-8(a)(2). Additionally, for purposes of this section, the following definitions apply:
(i) Batched qualified IDR items and services means multiple qualified Independent Dispute Resolution (IDR) items or services that are considered jointly as part of one payment determination by a certified IDR entity for purposes of the Federal IDR process in accordance with paragraph (c)(4)(i) of this section.
(ii) For further guidance, see 29 CFR 2590.716-8(a)(2)(ii) through (xii).
(b) Determination of payment amount through open negotiation and initiation of the Federal IDR process—(1) Determination of payment amount through open negotiation—(i) In general. For an item or service that meets the requirements of 29 CFR 2590.716-8(a)(2)(xi)(A), the provider, facility, or provider of air ambulance services or the group health plan or health insurance issuer offering group or individual health insurance coverage may, during the 30-business-day period beginning on the day the provider, facility, or provider of air ambulance services receives an initial payment or notice of denial of payment regarding the item or service, initiate a 30-business-day open negotiation period for purposes of determining the out-of-network rate for such item or service. To initiate the open negotiation period, a party must submit a written open negotiation notice with the content specified in paragraph (b)(1)(ii) of this section to the other party and to the Secretary in the manner specified in paragraph (b)(3) of this section. The 30-business-day open negotiation period begins on the day on which the party first submits the open negotiation notice, including the remittance advice documentation specified in paragraph (b)(1)(ii)(A)(12) of this section to the other party and the Secretary of the Treasury (Secretary). The party in receipt of the open negotiation notice must provide to the party that initiated open negotiation and to the Secretary in the manner specified in paragraph (b)(3) of this section, as soon as practicable, but no later than the 15th business day of the 30-business-day open negotiation period, a written notice and supporting documentation in response to the open negotiation notice, as specified in paragraph (b)(1)(iii)(A) of this section.
(ii) Open negotiation notice—(A) Content. The open negotiation notice must include, for the item or service that is the subject of the open negotiation notice, information about the item or service and the parties, including:
(1) Information sufficient to identify the provider, facility, or provider of air ambulance services, including the name and current contact information (including the legal business name, email address, phone number, and mailing address) as provided with the claim form submitted by the provider, facility, or provider of air ambulance services to the plan or issuer, and the applicable National Provider Identifier (NPI);
(2) Information sufficient to identify the plan or issuer, including the plan's or issuer's registration number, as required under § 54.9816-9, or an attestation from the party submitting the open negotiation notice that the plan's or issuer's registration number was not provided on any remittance advice associated with the initial payment or notice of denial of payment for the item or service; the legal business name of the plan or issuer (or, in the case of a self-insured group health plan that does not have a legal business name, the legal business name of the plan sponsor), as well as the current contact information (name, email address, phone number, and mailing address) of the plan or issuer as provided with any remittance advice associated with the initial payment or notice of denial of payment for the item or service; and if the party submitting the open negotiation notice is a plan or issuer, the plan type (for example, self-insured or fully-insured);
(3) The name and contact information (including the legal business name, email address, phone number, and mailing address) for any third party representing the party submitting the open negotiation notice, and an attestation that the third party has the authority to act on behalf of the party it represents in the open negotiation;
(4) Information sufficient to identify the item or service, including: the date(s) the item or service was furnished and, if the party submitting the open negotiation notice is a provider, facility, or provider of air ambulance services, the date(s) that the provider, facility, or provider of air ambulance services received the initial payment or notice of denial of payment for the item or service from the plan or issuer; the type of item or service (specifically, whether the item or service is an emergency service as defined in § 2590.716-4(c)(2)(i) or (ii), a non-emergency service as described in § 2590.716-5(b), or an air ambulance service as defined in § 2590.716-3); whether the service is a professional service or facility-based service; the State where the item or service was furnished; the claim number; the service code; and information to identify the location where the item or service was furnished (such as, place of service code or bill type code);
(5) The initial payment amount (including $0 if payment is denied);
(6) The qualifying payment amount, if provided in a remittance advice associated with the initial payment or notice of denial of payment, or if the party submitting the open negotiation notice is a plan or issuer;
(7) An offer of an out-of-network rate for each item or service;
(8) If the party submitting the open negotiation notice is a plan or issuer, the amount of cost sharing imposed for the item or service, if any;
(9) If the party submitting the open negotiation notice is a provider or facility, a statement that the items and services do not qualify for the notice and consent exception described at 45 CFR 149.410(b) or 45 CFR 149.420(c) through (i);
(10) A statement that the provider, facility, or provider of air ambulance services was a nonparticipating provider, nonparticipating emergency facility, or nonparticipating provider of air ambulance services on the date the item or service was furnished;
(11) General information listed in the standard open negotiation notice developed by the Secretary pursuant to paragraph (b)(3) of this section describing the open negotiation period and the Federal IDR process (including a description of the purpose of the open negotiation period and Federal IDR process and key deadlines in the open negotiation period and Federal IDR process); and
(12) A copy of any remittance advice associated with the initial payment or notice of denial of payment for the item or service.
(B) [Reserved]
(iii) Open negotiation response notice—(A) Content. The response to the open negotiation notice must include, for the item or service that is the subject of the open negotiation response notice, information about the item or service and the parties, including:
(1) Information sufficient to identify the provider, facility, or provider of air ambulance services, including the name and current contact information (including the legal business name, email address, phone number, and mailing address) as provided with the claim form submitted by the provider, facility, or provider of air ambulance services to the plan or issuer, and the applicable NPI;
(2) Information sufficient to identify the plan or issuer, including the plan's or issuer's registration number, as required under § 54.9816-9, or an attestation from the party submitting the open negotiation response notice that the plan's or issuer's registration number was not provided on any remittance advice associated with the initial payment or notice of denial of payment for the item or service, as well as the legal business name of the plan or issuer (or, in the case of a self-insured group health plan that does not have a legal business name, the legal business name of the plan sponsor), the current contact information (name, email address, phone number, and mailing address) of the plan or issuer as provided with any remittance advice associated with the initial payment or notice of denial of payment for the item or service; and if the party submitting the open negotiation response notice is a plan or issuer, the plan type (for example, self-insured or fully-insured);
(3) The name and contact information (including the legal business name, email address, phone number, and mailing address) for any third party representing the party submitting the open negotiation response notice, and an attestation that the third party has the authority to act on behalf of the party it represents in the open negotiation;
(4) Information sufficient to identify the item or service included in the open negotiation notice, including the date(s) the item or service was furnished, and if the party submitting the open negotiation response notice is a provider, facility, or provider of air ambulance services, the date(s) that the provider, facility, or provider of air ambulance services received the initial payment or notice of denial of payment for the item or service from the plan or issuer, and the claim number;
(5) If the party submitting the open negotiation response notice is a plan or issuer, a statement as to whether it agrees that the initial payment amount (including $0 if payment is denied) and the qualifying payment amount reflected in the open negotiation notice accurately reflect the initial payment amount and qualifying payment amount disclosed with the initial payment for the item or service, and if not, or if the open negotiation notice indicates that the initial payment amount or qualifying payment amount was not communicated by the plan or issuer in a remittance advice associated with the initial payment or notice of denial of payment, the initial payment amount (including $0 if payment is denied) and/or qualifying payment amount it believes to be correct, and documentation to support the statement (for example, the remittance advice confirming the qualifying payment amount);
(6) If the party submitting the open negotiation response notice is a plan or issuer, the amount of cost sharing imposed for the item or service, if any;
(7) If the party submitting the open negotiation response notice is a provider or facility, a statement that the items and services do not qualify for the notice and consent exception described at 45 CFR 149.410(b) or 45 CFR 149.420(c) through (i);
(8) For each item or service, either a statement and supporting documentation that explains why the item or service is not subject to the Federal IDR process or a statement agreeing that the item or service is subject to the Federal IDR process;
(9) A statement as to whether any of the information provided in the open negotiation notice is inaccurate and the basis for the statement, as well as supporting documentation; and
(10) A statement confirming that the initial payment or notice of denial of payment or other remittance advice reflected in the open negotiation notice under paragraph (b)(1)(ii)(A)(12) of this section is accurate, or if inaccurate, a copy of the accurate remittance advice associated with the initial payment or notice of denial of payment for the item or service.
(B) [Reserved]
(2) Initiating the Federal IDR process—(i) In general. Either party may initiate the Federal IDR process for a qualified IDR item or service as defined in 29 CFR 2590.716-8(a)(2)(xi) for which the parties have not agreed on an out-of-network rate by the last day of the open negotiation period provided for under paragraph (b)(1) of this section. To initiate the Federal IDR process, a party (the initiating party) must submit a written notice of IDR initiation, consistent with paragraph (b)(2)(ii) of this section, to the other party to the dispute (the non-initiating party) and to the Secretary in the manner specified in paragraph (b)(3) of this section, during the 4-business-day period beginning on the first business day after the last day of the open negotiation period (unless it is otherwise required to be submitted in the timeframe specified in paragraph (c)(5)(vii)(C) of this section). The date of IDR initiation is the date the Secretary receives the notice of IDR initiation described in paragraph (b)(2)(ii) of this section.
(A) Exception for items and services provided by certain nonparticipating providers and facilities. A party may not initiate the Federal IDR process for an item or service if, for that item or service, the party knows (or reasonably should have known) that the provider or facility provided notice and received consent under 45 CFR 149.410(b) or 45 CFR 149.420(c) through (i).
(B) [Reserved]
(ii) Notice of IDR initiation—(A) Content. The notice of IDR initiation must include, for the item or service that is the subject of the notice, information about the item or service and the parties including:
(1) Information sufficient to identify the provider, facility, or provider of air ambulance services, including the name and current contact information (including the legal business name, email address, phone number, and mailing address), and the NPI; and if the initiating party is a provider, facility, or provider of air ambulance services, the Taxpayer Identification Number (TIN);
(2) Information sufficient to identify the plan or issuer, including the plan's or issuer's registration number, as required under § 54.9816-9, or an attestation from the initiating party that the plan's or issuer's registration number was not provided on any remittance advice associated with the initial payment or notice of denial of payment for the item or service; the legal business name of the plan or issuer (or, in the case of a self-insured group health plan that does not have a legal business name, the legal business name of the plan sponsor), as well as the current contact information (name, email address, phone number, and mailing address) of the plan or issuer as provided with any remittance advice associated with the initial payment or notice of denial of payment for the item or service; and if the initiating party is a plan or issuer, the plan type (for example, self-insured or fully-insured) and TIN (or, in the case of a plan that does not have a TIN, the TIN of the plan sponsor);
(3) The name and contact information (including the legal business name, email address, phone number, TIN, and mailing address) for any third party representing the initiating party, and an attestation that the third party has the authority to act on behalf of the party it represents in the Federal IDR process;
(4) Information sufficient to identify whether the dispute being initiated includes batched or bundled qualified IDR items or services as described in paragraph (c)(4) of this section;
(5) Information sufficient to identify the qualified IDR item or service that is the subject of the notice of IDR initiation, including the date(s) the qualified IDR item or service was furnished; if the initiating party is a provider, facility, or provider of air ambulance services, the date(s) that the provider, facility, or provider of air ambulance services received the initial payment or notice of denial of payment for such item or service from the plan or issuer; the date the open negotiation period under paragraph (b)(1) of this section began; the type of item or service (specifically, whether the item or service that meets the requirements of 29 CFR 2590.716-8(a)(2)(xi)(A) is an emergency service as defined in 29 CFR 2590.716-4(c)(2)(i) or (ii), a non-emergency service as described in 29 CFR 2590.716-5(b), or an air ambulance service as defined in 29 CFR 2590.716-3); whether the service is a professional service or facility-based service; the State where the item or service was furnished; the claim number; the service code; and information to identify the location the item or service was furnished (including place of service code or bill type code);
(6) The initial payment amount (including $0 if payment is denied);
(7) If the initiating party is a plan or issuer, the amount of cost sharing imposed for the item or service, if any;
(8) The qualifying payment amount, if provided with the initial payment or notice of denial of payment, or if the initiating party is a plan or issuer;
(9) If the initiating party is a provider or facility, a statement that the items and services do not qualify for the notice and consent exception described at 45 CFR 149.410(b) or 45 CFR 149.420(c) through (i);
(10) A statement that the provider, facility, or provider of air ambulance services was a nonparticipating provider, a nonparticipating emergency facility, or nonparticipating provider of air ambulance services on the date the item or service was furnished;
(11) Attestation that the item or service under dispute is a qualified IDR item or service as defined in 29 CFR 2590.716-8(a)(2)(xi) and is eligible for the Federal IDR process, and the basis for the attestation;
(12) General information listed in the standard notice of IDR initiation developed by the Secretary under paragraph (b)(3) of this section describing the Federal IDR process (including a description of the purpose of the Federal IDR process and key deadlines in the Federal IDR process);
(14) A copy of any remittance advice associated with the initial payment or notice of denial of payment for the item or service; and
(15) Preferred certified IDR entity.
(B) [Reserved]
(iii) Notice of IDR initiation response. The non-initiating party must provide to the initiating party and the Secretary in the manner specified in paragraph (b)(3) of this section within 3 business days after the date of IDR initiation, a written notice and supporting documentation in response to the notice of IDR initiation, as specified in paragraph (b)(2)(iii)(A) of this section.
(A) Content. The notice of IDR initiation response must include, for the item or service that is the subject of the notice, information about the item or service and the parties, including:
(1) Information sufficient to identify the provider, facility, or provider of air ambulance services, including the name and current contact information (including the legal business name, email address, phone number, and mailing address), and the NPI; and if the non-initiating party is a provider, facility, or provider of air ambulance services, the TIN;
(2) Information sufficient to identify the plan or issuer, including the plan's or issuer's registration number, as required under § 54.9816-9, or an attestation from the non-initiating party that the plan's or issuer's registration number was not provided on any remittance advice associated with the initial payment or notice of denial of payment for the item or service; the legal business name of the plan or issuer (or, in the case of a self-insured group health plan that does not have a legal business name, the legal business name of the plan sponsor), as well as the current contact information (name, email address, phone number, and mailing address) of the plan or issuer as provided with any remittance advice associated with the initial payment or notice of denial of payment; and if the non-initiating party is a plan or issuer, the plan type (for example, self-insured or fully-insured) and TIN (or, in the case of a plan that does not have a TIN, the TIN of the plan sponsor);
(3) The name and contact information (including the legal business name, email address, phone number, TIN, and mailing address) for any third party representing the non-initiating party, and an attestation that the third party has the authority to act on behalf of the party it represents in the Federal IDR process;
(4) Information sufficient to identify each item or service included in the notice of IDR initiation, including the date(s) the item or service was furnished and if the non-initiating party is a provider, facility, or provider of air ambulance services, the date(s) that the provider, facility, or provider of air ambulance services received the initial payment or notice of denial of payment for such item or service from the plan or issuer, and the claim number;
(5) If the non-initiating party is a plan or issuer, a statement as to whether the non-initiating party agrees that the initial payment (including $0 if payment is denied) and the qualifying payment amount reflected in the notice of IDR initiation is accurate for the item or service that is the subject of the dispute, and if not, the initial payment amount (including $0 if payment is denied) and/or qualifying payment amount it believes to be correct, and documentation to support the statement (for example, the remittance advice confirming the qualifying payment amount);
(6) If the non-initiating party is a plan or issuer, the amount of cost sharing imposed for the item or service, if any;
(7) If the non-initiating party is a provider or facility, a statement that the items and services do not qualify for the notice and consent exception described at 45 CFR 149.410(b) or 45 CFR 149.420(c) through (i);
(8) For each item or service that is the subject of the dispute, either an attestation that the item or service is a qualified IDR item or service as defined in 29 CFR 2590.716-8(a)(2)(xi) of this section and is eligible for the Federal IDR process, or for each item or service that the non-initiating party asserts is not a qualified IDR item or service that is eligible for the Federal IDR process, an explanation and documentation to support the assertion;
(9) A statement confirming that the remittance advice associated with the initial payment or notice of denial of payment provided by the initiating party under paragraph (b)(2)(ii)(A)(13) of this section is accurate or, if inaccurate, a copy of the accurate remittance advice associated with the initial payment or notice of denial of payment for the item or service;
(10) A statement as to whether any of the information provided in the notice of IDR initiation is inaccurate and the basis for the statement, as well as any supporting documentation; and
(11) A statement as to whether the non-initiating party agrees or objects to the initiating party's preferred certified IDR entity. If the non-initiating party objects to the initiating party's preferred certified IDR entity, the notice of IDR initiation response must include the name of an alternative preferred certified IDR entity and, if applicable, an explanation of any conflict of interest with the initiating party's preferred certified IDR entity.
(B) [Reserved]
(3) Manner. A party furnishing notices as required under paragraphs (b)(1)(ii) and (iii) and (b)(2)(ii) and (iii) of this section must furnish the notices using the standard forms developed by the Secretary and must furnish the notices and supporting documentation to the other party and the Secretary through the Federal IDR portal.
(c) Federal IDR process following initiation—(1) Selection of certified IDR entity—(i) Preliminary selection of the certified IDR entity. Within 3 business days after the date of IDR initiation, the non-initiating party must agree or object to the preferred certified IDR entity identified in the notice of IDR initiation by submitting the notice of IDR initiation response described in paragraph (b)(2)(iii) of this section, which contains the information described in subordinate paragraph (b)(2)(iii)(A)(11) thereof.
(A) If the non-initiating party agrees or fails to respond to the selection of the initiating party's preferred certified IDR entity in the manner and timeframe described in paragraph (c)(1)(i) of this section, the initiating party's preferred certified IDR entity will be considered jointly selected on the third business day after the date of IDR initiation.
(B) If the non-initiating party objects to the selection of the initiating party's preferred certified IDR entity by designating an alternative preferred certified IDR entity in the manner and timeframe described in paragraph (c)(1)(i) of this section, the initiating party may then agree or object to the non-initiating party's alternative preferred certified IDR entity by submitting the notice of certified IDR entity selection in the manner specified in paragraph (c)(1)(i)(D) of this section.
(1) If the initiating party agrees to the non-initiating party's alternative preferred certified IDR entity within 3 business days after the date of IDR initiation, the alternative preferred certified IDR entity will be considered jointly selected by the parties.
(2) If the non-initiating party submits the notice of IDR initiation response on the first or second business day after the date of IDR initiation, and the initiating party fails to respond within 3 business days after the date of IDR initiation, the alternative preferred certified IDR entity will be considered jointly selected by the parties.
(3) If the non-initiating party submits the notice of IDR initiation response on the third business day after the date of IDR initiation and the initiating party fails to respond on the same day, selection will proceed pursuant to paragraph (c)(1)(i)(C) of this section.
(C) If a certified IDR entity is not jointly selected under paragraph (c)(1)(i)(A) or (B) of this section, either party may select an alternative preferred certified IDR entity by submitting the notice of certified IDR entity selection in the manner specified in paragraph (c)(1)(i)(D) of this section, until the earlier of the date that the parties agree on the alternative preferred certified IDR entity or the deadline for joint selection, which is 3 business days after the date of IDR initiation. Once a party submits a notice of certified IDR entity selection, it may not submit another notice of certified IDR entity selection until it receives a responding notice of certified IDR entity selection from the other party.
(1) If a party submits a notice of certified IDR entity selection to the other party on the first or second business day after the date of IDR initiation and the party in receipt of the notice agrees or fails to respond to the alternative preferred certified IDR entity by the third business day after the date of IDR initiation, the alternative preferred certified IDR entity will be considered jointly selected by the parties.
(2) If a party submits a notice of certified IDR entity selection to the other party on the third business day after the date of IDR initiation and the party last in receipt of the notice agrees to the alternative preferred certified IDR entity on the same day, the alternative preferred certified IDR entity will be considered jointly selected by the parties.
(3) If a party submits a notice of certified IDR entity selection to the other party on the third business day after the date of IDR initiation and the party last in receipt of the notice fails to respond to the alternative preferred certified IDR entity on the same day, the parties will have failed to jointly select a certified IDR entity.
(D) To notify the other party and the Secretary of an agreement or objection to an alternative preferred certified IDR entity as described in paragraph (c)(1)(i)(C) of this section, a party must furnish a notice of certified IDR entity selection, using the standard form developed by the Secretary, to the other party and the Secretary through the Federal IDR portal within 3 business days after the date of IDR initiation. The notice of certified IDR entity selection must include a statement indicating the party's agreement with or objection to the other party's alternative preferred certified IDR entity and, if applicable, an explanation of any conflict of interest with the alternative preferred certified IDR entity, and the name of another alternative preferred certified IDR entity. However, in the event the conditions for failure to jointly select a certified IDR entity apply, selection will proceed in accordance with paragraph (c)(1)(ii) of this section.
(ii) Failure to jointly select a certified IDR entity. If the parties fail to jointly select a certified IDR entity within 3 business days after the date of IDR initiation, the Secretary will select a certified IDR entity. The parties will have failed to jointly select a certified IDR entity if, by the end of the third business day after the date of IDR initiation, the party last in receipt of the notice of IDR initiation response or the notice of certified IDR entity selection has received an objection to their preferred or alternative preferred certified IDR entity in the applicable notice. Alternatively, the parties will have failed to jointly select a certified IDR entity if the notice of IDR initiation response or the notice of certified IDR entity selection is submitted to the other party on the third business day after the date of IDR initiation and the party in receipt of the notice fails to respond to the alternative preferred certified IDR entity on the same day.
(A) In selecting the certified IDR entity, the Secretary will first confirm whether a party submitted the notice of IDR initiation response or the notice of certified IDR entity selection with an alternative preferred certified IDR entity on the third business day after the date of IDR initiation without the other party's agreement to the selection. If either notice was provided on the third business day after the date of IDR initiation without the other party's agreement to the alternative preferred certified IDR entity by the end of the third business day after the date of IDR initiation, the Secretary will provide the party last in receipt of the applicable notice, as of the end of the third business day after the date of IDR initiation, 2 additional business days to agree or object to the other party's alternative preferred certified IDR entity selection.
(1) If the party last in receipt of the applicable notice, as of the end of the third business day after the date of IDR initiation, agrees with the other party's alternative preferred certified IDR entity and notifies the Secretary of the agreement, or fails to respond in the Federal IDR portal by the fifth business day after the date of IDR initiation, the Secretary will select the final alternative preferred certified IDR entity selected in the applicable notice.
(2) If the party last in receipt of the applicable notice, as of the end of the third business day after the date of IDR initiation, notifies the Secretary of its objection to the alternative preferred certified IDR entity by the fifth business day after the date of IDR initiation, the Secretary will randomly select a certified IDR entity from among the certified IDR entities (other than the preferred certified IDR entity and any alternative preferred certified IDR entity previously selected in such dispute by a party, unless there is no other certified IDR entity available to select) that charge a fee within the allowed range of certified IDR entity fees, not later than the sixth business day after the date of IDR initiation. If there are insufficient certified IDR entities that charge a fee within the allowed range of certified IDR entity fees available to arbitrate the dispute, the Secretary will select a certified IDR entity that has received approval, as described in paragraph (e)(2)(vii)(A) of this section, to charge a fee outside of the allowed range of certified IDR entity fees. In either case, the Secretary will notify the parties of the preliminary selection of the certified IDR entity not later than 6 business days after the date of IDR initiation.
(B) [Reserved]
(iii) Date of preliminary selection of the certified IDR entity. The date of preliminary selection of the certified IDR entity will be:
(A) Three business days after the date of IDR initiation if the parties jointly select a certified IDR entity, as specified in paragraph (c)(1)(i) of this section; or
(B) Six business days after the date of IDR initiation, if the parties fail to jointly select a certified IDR entity as specified in paragraph (c)(1)(ii) of this section.
(iv) Final selection of the certified IDR entity—(A) Conflict-of-interest review. The certified IDR entity preliminarily selected for a dispute must review the selection. The selection of the certified IDR entity will be finalized only if the certified IDR entity attests to the Secretary that it meets the following requirements:
(1) The certified IDR entity does not have a conflict of interest as defined in 29 CFR 2590.716-8(a)(2)(iv);
(2) The certified IDR entity will only assign personnel to a dispute and make decisions regarding hiring, compensation, termination, promotion, or other similar matters related to personnel assigned to the dispute in a manner that is not based upon the likelihood that the assigned personnel will support a particular party to the dispute; and
(3) The certified IDR entity will not assign any personnel to a dispute who would have any conflicts of interest, as defined in 29 CFR 2590.716-8(a)(2)(iv), regarding any party to the dispute or whose relationship with a party within the 1 year immediately preceding the assignment to the dispute would violate the restrictions on aiding or advising a former employer or principal in a manner similar to the restrictions set forth in 18 U.S.C. 207(b).
(B) Failure to meet conflict-of-interest requirements. If the certified IDR entity fails to attest to the Secretary within 3 business days of the date of preliminary selection of the certified IDR entity that it meets the requirements of paragraphs (c)(1)(iv)(A)(1) through (3) of this section, the Secretary will randomly select another certified IDR entity consistent with paragraph (c)(1)(ii) of this section. The Secretary will notify the parties of the new randomly preliminarily selected certified IDR entity no later than 1 business day after the date of preliminary selection of the certified IDR entity, no later than 1 business day after the end of the 3-business-day period.
(C) Date of final selection of the certified IDR entity. If the certified IDR entity that has been preliminarily selected attests within 3 business days that it meets the requirements of paragraph (c)(1)(iv)(A) of this section, the Secretary will notify the parties of the final selection of the certified IDR entity no later than 1 business day after the certified IDR entity attests that it meets the conflict-of-interest requirements. The date of final selection of the certified IDR entity is the date that the Secretary provides this notice to the parties.
(2) Federal IDR process eligibility review—(i) Federal IDR process eligibility determination by certified IDR entity. The selected certified IDR entity must review the information in the notice of IDR initiation, notice of IDR initiation response, and any additional information described in paragraph (c)(2)(ii) of this section, and make a final determination as to whether the item or service is a qualified IDR item or service (and in the case of a batched dispute, whether the items or services are qualified IDR items or services), as defined in 29 CFR 2590.716-8(a)(2)(xi), that is eligible for the Federal IDR process. The certified IDR entity must make such a determination and notify the Secretary and both parties no later than 5 business days after the date of final selection of the certified IDR entity. If the certified IDR entity determines that the item or service is not a qualified IDR item or service that is eligible for the Federal IDR process, the dispute will be closed, and the selected certified IDR entity will not take any further action with respect to the dispute. In the case of a batched dispute, only those items and services determined to be qualified IDR items or services that are eligible for the Federal IDR process and that meet the requirements of paragraph (c)(4)(i) of this section will continue through the Federal IDR process, and the selected certified IDR entity will not take any further action with respect to the other items and services included in the batched dispute.
(ii) Request for additional information. The selected certified IDR entity may request additional information from either party to a dispute at any time, including for the purpose of assessing whether a conflict of interest exists, conducting an eligibility determination, or making a payment determination.
(A) Upon request, a party must submit the additional information within 5 business days to the selected certified IDR entity through the Federal IDR portal. Following a request for additional information, the time period for the applicable stage of the Federal IDR process will be tolled until the earlier of the date either all of the requested information is provided or the 5-business-day period expires, and each subsequent timeframe in the Federal IDR process will be determined based on the date of completion of the stage of the Federal IDR process that was tolled for provision of the requested information.
(B) If a party fails to submit the additional information as required, the related determination, including the conflict-of-interest review, eligibility determination, or payment determination, will be made without the requested information unless a good-cause extension of the 5-business-day period, as specified in paragraph (g)(1)(i) of this section, has been provided, and the party subsequently submits the additional information requested within the extended period. If the related determination cannot be made because both parties failed to provide the additional information as required, the dispute will be considered withdrawn, as specified in paragraph (c)(3)(ii) of this section.
(3) Authority to continue negotiations or withdraw. (i) Authority to continue to negotiate. If the parties to the Federal IDR process agree on an out-of-network rate for a qualified IDR item or service after providing the notice of IDR initiation to the Secretary required under paragraph (b)(2)(ii) of this section, but before the certified IDR entity has made its payment determination, the amount agreed to by the parties for the qualified IDR item or service will be treated as the out-of-network rate for the qualified IDR item or service. To the extent the amount exceeds the initial payment amount and any cost sharing paid or owed by the participant, beneficiary, or enrollee, payment must be made directly by the plan or issuer to the nonparticipating provider, nonparticipating facility, or nonparticipating provider of air ambulance services not later than 30 calendar days after the date the agreement is reached. In no instance may either party seek additional payment from the participant, beneficiary, or enrollee, calculated based on the agreed-upon amount, in instances in which the out-of-network rate exceeds the qualifying payment amount. The initiating party must send a notification for the parties' agreement to the Secretary and the certified IDR entity (if selected) through the Federal IDR portal as soon as possible, but no later than 3 business days after the date of the agreement. The notification must include the dispute number, a statement of the agreed-on out-of-network rate for the qualified IDR item or service, and signatures from authorized signatories for both parties.
(ii) Withdrawal of disputes. A dispute may be withdrawn from the Federal IDR process by the initiating party, the Secretary, or a certified IDR entity before a payment determination is made, if one of the following conditions is met:
(A) The initiating party provides notification through the Federal IDR portal to the Secretary and the certified IDR entity (if selected) that both parties to the dispute agree to withdraw the dispute from the Federal IDR process without agreement on an out-of-network rate. The notification must include the dispute number, a statement about both parties' agreement to withdraw, and signatures from authorized signatories for both parties;
(B) The initiating party provides a standard withdrawal request notice through the Federal IDR portal to the Secretary, the certified IDR entity (if selected), and the non-initiating party of its request to withdraw the dispute from the Federal IDR process, and the non-initiating party notifies the Secretary, certified IDR entity (if selected), and the initiating party through the Federal IDR portal of its agreement to withdraw from the Federal IDR process within 5 business days of the initiating party's request. Provision of the withdrawal request through the Federal IDR portal pauses the Federal IDR process for 5 business days or until the non-initiating party responds, whichever happens first. If the non-initiating party fails to respond within 5 business days of the initiating party's request, the non-initiating party will be considered to have agreed to the withdrawal, and the dispute will be withdrawn;
(C) The certified IDR entity cannot determine eligibility, for example, because both parties to the dispute are nonresponsive to any requests for additional information to determine eligibility as described in paragraph (c)(2)(ii) of this section; or
(D) The certified IDR entity cannot make a payment determination, for example, because both parties to the dispute have failed to submit an offer as described in paragraph (c)(5)(i) of this section.
(4) Treatment of batched qualified IDR items and services— (i) In general. For purposes of encouraging efficiencies (including minimizing costs) in the Federal IDR process, a certified IDR entity may consider up to 50 qualified IDR items and services jointly as part of a single payment determination that is subject to the certified IDR entity fee for batched disputes only if the qualified IDR items and services meet the requirements of this paragraph (c)(4)(i):
(A) For further guidance, see 29 CFR 2590.716-8(c)(4)(i)(A):
(B) Payment for the qualified IDR items and services is required to be made by the same group health plan or health insurance issuer. For group or individual health insurance coverage, this requirement is satisfied if the same issuer is required to make payment for the qualified IDR items and services, even if the qualified IDR items and services relate to claims from different group health plans or individual market policies. For self-insured group health plans, this requirement is satisfied if the same self-insured group health plan is required to make payment for the qualified IDR items and services, including when the plan makes payments through a third party administrator; the requirement is not satisfied if multiple self-insured group health plans are required to make payments for the qualified IDR items and services, even if those group health plans make payments through the same third party administrator;
(C) The qualified IDR items and services meet any of the following criteria under which multiple qualified IDR items and services relate to the treatment of a similar condition:
(1) The qualified IDR items or services were furnished to a single patient during a single patient encounter. For purposes of this section, a single patient encounter is defined as a patient encounter on one or more consecutive days during which the qualified IDR items or services were furnished to the same patient and billed on the same claim form; or
(2) The qualified IDR items and services were furnished to one or more patients and were billed under the same service code or a comparable code under a different procedural coding system, such as Current Procedural Terminology (CPT) codes with modifiers, if applicable, Healthcare Common Procedure Coding System (HCPCS) codes with modifiers, if applicable, or Diagnosis-Related Group (DRG) codes with modifiers, if applicable; or
(3) For anesthesiology, radiology, pathology, and laboratory qualified IDR items and services, the qualified IDR items and services were furnished to one or more patients and were billed under service codes belonging to the same Category I CPT code range, as specified in guidance published by the Secretary; and
(D) All the qualified IDR items and services were furnished within the same 30-business-day period following the date on which the first item or service included in the batched dispute was furnished, and the qualified IDR items and services were the subjects of a 30-business-day open negotiation period that ended within 4 business days of IDR initiation, except as provided in paragraph (c)(5)(vii)(B) of this section.
(ii) Treatment of bundled payment arrangements. Qualified IDR items and services that meet the definition of a bundled payment arrangement under § 54.9816-3 may be submitted and considered as a single payment determination, and the certified IDR entity must make a single payment determination for the multiple qualified IDR items and services included in the bundled payment arrangement. Bundled payment arrangements as defined in § 54.9816-3 and submitted under this paragraph (c)(4)(ii) are subject to the certified IDR entity fee for single determinations.
(5) Payment determination for a qualified IDR item or service—(i) Submission of offers. Not later than 10 business days after the date of final selection of the certified IDR entity as described in paragraph (c)(1)(iv)(C) of this section (or not later than 10 business days after the qualified IDR items and services are determined eligible as described in paragraph (c)(2) of this section, when the Secretary determines that any of the extenuating circumstances described in paragraph (g)(1)(ii) of this section apply, the plan or issuer and the provider, facility, or provider of air ambulance services:
(A) For further guidance, see 29 CFR 2590.716-8(c)(5)(i)(A).
(B) For further guidance, see 29 CFR 2590.716-8(c)(5)(i)(B).
(ii) Payment determination and notification. Not later than 30 business days after the date of final selection of the certified IDR entity as described in paragraph (c)(1)(iv)(C) of this section (or not later than 30 business days after the qualified IDR items and services are determined eligible as described in paragraph (c)(2) of this section, when the Secretary determines that any of the extenuating circumstances described in paragraph (g) of this section apply), the certified IDR entity must:
(A) Select as the out-of-network rate for the qualified IDR item or service one of the offers submitted under paragraph (c)(5)(i) of this section, weighing only the considerations specified in paragraph (c)(5)(iii) of this section (as applied to the information provided by the parties pursuant to 29 CFR 2590.716-8(c)(5)(i). The certified IDR entity must select the offer that the certified IDR entity determines best represents the value of the qualified IDR item or service as the out-of-network rate.
(1) Prevailing party. In the case of single determinations, the party whose offer is selected by the certified IDR entity is considered the prevailing party. In the case of batched determinations, the party with the most determinations in its favor is considered the prevailing party.
(2) Non-prevailing party. In the case of single determinations, the party whose offer is not selected by the certified IDR entity is considered the non-prevailing party. In the case of batched determinations, the party with the fewest determinations in its favor is considered the non-prevailing party.
(3) Parties prevailing in equal numbers of determinations. If each party prevails in an equal number of determinations, neither party will be considered the prevailing party or the non-prevailing party, and the certified IDR entity fee will be split evenly between the parties.
(B) For further guidance, see 29 CFR 2590.716-8(c)(5)(ii)(B).
(iii) Considerations in determination. In determining which offer to select:
(A) The certified IDR entity must consider the qualifying payment amount(s) for the applicable year for the same or similar item or service.
(B) The certified IDR entity must consider information submitted by a party that relates to the following circumstances:
(1) The level of training, experience, and quality and outcomes measurements of the provider or facility that furnished the qualified IDR item or service (such as those endorsed by the consensus-based entity authorized in section 1890 of the Social Security Act).
(2) The market share held by the provider or facility or that of the plan or issuer in the geographic region in which the qualified IDR item or service was provided.
(3) The acuity of the participant or beneficiary receiving the qualified IDR item or service, or the complexity of furnishing the qualified IDR item or service to the participant or beneficiary.
(4) The teaching status, case mix, and scope of services of the facility that furnished the qualified IDR item or service, if applicable.
(5) Demonstration of good faith efforts (or lack thereof) made by the provider or facility or the plan or issuer to enter into network agreements with each other, and, if applicable, contracted rates between the provider or facility, as applicable, and the plan or issuer, as applicable, during the previous 4 plan years.
(C) The certified IDR entity must also consider information provided by a party in response to a request by the certified IDR entity under 29 CFR 2590.716-8(c)(5)(i)(A)(2) that relates to the offer for the payment amount for the qualified IDR item or service that is the subject of the payment determination and that does not include information on factors described in 29 CFR 2590.716-8(c)(5)(v).
(D) The certified IDR entity must also consider additional information submitted by a party that relates to the offer for the payment amount for the qualified IDR item or service that is the subject of the payment determination and that does not include information on factors described in 29 CFR 2950.716-8(c)(5)(v).
(iv) [Reserved]
(v) Prohibition on consideration of certain factors. For further guidance, see 29 CFR 2950.716-8(c)(5)(v).
(vi) Written decision. (A) The certified IDR entity must explain its determination in a written decision submitted to the parties and the Secretary, in a form and manner specified by the Secretary;
(B) The certified IDR entity's written decision must include an explanation of their determination, including what information the certified IDR entity determined demonstrated that the offer selected as the out-of-network rate is the offer that best represents the value of the qualified IDR item or service, including the weight given to the qualifying payment amount and any additional credible information under paragraphs (c)(5)(iii)(B) through (D) of this section.
(vii) Effects of determination. (A) Binding. A determination made by a certified IDR entity under paragraph (c)(5)(ii) of this section:
(1) Is binding upon the parties, in the absence of fraud or evidence of intentional misrepresentation of material facts presented to the certified IDR entity regarding the claim; and
(2) Is not subject to judicial review, except in a case described in any of paragraphs (1) through (4) of section 10(a) of title 9, United States Code.
(B) Suspension of certain subsequent IDR requests. In the case of a single determination made by a certified IDR entity under paragraph (c)(5)(ii) of this section, the party that submitted the initial notification under paragraph (b)(2) of this section may not submit a subsequent notification involving the same other party for a claim for the same item or service that was the subject of the initial notification during the 90-calendar-day period following the determination. In the case of a batched determination made by a certified IDR entity under paragraph (c)(5)(ii) of this section, the party that submitted the initial notification under paragraph (b)(2) of this section may not submit a subsequent notification involving the same other party for a claim for the same items or services that were the subject of the initial notification during the 30-business-day period following the determination.
(C) Subsequent submission of requests permitted. In the case of a single determination made by a certified IDR entity under paragraph (c)(5)(ii) of this section, if the end of the open negotiation period specified in paragraph (b)(1) of this section occurs during the 90-calendar-day suspension period regarding claims for the same item or service that were the subject of the single determination, either party may initiate the Federal IDR process for those claims by submitting a notification as specified in paragraph (b)(2) of this section during the 30-business-day period beginning on the day after the last day of the 90-calendar-day suspension period. In the case of a batched determination made by a certified IDR entity under paragraph (c)(5)(ii) of this section, if the end of the open negotiation period specified in paragraph (b)(1) of this section is completed in the 30 business days prior to or during the 30-business-day suspension period regarding claims for the same items or services that were the subject of the batched determination, either party may initiate the Federal IDR process for those claims by submitting a notification as specified in paragraph (b)(2) of this section during the 4-business-day period beginning on the business day after the 30-business-day suspension period as described in paragraph (c)(5)(vii)(B) of this section.
(viii) For further guidance, see 29 CFR 2590.716-8(c)(5)(viii).
(ix) For further guidance, see 29 CFR 2590.716-8(c)(5)(ix).
(d) Costs of IDR process—(1) Certified IDR entity fee—(i) Timing of payment of certified IDR entity fee. Each party to a dispute for which there is a final selection of the certified IDR entity and a determination that the dispute is eligible for the Federal IDR process in accordance with paragraph (c)(2) of this section must pay to the certified IDR entity the predetermined certified IDR entity fee charged by the certified IDR entity. The certified IDR entity fee must be paid no later than the date a party submits its offer to the certified IDR entity, in accordance with paragraph (c)(5)(i) of this section.
(ii) Failure to timely pay certified IDR entity fee. If a party fails to pay the certified IDR entity fee as specified in paragraph (d)(1)(i) of this section, that party's offer will not be considered received. Such party will continue to be responsible for payment of the certified IDR entity fee.
(iii) Method of allocation of the certified IDR entity fee after a payment determination. After making a payment determination, the certified IDR entity will retain the certified IDR entity fee described under paragraph (d)(1)(i) of this section paid by the non-prevailing party as defined in paragraph (c)(5)(ii)(A)(2) of this section. The certified IDR entity must return the fee paid by the prevailing party, as defined in paragraph (c)(5)(ii)(A)(1) of this section, within 30 business days following the date of the certified IDR entity's payment determination. In the event of a batched dispute in which each party prevails in an equal number of determinations, the certified IDR entity fee will be split evenly between the parties. In that case, the certified IDR entity must return half of the fee paid by each party within 30 business days following the date of the certified IDR entity's payment determination.
(iv) Method of allocation of the certified IDR entity fee upon agreement or withdrawal after an eligibility determination. For a dispute for which there is a final selection of the certified IDR entity and a determination that the dispute is eligible for the Federal IDR process in accordance with paragraph (c)(2) of this section, unless directed otherwise by both parties, the certified IDR entity is required to return half of each party's certified IDR entity fee within 30 business days of the date both parties notify the certified IDR entity that they have:
(A) Reached an agreement on an out-of-network rate for qualified IDR items or services before the certified IDR entity has made its payment determination, as described in paragraph (c)(3)(i) of this section; or
(B) Withdrawn the dispute before the certified IDR entity has made its payment determination, as described in paragraph (c)(3)(ii) of this section.
(v) Method of allocation of the certified IDR entity fee upon agreement or withdrawal before an eligibility determination. For a dispute for which there is a final selection of the certified IDR entity, but the dispute has been determined ineligible or no eligibility determination has been made for the dispute, in accordance with paragraph (c)(2) of this section (excluding situations as provided in paragraph (c)(3)(ii)(C) of this section where a certified IDR entity cannot determine eligibility), the certified IDR entity is required to return the entirety of each party's certified IDR entity fee within 30 business days of the date both parties notify the certified IDR entity that they have:
(A) Reached an agreement on an out-of-network rate for qualified IDR items or services before the certified IDR entity has made its payment determination, as described in paragraph (c)(3)(i) of this section; or
(B) Withdrawn the dispute before the certified IDR entity has made its payment determination, as described in paragraph (c)(3)(ii) of this section.
(2) Administrative fee—(i) In general. For further guidance, see 29 CFR 2590.716-8(d)(i).
(ii) Administrative fee amount. The administrative fee amount will be established through notice and comment rulemaking no more frequently than once per calendar year in a manner such that the total administrative fees paid for a year are estimated to be equal to the amount of expenditures estimated to be made by the Secretaries of the Treasury, Labor, and Health and Human Services for the year in carrying out the Federal IDR process. The administrative fee amount will remain in effect until changed by notice and comment rulemaking.
(A) For disputes initiated on January 22, 2024, through June 10, 2026, the administrative fee amount is $115 per party per dispute.
(B) For disputes initiated on or after June 11, 2026, the administrative fee amount is $15 per party per dispute.
(iii) Failure to pay the administrative fee. If a party fails to pay the administrative fee as specified in paragraph (d)(2) of this section, that party's offer will not be considered received. Such party will continue to be responsible for payment of the administrative fee.
(e) Certification of IDR entity—(1) In general. For further guidance, see 29 CFR 2590.716-8(e)(1).
(2) Requirements. For further guidance, see 29 CFR 2590.716-8(e)(2)(i) through (vi);
(i)-(vi) [Reserved]
(vii) Provide, no more frequently than once per calendar year, a fixed fee for single determinations and a separate fixed fee for batched determinations, as well as additional fixed tiered fees for batched determinations, if applicable, within the upper and lower limits for each, as established by the Secretary in notice and comment rulemaking. The certified IDR entity fee ranges established by the Secretary in rulemaking will remain in effect until changed by notice and comment rulemaking. The certified IDR entity may not charge a fee outside the limits set forth in rulemaking unless the certified IDR entity or IDR entity seeking certification receives advance written approval from the Secretary to charge a fixed fee beyond the upper or lower limits by following the process described in paragraph (e)(2)(vii)(A) of this section. A certified IDR entity may also seek advance written approval from the Secretary to update its fees one additional time per calendar year by meeting the requirements described in paragraph (e)(2)(vii)(A). The Secretary will approve a request to charge a fixed fee beyond the upper or lower limits for fees as set forth in rulemaking or to update the fixed fee during the calendar year if, in their discretion, they determine the information submitted by a certified IDR entity or IDR entity seeking certification demonstrates that the proposed change to the certified IDR entity fee would ensure the financial viability of the certified IDR entity or IDR entity seeking certification and would not impose on parties an undue barrier to accessing the Federal IDR process.
(A) In order for the certified IDR entity or IDR entity seeking certification to receive the Secretary's written approval to charge a fixed fee beyond the upper or lower limits for fees as set forth in rulemaking or to update the fixed fee during the calendar year, the certified IDR entity or IDR entity seeking certification must submit to the Secretary, in the form and manner specified by the Secretary:
(1) The fixed fee the certified IDR entity or IDR entity seeking certification believes is appropriate for the certified IDR entity or IDR entity seeking certification to charge;
(2) A description of the circumstances that require the alternative fixed fee, or that require a change to the fixed fee during the calendar year, as applicable; and
(3) A detailed description that reasonably explains how the alternative fixed fee or the change to the fixed fee during the calendar year, as applicable, will be used to mitigate the effects of those circumstances.
(B) [Reserved]
(viii) For disputes initiated on or after January 22, 2024, certified IDR entities are permitted to charge a fixed certified IDR entity fee for single determinations within the range of $200 to $840, and a fixed certified IDR entity fee for batched determinations within the range of $268 to $1,173, unless a fee outside such ranges is approved by the Secretary, pursuant to paragraph (e)(2)(vii)(A) of this section. As part of the batched determination fee, certified IDR entities are permitted to charge an additional fixed tiered fee within the range of $75 to $250 for every additional 25 line items within a batched dispute, beginning with the 26th line item. The ranges for the certified IDR entity fees for single and batched determinations will remain in effect until changed by notice and comment rulemaking.
(ix) Have a procedure in place to retain the certified IDR entity fees described in paragraph (d)(1) of this section paid by both parties in a trust or escrow account and to return the certified IDR entity fee paid by the prevailing party or a portion of each party's certified IDR entity fee in the case of an agreement described in paragraph (c)(3)(i) of this section, a withdrawal described in paragraph (c)(3)(ii) of this section, or a circumstance in which each party prevails in an equal number of determinations, as described in paragraph (d)(1)(iii) of this section, within 30 business days following the date of the determination or the date the certified IDR entity is notified by both parties of an agreement or withdrawal, as applicable;
(x) For further guidance, see 29 CFR 2590.716-8(e)(2)(x).
(xi) For further guidance, see 29 CFR 2590.716-8(e)(2)(xi).
(xii) For further guidance, see 29 CFR 2590.716-8(e)(2)(xii).
(3) Conflict of interest standards. For further guidance, see 29 CFR 2590.716-8(e)(3).
(4) Period of Certification. For further guidance, see 29 CFR 2590.716-8(e)(4).
(5) Petition for denial or revocation. For further guidance, see 29 CFR 2590.716-8(e)(5).
(6) Denial of IDR entity certification or revocation of certified IDR entity certification. For further guidance, see 29 CFR 2590.716-8(e)(6).
(f) Reporting of information relating to the Federal IDR process. For further guidance, see 29 CFR 2590.716-8(f) introductory text through (f)(1)(iv).
(1) [Reserved]
(i)-(iv) [Reserved]
(v) For further guidance, see 29 CFR 2590.716-8(f)(1)(v) introductory text through (f)(1)(v)(E).
(A)-(E) [Reserved]
(F) The rationale for the certified IDR entity's decision, including the extent to which the decision relied on the criteria in paragraphs (c)(5)(iii)(B) through (D) of this section.
(G) For further guidance, see 29 CFR 2590.716-(f)(1)(v)(G).
(H) For further guidance, see 29 CFR 2590.716-8(f)(1)(v)(H).
(I) For further guidance, see 29 CFR 2590.716-8(f)(1)(v)(I).
(vi) For further guidance, see 29 CFR 2590.716-8(f)(1)(vi).
(2) [Reserved]
(g) Extension of time periods for extenuating circumstances. (1) In general. The time periods specified in this section (other than the time for payment, if applicable, under paragraph (c)(5)(ix) of this section) may be extended in extenuating circumstances at the Secretary's discretion. Extenuating circumstances include, but are not limited to, when:
(i) For a specific dispute, the Secretary determines that the parties or certified IDR entity cannot meet applicable timeframes due to matters beyond the control of one or both parties or the certified IDR entity, or for other good cause. The certified IDR entity or either party may also submit a request for an extension due to extenuating circumstances to the Secretary through the Federal IDR portal. The requesting certified IDR entity or party must attest that it will take prompt action to ensure that the certified IDR entity's payment determination under this section may be made as soon as administratively practicable under the circumstances; or
(ii) The Secretary determines that the parties or certified IDR entity cannot meet applicable timeframes due to systematic delays in processing disputes under the Federal IDR process, such as an unforeseen volume of disputes or Federal IDR portal system failures. Extensions provided due to extenuating circumstances caused by an unforeseen volume of disputes will be applied to the timeframe for eligibility determinations under paragraph (c)(2) of this section. Extensions provided due to extenuating circumstances caused by systems failures within the Federal IDR portal will be applied to the Federal IDR process timeframe(s) determined relevant by the Secretary. The Secretary will post a public notice regarding any extensions of time periods under this paragraph (g)(1)(ii).
(A) Timeframe following an extension to eligibility determination. When an extension to the eligibility determination timeframe under paragraph (g)(1)(ii) of this section is in effect, the start date of the subsequent timeframes in the Federal IDR process will be determined based on the date of completion of the eligibility determination by the certified IDR entity.
(1) Submission of offers. The parties must submit their offers and certified IDR entity fees to the certified IDR entity not later than 10 business days after the qualified IDR items and services are determined eligible as described in paragraph (c)(2) of this section.
(2) Payment determination. The certified IDR entity must make the payment determination and provide notification of the payment determination to the parties not later than 30 business days after the qualified IDR items and services are determined eligible as described in paragraph (c)(2) of this section.
(B) Timeframe following an extension to other timeframes in the Federal IDR process. When an extension to any timeframe within the Federal IDR process, other than the eligibility timeframe, is in effect under paragraph (g)(1)(ii) of this section, the start date of each subsequent timeframe in the Federal IDR process will be determined based on the date of completion of the process for which the extension was granted.
(2) [Reserved]
(h) Applicability date. (1) Paragraph (a) of this section is applicable for plan years (or in the individual market, policy years) beginning on or after January 1, 2022, except that the provisions regarding IDR entity certification at paragraph (a) of this section are applicable beginning on October 7, 2021, and the definition for batched IDR items and services at paragraph (a)(2)(i) of this section is applicable to disputes with open negotiation periods beginning on November 1, 2026.
(2) Paragraph (b) of this section is applicable to disputes with open negotiation periods beginning 90 calendar days after the Departments issue guidance announcing that the functionality supporting these provisions has become available.
(3) Paragraph (c)(1) of this section, regarding the selection of a certified IDR entity, is applicable for plan years (or in the individual market, policy years) beginning on or after January 1, 2022, and paragraph (c)(1) of this section is applicable to disputes with open negotiation periods beginning 90 calendar days after the Departments issue guidance announcing that the functionality supporting these provisions has become available.
(4) Paragraph (c)(2) of this section, regarding the Federal IDR process eligibility review, paragraph (c)(3) of this section, regarding the authority to continue negotiations or withdraw, and paragraph (c)(4) of this section, regarding the treatment of batched and bundled qualified IDR items and services, are applicable for plan years (or in the individual market, policy years) beginning on or after January 1, 2022. Paragraphs (c)(3)(i) and (c)(3)(ii)(C) and (D) of this section are applicable beginning on November 1, 2026. Paragraphs (c)(2), (c)(3)(ii)(A) and (B), and (c)(4) of this section are applicable to disputes with open negotiation periods beginning 90 calendar days after the Departments issue guidance announcing that the functionality supporting these provisions has become available.
(5) Paragraphs (c)(5)(ii) and (iii) of this section regarding payment determination and notification and considerations in payment determinations, and paragraph (c)(5)(vi)(B) of this section regarding written decisions are applicable for items or services furnished on or after October 25, 2022, are applicable for plan years (or in the individual market policy years) beginning on or after January 1, 2022. Paragraphs (c)(5)(i), (c)(5)(v) through (vi)(A), and (c)(5)(vii) through (ix) of this section regarding submission of offers, prohibition on consideration of certain factors, written decision, effects of determination, recordkeeping requirements, and payment are applicable for plan years (or in the individual market, policy years) beginning on or after January 1, 2022. Paragraphs (c)(5)(i) and (ii), and (c)(5)(vii)(B) and (C) of this section regarding the deadlines for the submission of offers, payment determination and notification, suspension of certain subsequent IDR requests, and subsequent submission of requests permitted are applicable to disputes with open negotiation periods beginning 90 calendar days after the Departments issue guidance announcing that the functionality supporting these provisions has become available.
(6) Paragraph (d)(1) of this section regarding the certified IDR entity fee is applicable to disputes initiated on or after August 3, 2026. Paragraph (d)(2)(ii) of this section regarding the administrative fee is applicable to disputes initiated on or after June 11, 2026. Paragraph (d)(2)(iii) of this section regarding failure to pay the administrative fee is applicable on or after August 3, 2026.
(7) Paragraph (e) of this section is applicable for plan years (or in the individual market, policy years) beginning on or after January 1, 2022, except that the provisions regarding IDR entity certification at paragraphs (e)(1), (e)(2)(i) through (vi), (e)(2)(x) and (xi), and (e)(3) through (6) of this section are applicable beginning on October 7, 2021. Paragraph (e)(2)(ix) of this section regarding procedures to retain the certified IDR entity fee is applicable beginning on August 3, 2026.
(8) Paragraph (f) of this section is applicable for plan years (or in the individual market, policy years) beginning on or after January 1, 2022, except that paragraph (f)(1)(v)(F) of this section regarding reporting of information relating to the Federal IDR process is applicable for items or services furnished on or after October 25, 2022, for plan years (or in the individual market policy years) beginning on or after January 1, 2022.
(9) Paragraph (g) of this section regarding the extension of time periods for extenuating circumstances is applicable for plan years (or in the individual market, policy years) beginning on or after January 1, 2022. Paragraph (g) of this section is applicable beginning on November 1, 2026.
(10) Until the relevant applicability date for the requirements of this section, plans, issuers, providers, facilities, providers of air ambulance services and certified IDR entities are required to continue to comply with the corresponding requirements of § 54.9816-8 in effect prior to June 4, 2026.
(i) Severability. (1) Any provision of this section held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, will be construed so as to continue to give maximum effect to the provision permitted by law, unless such holding is one of utter invalidity or unenforceability, in which event the provision will be severable from this section and will not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.
(2) The provisions of paragraphs (b)(1), (c)(2)(ii), (c)(4), (d)(2), and (g)(1) of this section are intended to be severable from one another, from any grant of forbearance from removal resulting from this subpart, and from any provision referenced in those paragraphs. The provisions in this section are intended to be severable from the provisions in §§ 54.9816-6A, 54.9816-6 and 54.9816-9 from any grant of forbearance from removal resulting from this subpart, and from any provision referenced in §§ 54.9816-6A, 54.9816-6 and 54.9816-9.
[T.D. 10049, 91 FR 34048, June 4, 2026; 91 FR 55465, Aug. 28, 2026]
§ 54.9816-8T Independent dispute resolution process (temporary).
(a) Scope and definitions—(1) Scope. This section sets forth requirements with respect to the independent dispute resolution (IDR) process (referred to in this section as the Federal IDR process) under which a nonparticipating provider, nonparticipating emergency facility, or nonparticipating provider of air ambulance services (as applicable); and a group health plan complete a requisite open negotiation period, and at least one party submits a notification under paragraph (b) of this section to initiate the Federal IDR process under paragraph (c) of this section, and under which an IDR entity (as certified under paragraph (e) of this section) determines the amount of payment under the plan for an item or service furnished by the provider or facility.
(2) Definitions. Unless otherwise stated, the definitions in § 54.9816-3T apply to this section. Additionally, for purposes of this section, the following definitions apply:
(i) Batched items and services means multiple qualified IDR items or services that are considered jointly as part of one payment determination by a certified IDR entity for purposes of the Federal IDR process. In order for a qualified IDR item or service to be included in a batched item or service, the qualified IDR item or service must meet the criteria set forth in paragraph (c)(3) of this section.
(ii) Breach means the acquisition, access, use, or disclosure of individually identifiable health information (IIHI) in a manner not permitted under paragraph (e)(2)(v) of this section that compromises the security or privacy of the IIHI.
(A) Breach excludes:
(1) Any unintentional acquisition, access, or use of IIHI by personnel, a contractor, or a subcontractor of a certified IDR entity that is acting under the authority of that certified IDR entity, if the acquisition, access, or use was made in good faith and within the scope of that authority and that does not result in further use or disclosure in a manner not permitted under paragraph (e)(2)(v) of this section.
(2) Any inadvertent disclosure by a person who is authorized to access IIHI at a certified IDR entity to another person authorized to access IIHI at the same certified IDR entity, and the information received as a result of the disclosure is not further used or disclosed in a manner not permitted under paragraph (e)(2)(v) of this section.
(3) A disclosure of IIHI in which a certified IDR entity has a good faith belief that an unauthorized person to whom the disclosure was made would not reasonably have been able to retain such information.
(B) Except as provided in paragraph (a)(2)(ii)(A) of this section, access, use, or disclosure of IIHI in a manner not permitted under paragraph (e)(2)(v) of this section is presumed to be a breach unless the certified IDR entity demonstrates that there is a low probability that the security or privacy of the IIHI has been compromised based on a risk assessment encompassing at least the following factors:
(1) The nature and extent of the IIHI involved, including the types of identifiers and the likelihood of re-identification;
(2) The unauthorized person who used the IIHI or to whom the disclosure was made;
(3) Whether the IIHI was actually acquired or viewed; and
(4) The extent to which the risk to the IIHI has been mitigated.
(iii) Certified IDR entity means an entity responsible for conducting determinations under paragraph (c) of this section that meets the certification criteria specified in paragraph (e) of this section and that has been certified by the Secretary, jointly with the Secretaries of Health and Human Services and Labor.
(iv) Conflict of interest means, with respect to a party to a payment determination or certified IDR entity, a material relationship, status, or condition of the party or certified IDR entity that impacts the ability of the certified IDR entity to make an unbiased and impartial payment determination. For purposes of this section, a conflict of interest exists when a certified IDR entity is:
(A) A group health plan; a health insurance issuer offering group health insurance coverage, individual health insurance coverage, or short-term, limited-duration insurance; a carrier offering a health benefits plan under 5 U.S.C. 8902; or a provider, a facility or a provider of air ambulance services;
(B) An affiliate or a subsidiary of a group health plan; a health insurance issuer offering group health insurance coverage, individual health insurance coverage, or short-term, limited-duration insurance; a carrier offering a health benefits plan under 5 U.S.C. 8902; or a provider, a facility, or a provider of air ambulance services;
(C) An affiliate or subsidiary of a professional or trade association representing group health plans; health insurance issuers offering group health insurance coverage, individual health insurance coverage, or short-term, limited-duration insurance; carriers offering a health benefits plan under 5 U.S.C. 8902; or providers, facilities, or providers of air ambulance services.
(D) A certified IDR entity that has, or that has any personnel, contractors, or subcontractors assigned to a determination who have, a material familial, financial, or professional relationship with a party to the payment determination being disputed, or with any officer, director, or management employee of the plan, issuer, or carrier offering a health benefits plan under 5 U.S.C. 8902; the plan administrator, plan fiduciaries, or plan, issuer, or carrier employees; the health care provider, the health care provider's group or practice association; the provider of air ambulance services, the provider of air ambulance services' group or practice association, or the facility that is a party to the dispute.
(v) Credible information means information that upon critical analysis is worthy of belief and is trustworthy.
(vi) IDR entity means an entity that may apply or has applied for certification to conduct determinations under paragraph (c) of this section, and that currently is not certified by the Secretary, jointly with the Secretaries of Health and Human Services and Labor, pursuant to paragraph (e) of this section.
(vii) Individually identifiable health information (IIHI) means any information, including demographic data, that relates to the past, present, or future physical or mental health or condition of an individual; the provision of health care to an individual; or the past, present, or future payment for the provision of health care to an individual; and
(A) That identifies the individual; or
(B) With respect to which there is a reasonable basis to believe the information can be used to identify the individual.
(viii) Material familial relationship means any relationship as a spouse, domestic partner, child, parent, sibling, spouse's or domestic partner's parent, spouse's or domestic partner's sibling, spouse's or domestic partner's child, child's parent, child's spouse or domestic partner, or sibling's spouse or domestic partner.
(ix) Material financial relationship means any financial interest of more than five percent of total annual revenue or total annual income of a certified IDR entity, or an officer, director, or manager thereof, or of a reviewer or reviewing physician employed or engaged by a certified IDR entity to conduct or participate in any review in the Federal IDR process. The terms annual revenue and annual income do not include mediation fees received by mediators who are also arbitrators, provided that the mediator acts in the capacity of a mediator and does not represent a party in the mediation.
(x) Material professional relationship means any physician-patient relationship, any partnership or employment relationship, any shareholder or similar ownership interest in a professional corporation, partnership, or other similar entity; or any independent contractor arrangement that constitutes a material financial relationship with any expert used by the certified IDR entity or any officer or director of the certified IDR entity.
(xi) Qualified IDR item or service means an item or service:
(A) That is an emergency service furnished by a nonparticipating provider or nonparticipating facility subject to the protections of § 54.9816-4T, 29 CFR 2590.716-4, or 45 CFR 149.110, as applicable, for which the conditions of 45 CFR 149.410(b) are not met, or an item or service furnished by a nonparticipating provider at a participating health care facility, subject to the requirements of § 54.9816-5T, 29 CFR 2590.716-5, or 45 CFR 149.120, as applicable, for which the conditions of 45 CFR 149.420(c) through (i) are not met, or air ambulance services furnished by a nonparticipating provider of air ambulance services subject to the protections of § 54.9817-1T, 29 CFR 2590.717-1, or 45 CFR 149.130, as applicable, and for which the out-of-network rate is not determined by reference to an All-Payer Model Agreement under section 1115A of the Social Security Act or a specified State law as defined in § 54.9816-3T;
(B) With respect to which a provider or facility (as applicable) or group health plan submits a notification under paragraph (b)(2) of this section;
(C) That is not an item or service that is the subject of an open negotiation under paragraph (b)(1) of this section; and
(D) That is not an item or service for which a notification under paragraph (b)(2) of this section is submitted during the 90-calendar-day period under paragraph (c)(4)(vi)(B) of this section, but that may include such an item or service if the notification is submitted during the subsequent 30-business-day period under paragraph (c)(4)(vi)(C) of this section.
(xii) Unsecured IIHI means IIHI that is not rendered unusable, unreadable, or indecipherable to unauthorized persons through the use of a technology or methodology specified by the Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor.
(b) Determination of payment amount through open negotiation and initiation of the Federal IDR process—(1) Determination of payment amount through open negotiation—(i) In general. With respect to an item or service that meets the requirements of paragraph (a)(2)(xii)(A) of this section, the provider, facility, or provider of air ambulance services or the group health plan may, during the 30-business-day period beginning on the day the provider, facility, or provider of air ambulance services receives an initial payment or notice of denial of payment regarding the item or service, initiate an open negotiation period for purposes of determining the out-of-network rate for such item or service. To initiate the open negotiation period, a party must send a notice to the other party (open negotiation notice) in accordance with paragraph (b)(1)(ii) of this section.
(ii) Open negotiation notice—(A) Content. The open negotiation notice must include information sufficient to identify the item(s) and service(s) (including the date(s) the item(s) or service(s) were furnished, the service code, and initial payment amount, if applicable), an offer of an out-of-network rate, and contact information for the party sending the open negotiation notice.
(B) Manner. The open negotiation notice must be provided, using the standard form developed by the Secretary, in writing within 30 business days beginning on the day the provider, facility, or provider of air ambulance services receives an initial payment or a notice of denial of payment from the plan regarding the item or service. The day on which the open negotiation notice is first sent by a party is the date the 30-business-day open negotiation period begins. This notice may be provided to the other party electronically (such as by email) if the following two conditions are satisfied:
(1) The party sending the open negotiation notice has a good faith belief that the electronic method is readily accessible by the other party; and
(2) The notice is provided in paper form free of charge upon request.
(2) Initiating the Federal IDR process—(i) In general. With respect to an item or service for which the parties do not agree upon an out-of-network rate by the last day of the open negotiation period under paragraph (b)(1) of this section, either party may initiate the Federal IDR process. To initiate the Federal IDR process, a party must submit a written notice of IDR initiation to the other party and to the Secretary, using the standard form developed by the Secretary, during the 4-business-day period beginning on the 31st business day after the start of the open negotiation period.
(ii) Exception for items and services provided by certain nonparticipating providers and facilities. A party may not initiate the Federal IDR process with respect to an item or service if, with respect to that item or service, the party knows (or reasonably should have known) that the provider or facility provided notice and received consent under 45 CFR 149.410(b) or 149.420(c) through (i).
(iii) Notice of IDR initiation—(A) Content. The notice of IDR initiation must include:
(1) Information sufficient to identify the qualified IDR items or services under dispute (and whether the qualified IDR items or services are designated as batched items and services as described in paragraph (c)(3) of this section), including the date(s) and location the item or service was furnished, the type of item or service (such as whether the qualified IDR item or service is an emergency service as defined in § 54.9816-4T(c)(2)(i), 29 CFR 2590.716-4(c)(2)(i), or 45 CFR 149.110(c)(2)(i), as applicable, an emergency service as defined in § 54.9816-4T(c)(2)(ii), 29 CFR 2590.716-4(c)(2)(ii), or 45 CFR 149.110(c)(2)(ii), as applicable, or a nonemergency service; and whether any service is a professional service or facility-based service), corresponding service codes, place of service code, the amount of cost sharing allowed, and the amount of the initial payment made for the qualified IDR item or service, if applicable;
(2) Names of the parties involved and contact information, including name, email address, phone number, and mailing address;
(3) State where the qualified IDR item or service was furnished;
(4) Commencement date of the open negotiation period under paragraph (b)(1) of this section;
(5) Preferred certified IDR entity;
(6) An attestation that the items and services under dispute are qualified IDR items or services;
(7) Qualifying payment amount;
(8) Information about the qualifying payment amount as described in § 54.9816-6T(d); and
(9) General information describing the Federal IDR process as specified by the Secretary.
(B) Manner. The initiating party must provide written notice of IDR initiation to the other party. The initiating party may satisfy this requirement by furnishing the notice of IDR initiation to the other party electronically (such as by email) if the following two conditions are satisfied—
(1) The initiating party has a good faith belief that the electronic method is readily accessible by the other party; and
(2) The notice is provided in paper form free of charge upon request.
(C) Notice to the Secretary. The initiating party must also furnish the notice of IDR initiation to the Secretary by submitting the notice through the Federal IDR portal. The initiation date of the Federal IDR process will be the date of receipt by the Secretary.
(c) Federal IDR process following initiation—(1) Selection of certified IDR entity—(i) In general. The plan or the provider, facility, or provider of air ambulance services receiving the notice of IDR initiation under paragraph (b)(2) of this section may agree or object to the preferred certified IDR entity identified in the notice of IDR initiation. If the party in receipt of the notice of IDR initiation fails to object within 3 business days, the preferred certified IDR entity identified in the notice of IDR initiation will be selected and will be treated as jointly agreed to by the parties, provided that the certified IDR entity does not have a conflict of interest. If the party in receipt of the notice of IDR initiation objects, that party must notify the initiating party of the objection and propose an alternative certified IDR entity. The initiating party must then agree or object to the alternative certified IDR entity; if the initiating party fails to agree or object to the alternative certified IDR entity, the alternative certified IDR entity will be selected and will be treated as jointly agreed to by the parties. In order to select a preferred certified IDR entity, the plan and the provider, facility, or provider of air ambulance services, must jointly agree on a certified IDR entity not later than 3 business days after the initiation date of the Federal IDR process. If the plan and the provider, facility, or provider of air ambulance services fail to agree upon a certified IDR entity within that time, the Secretary shall select a certified IDR entity in accordance with paragraph (c)(1)(iv) of this section.
(ii) Requirements for selected certified IDR entity. The certified IDR entity selected must be an IDR entity certified under paragraph (e) of this section, that:
(A) Does not have a conflict of interest as defined in paragraph (a)(2) of this section;
(B) Ensures that assignment of personnel to a payment determination and decisions regarding hiring, compensation, termination, promotion, or other similar matters related to personnel assigned to the dispute are not made based upon the likelihood that the assigned personnel will support a particular party to the determination being disputed other than as outlined under paragraph (c)(4)(iii) of this section; and
(C) Ensures that any personnel assigned to a payment determination do not have any conflicts of interests as defined in paragraph (a)(2) of this section regarding any party to the dispute within the 1 year immediately preceding an assignment of dispute determination, similar to the requirements laid out in 18 U.S.C. 207(b).
(iii) Notice of certified IDR entity selection. Upon the selection of a certified IDR entity, in accordance with paragraph (c)(1)(i) of this section, the plan or the provider or emergency facility that submitted the notice of IDR initiation under paragraph (b)(2) of this section must notify the Secretary of the selection as soon as reasonably practicable, but no later than 1 business day after such selection, through the Federal IDR portal. In addition, if the non-initiating party believes that the Federal IDR process is not applicable, the non-initiating party must also provide information regarding the Federal IDR process's inapplicability through the Federal IDR portal by the same date that the notice of certified IDR entity selection must be submitted.
(A) Content. If the parties have agreed on the selection of a certified IDR entity or the party in receipt of the notice of IDR initiation has not objected to the other party's selection, the notice of the certified IDR entity selection must include the following information:
(1) Name of the certified IDR entity;
(2) The certified IDR entity number; and
(3) Attestation by both parties, or by the initiating party if the non-initiating party fails to object to the selection of the certified IDR entity, that the selected certified IDR entity meets the requirements of paragraph (c)(1)(ii) of this section.
(B) [Reserved]
(iv) Failure to select a certified IDR entity. If the plan and the provider, facility, or provider of air ambulance services fail to select a certified IDR entity in accordance with paragraph (c)(1)(i) of this section, the initiating party must notify the Secretary of the failure no later than 1 business day after the date of such failure (or in other words, 4 business days after initiation of the Federal IDR process) by electronically submitting the notice as described in paragraph (c)(1)(iii) of this section but indicating that the parties have failed to select a certified IDR entity. In addition, if the non-initiating party believes that the Federal IDR process is not applicable, the non-initiating party must also provide information regarding the Federal IDR process's inapplicability through the Federal IDR portal by the same date that the notice of failure to select must be submitted. Upon notification of the failure of the parties to select a certified IDR entity, the Secretary will select a certified IDR entity that charges a fee within the allowed range of certified IDR entity fees through a random selection method not later than 6 business days after the date of initiation of the Federal IDR process and will notify the plan and the provider or facility of the selection. If there are insufficient certified IDR entities that charge a fee within the allowed range of certified IDR entity fees available to arbitrate the dispute, the Secretary, jointly with the Secretary of Health and Human Services and Secretary of Labor, will select a certified IDR entity that has received approval, as described in paragraph (e)(2)(vi)(B) of this section, to charge a fee outside of the allowed range of certified IDR entity fees.
(v) Review by certified IDR entity. After selection by the parties (including when the initiating party selects a certified IDR entity and the other party does not object), or by the Secretary under paragraph (c)(1)(iv) of this section, the certified IDR entity must review the selection and attest that it meets the requirements of paragraph (c)(1)(ii) of this section. If the certified IDR entity is unable to attest that it meets the requirements of paragraph (c)(1)(ii) within 3 business days of selection, the parties, upon notification, must select another certified IDR entity under paragraph (c)(1) of this section, treating the date of notification of the failure to attest to the requirements of (c)(1)(ii) of this section as the date of initiation of the Federal IDR process for purposes of the time periods in paragraphs (c)(1)(i) and (iv) of this section. Additionally, the certified IDR entity selected must review the information submitted in the notice of IDR initiation to determine whether the Federal IDR process applies. If the Federal IDR process does not apply, the certified IDR entity must notify the Secretary and the parties within 3 business days of making that determination.
(2) Authority to continue negotiations—(i) In general. If the parties to the Federal IDR process agree on an out-of-network rate for a qualified IDR item or service after providing the notice of IDR initiation to the Secretary consistent with paragraph (b)(2) of this section, but before the certified IDR entity has made its payment determination, the amount agreed to by the parties for the qualified IDR item or service will be treated as the out-of-network rate for the qualified IDR item or service. To the extent the amount exceeds the initial payment amount (or initial denial of payment) and any cost sharing paid or required to be paid by the participant or beneficiary, payment must be made directly by the plan to the nonparticipating provider, facility, or nonparticipating provider of air ambulance services not later than 30 business days after the agreement is reached. In no instance may either party seek additional payment from the participant or beneficiary, including in instances in which the out-of-network rate exceeds the qualifying payment amount. The initiating party must send a notification to the Secretary and to the certified IDR entity (if selected) electronically through the Federal IDR portal, as soon as possible, but no later than 3 business days after the date of the agreement. The notification must include the out-of-network rate for the qualified IDR item or service and signatures from authorized signatories for both parties.
(ii) Method of allocation of the certified IDR entity fee. In the case of an agreement described in paragraph (c)(2)(i) of this section, the certified IDR entity is required to return half of each parties' certified IDR entity fee, unless directed otherwise by both parties. The administrative fee under paragraph (d)(2) of this section will not be returned to the parties.
(3) Treatment of batched items and services—(i) In general. Batched items and services may be submitted and considered jointly as part of one payment determination by a certified IDR entity only if the batched items and services meet the requirements of this paragraph (c)(3). Batched items and services submitted and considered jointly as part of one payment determination under this paragraph (c)(3)(i) are treated as a batched determination and subject to the fee for batched determinations under this section.
(A) The qualified IDR items and services are billed by the same provider or group of providers, the same facility, or the same provider of air ambulance services. Items and services are billed by the same provider or group of providers, the same facility, or the same provider of air ambulance services if the items or services are billed with the same National Provider Identifier or Tax Identification Number;
(B) Payment for the qualified IDR items and services would be made by the same plan;
(C) The qualified IDR items and services are the same or similar items and services. The qualified IDR items and services are considered to be the same or similar items or services if each is billed under the same service code, or a comparable code under a different procedural code system, such as Current Procedural Terminology (CPT) codes with modifiers, if applicable, Healthcare Common Procedure Coding System (HCPCS) with modifiers, if applicable, or Diagnosis-Related Group (DRG) codes with modifiers, if applicable; and
(D) All the qualified IDR items and services were furnished within the same 30-business-day period, or the same 90-calendar-day period under paragraph (c)(4)(vi)(B) of this section, as applicable.
(ii) Treatment of bundled payment arrangements. In the case of qualified IDR items and services billed by a provider, facility, or provider of air ambulance services as part of a bundled payment arrangement, or where a plan makes or denies an initial payment as a bundled payment, the qualified IDR items and services may be submitted as part of one payment determination. Bundled payment arrangements submitted under this paragraph (c)(3)(ii) are subject to the rules for batched determinations set forth in paragraph (c)(3)(i) of this section and the certified IDR entity fee for single determinations as set forth in paragraph (e)(2)(vii) of this section.
(4) Payment determination for a qualified IDR item or service—(i) Submission of offers. Not later than 10 business days after the selection of the certified IDR entity, the plan and the provider, facility, or provider of air ambulance services:
(A) Must each submit to the certified IDR entity:
(1) An offer of an out-of-network rate expressed as both a dollar amount and the corresponding percentage of the qualifying payment amount represented by that dollar amount;
(2) Information requested by the certified IDR entity relating to the offer.
(3) The following additional information, as applicable—
(i) For providers and facilities, information on the size of the provider's practice or of the facility (if applicable). Specifically, a group of providers must specify whether the providers' practice has fewer than 20 employees, 20 to 50 employees, 51 to 100 employees, 101 to 500 employees, or more than 500 employees. For facilities, the facility must specify whether the facility has 50 or fewer employees, 51 to 100 employees, 101 to 500 employees, or more than 500 employees;
(ii) For providers and facilities, information on the practice specialty or type, respectively (if applicable);
(iii) For plans, information on the coverage area of the plan, the relevant geographic region for purposes of the qualifying payment amount, whether the coverage is fully-insured or partially or fully self-insured; and
(iv) The qualifying payment amount for the applicable year for the same or similar item or service as the qualified IDR item or service.
(B) May each submit to the certified IDR entity any information relating to the offer that was submitted by either party, except that the information may not include information on factors described in paragraph (c)(4)(v) of this section.
(ii) Payment determination and notification. Not later than 30 business days after the selection of the certified IDR entity, the certified IDR entity must:
(A) For further guidance see § 54.9816-8(c)(4)(ii)(A).
(B) Notify the plan and the provider or facility, as applicable, of the selection of the offer under paragraph (c)(4)(ii)(A) of this section, and provide the written decision required under (c)(4)(vi) of this section.
(iii) For further guidance see § 54.9816-8(c)(4)(iii).
(iv) For further guidance see § 54.9816-8(c)(4)(iv).
(v) Prohibition on consideration of certain factors. In determining which offer to select, the certified IDR entity must not consider:
(A) Usual and customary charges (including payment or reimbursement rates expressed as a proportion of usual and customary charges);
(B) The amount that would have been billed by the provider or facility with respect to the qualified IDR item or service had the provisions of 45 CFR 149.410 and 149.420 (as applicable) not applied; or
(C) The payment or reimbursement rate for items and services furnished by the provider or facility payable by a public payor, including under the Medicare program under title XVIII of the Social Security Act; the Medicaid program under title XIX of the Social Security Act; the Children's Health Insurance Program under title XXI of the Social Security Act; the TRICARE program under chapter 55 of title 10, United States Code; chapter 17 of title 38, United States Code; or demonstration projects under section 1115 of the Social Security Act.
(vi) Written decision. (A) The certified IDR entity must explain its determination in a written decision submitted to the parties and the Secretary, in a form and manner specified by the Secretary;
(B) For further guidance see § 54.9816-8(c)(4)(vi)(B).
(vii) Effects of determination—(A) Binding. A determination made by a certified IDR entity under paragraph (c)(4)(ii) of this section:
(1) Is binding upon the parties, in the absence of fraud or evidence of intentional misrepresentation of material facts presented to the certified IDR entity regarding the claim; and
(2) Is not subject to judicial review, except in a case described in any of paragraphs (1) through (4) of section 10(a) of title 9, United States Code.
(B) Suspension of certain subsequent IDR requests. In the case of a determination made by a certified IDR entity under paragraph (c)(4)(ii) of this section, the party that submitted the initial notification under paragraph (b)(2) of this section may not submit a subsequent notification involving the same other party with respect to a claim for the same or similar item or service that was the subject of the initial notification during the 90-calendar-day period following the determination.
(C) Subsequent submission of requests permitted. If the end of the open negotiation period specified in paragraph (b)(1) of this section occurs during the 90-calendar-day suspension period regarding claims for the same or similar item or service that were the subject of the initial notice of IDR determination as described in paragraph (c)(4)(vi) of this section, either party may initiate the Federal IDR process for those claims by submitting a notification as specified in paragraph (b)(2) of this section during the 30-business-day period beginning on the day after the last day of the 90-calendar-day suspension period.
(viii) Recordkeeping requirements. The certified IDR entity must maintain records of all claims and notices associated with the Federal IDR process with respect to any determination for 6 years. The certified IDR entity must make these records available for examination by the plan, provider, facility, provider of air ambulance services, or a State or Federal oversight agency upon request, except to the extent the disclosure would violate either State or Federal privacy law.
(ix) Payment. If applicable, the amount of the offer selected by the certified IDR entity (less the sum of the initial payment and any cost sharing paid or owed by the participant or beneficiary) must be paid directly to the provider, facility, or provider of air ambulance services not later than 30 calendar days after the determination by the certified IDR entity. If the offer selected by the certified IDR entity is less than the sum of the initial payment and any cost sharing paid by the participant or beneficiary, the provider, facility, or provider of air ambulance services will be liable to the plan for the difference. The provider, facility, or provider of air ambulance services must pay the difference directly to the plan not later than 30 calendar days after the determination by the certified IDR entity.
(d) Costs of IDR process—(1) Certified IDR entity fee. (i) With respect to the Federal IDR process described in paragraph (c) of this section, the party whose offer submitted to the certified IDR entity under paragraph (c)(4)(ii)(A) of this section is not selected is responsible for the payment to the certified IDR entity of the predetermined fee charged by the certified IDR entity.
(ii) Each party to a determination for which a certified IDR entity is selected under paragraph (c)(1) of this section must pay the predetermined certified IDR entity fee charged by the certified IDR entity to the certified IDR entity at the time the parties submit their offers under (c)(4)(i) of this section. The certified IDR entity fee paid by the prevailing party whose offer is selected by the certified IDR entity will be returned to that party within 30 business days following the date of the certified IDR entity's determination.
(2) Administrative fee. (i) Each party to a determination for which a certified IDR entity is selected under paragraph (c)(1) of this section must, at the time the certified IDR entity is selected under paragraph (c)(1), pay to the certified IDR entity a non-refundable administrative fee due to the Secretary for participating in the Federal IDR process described in this section.
(ii) For further guidance, see § 54.9816-8(d)(2)(ii).
(3) Severability. For further guidance, see § 54.9816-8(d)(3).
(e) Certification of IDR entity—(1) In general. In order to be selected under paragraph (c)(1) of this section—
(i) An IDR entity must meet the standards described in this paragraph (e) and be certified by the Secretary, jointly with the Secretaries of Health and Human Services and Labor, as set forth in this paragraph (e) and guidance promulgated by the Secretary. Once certified, the IDR entity will be provided with a certified IDR entity number.
(ii) An IDR entity must provide written documentation to the Secretary regarding general company information (such as contact information, Taxpayer Identification Number, and website), as well as the applicable service area in which the IDR entity intends to conduct payment determinations under the Federal IDR process. IDR entities may choose to submit their application for all States or self-limit to a particular subset of States.
(iii) An IDR entity that the Secretary, jointly with the Secretary of Labor and the Secretary of Health and Human Services, certifies must enter into an agreement as a condition of certification. The agreement shall include specified provisions encompassed by this section, including, but not limited to, the requirements applicable to certified IDR entities when making payment determinations, as well as the requirements regarding certification and revocation (such as specifications for wind-down activities and reallocation of certified IDR entity fees, where warranted).
(2) Requirements. An IDR entity must provide written documentation to the Secretary through the Federal IDR portal that demonstrates that the IDR entity satisfies the following standards to be a certified IDR entity under this paragraph (e):
(i) Possess (directly or through contracts or other arrangements) sufficient arbitration and claims administration of health care services, managed care, billing and coding, medical and legal expertise to make the payment determinations described in paragraph (c) of this section within the time prescribed in paragraph (c)(4)(ii) of this section.
(ii) Employ (directly or through contracts or other arrangements) a sufficient number of personnel to make the determinations described in paragraph (c) of this section within the time prescribed by (c)(4)(ii) of this section. To satisfy this standard, the written documentation must include a description of the IDR entity's organizational structure and capabilities, including an organizational chart and the credentials, responsibilities, and number of personnel employed to make determinations described in paragraph (c) of this section.
(iii) Maintain a current accreditation from a nationally recognized and relevant accrediting organization, such as URAC, or ensure that it otherwise possesses the requisite training to conduct payment determinations (for example, providing documentation that personnel employed by the IDR entity have completed arbitration training by the American Arbitration Association, the American Health Law Association, or a similar organization).
(iv) Have a process to ensure that no conflict of interest, as defined in paragraph (a)(2) of this section, exists between the parties and the personnel the certified IDR entity assigns to a payment determination to avoid violating paragraph (c)(1)(ii) of this section, including policies and procedures for conducting ongoing audits for conflicts of interest, to ensure that should any conflicts of interest arise, the certified IDR entity has procedures in place to inform the Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, of the conflict of interest and to mitigate the risk by reassigning the dispute to other personnel in the event that any personnel previously assigned have a conflict of interest.
(v) Have a process to maintain the confidentiality of IIHI obtained in the course of conducting determinations. A certified IDR entity's responsibility to comply with these confidentiality requirements shall survive revocation of the IDR entity's certification for any reason, and IDR entities must comply with the record retention and disposal requirements described in this section. Under this process, once certified, the certified IDR entity must comply with the following requirements:
(A) Privacy. The certified IDR entity may create, collect, handle, disclose, transmit, access, maintain, store, and/or use IIHI, only to perform:
(1) The certified IDR entity's required duties described in this section; and
(2) Functions related to carrying out additional obligations as may be required under applicable Federal or State laws or regulations.
(B) Security. (1) The certified IDR entity must ensure the confidentiality of all IIHI it creates, obtains, maintains, stores, and transmits;
(2) The certified IDR entity must protect against any reasonably anticipated threats or hazards to the security of this information;
(3) The certified IDR entity must ensure that IIHI is securely destroyed or disposed of in an appropriate and reasonable manner 6 years from either the date of its creation or the first date on which the certified IDR entity had access to it, whichever is earlier;
(4) The certified IDR entity must implement policies and procedures to prevent, detect, contain, and correct security violations in the event of a breach of IIHI;
(C) Breach notification. The certified IDR entity must, following the discovery of a breach of unsecured IIHI, notify of the breach the provider, facility, or provider of air ambulance services; the plan; the Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor; and each individual whose unsecured IIHI has been, or is reasonably believed to have been, subject to the breach, to the extent possible.
(1) Breaches treated as discovered. For purposes of this paragraph (e)(2)(v)(C), a breach shall be treated as discovered by a certified IDR entity as of the first day on which the breach is known to the certified IDR entity or, by exercising reasonable diligence, would have been known to the certified IDR entity. A certified IDR entity shall be deemed to have knowledge of a breach if the breach is known, or by exercising reasonable diligence would have been known, to any person, other than the person committing the breach, who is an employee, officer, or other agent of the certified IDR entity;
(2) Timing of notification. A certified IDR entity must provide the notification required by this paragraph (e)(2)(v)(C) without unreasonable delay and in no case later than 60 calendar days after discovery of a breach.
(3) Content of notification. The notification required by this paragraph (e)(2)(v)(C) must include, to the extent possible:
(i) The identification of each individual whose unsecured IIHI has been, or is reasonably believed by the certified IDR entity to have been, subject to the breach;
(ii) A brief description of what happened, including the date of the breach and the date of the discovery of the breach, to the extent known;
(iii) A description of the types of unsecured IIHI that were involved in the breach (for example whether full name, social security number, date of birth, home address, account number, diagnosis, disability code, or other types of information were involved);
(iv) A brief description of what the certified IDR entity involved is doing to investigate the breach, to mitigate harm to the affected parties, and to protect against any further breaches; and
(v) Contact procedures for individuals to ask questions or learn additional information, which must include a toll-free telephone number, email address, website, or postal address.
(4) Method for providing notification. A certified IDR entity must submit the notification required by this paragraph (e)(2)(v)(C) in written form (in clear and understandable language) either on paper or electronically through the Federal IDR portal or electronic mail.
(D) Application to contractor and subcontractors. The certified IDR entity must ensure compliance with this paragraph (e)(2)(v) of this section by any contractor or subcontractor with access to IIHI performing any duties related to the Federal IDR process.
(vi) Meet appropriate indicators of fiscal integrity and stability by demonstrating that the certified IDR entity has a system of safeguards and controls in place to prevent and detect improper financial activities by its employees and agents to assure fiscal integrity and accountability for all certified IDR entity fees and administrative fees received, held, and disbursed and by submitting 3 years of financial statements or, if not available, other information to demonstrate fiscal stability of the IDR entity.
(vii) For further guidance, see § 54.9816-8(e)(2)(vii).
(viii) For further guidance, see § 54.9816-8(e)(2)(viii).
(ix) Have a procedure in place to retain the certified IDR entity fees described in paragraph (d)(1) of this section paid by both parties in a trust or escrow account and to return the certified IDR entity fee paid by the prevailing party of an IDR payment determination, or half of each party's certified IDR entity fee in the case of an agreement described in paragraph (c)(2)(i) of this section, within 30 business days following the date of the determination.
(x) Have a procedure in place to retain the administrative fees described in paragraph (d)(2) of this section and to remit the administrative fees to the Secretary in accordance with the timeframe and procedures set forth in guidance published by the Secretary.
(xi) Discharge its responsibilities in accordance with paragraph (c) of this section, including not making any determination with respect to which the certified IDR entity would not be eligible for selection pursuant to paragraph (c)(1) of this section.
(xii) Collect the information required to be reported to the Secretary under paragraph (f) of this section and report the information on a timely basis in the form and manner provided in guidance published by the Secretary.
(3) Conflict-of-interest standards. In addition to the general standards set forth in paragraph (e)(2)(iv) of this section, an IDR entity must provide written documentation that the IDR entity satisfies the standards to be a certified IDR entity under this paragraph (e)(3).
(i) The IDR entity must provide an attestation indicating that it does not have a conflict of interest as defined in paragraph (a)(2) of this section;
(ii) The IDR entity must have procedures in place to ensure that personnel assigned to a determination do not have any conflicts of interest regarding any party to the dispute within the 1 year immediately preceding an assignment of dispute determination, similar to the requirements laid out in 18 U.S.C. 207(b). In order to satisfy this requirement, if certified, the IDR entity must ensure that any personnel assigned to a determination do not have any conflicts of interest as defined in paragraph (a)(2) of this section.
(iii) Following certification under this paragraph (e), if a certified IDR entity acquires control of, becomes controlled by, or comes under common control with any entity described in paragraph (e)(3)(i) of this section, the certified IDR entity must notify the Secretary in writing no later than 3 business days after the acquisition or exercise of control and shall be subject to revocation of certification under paragraph (e)(6)(ii) of this section.
(4) Period of certification. Subject to paragraphs (e)(5) and (6) of this section, each certification (including a recertification) of a certified IDR entity under the process described in paragraph (e)(1) of this section will be effective for a 5-year period.
(5) Petition for denial or revocation—(i) In general. An individual, provider, facility, provider of air ambulance services, plan, or issuer may petition for a denial of a certification for an IDR entity or a revocation of a certification for a certified IDR entity for failure to meet a requirement of this section using the standard form and manner set forth in guidance issued by the Secretary. The petition for denial of a certification must be submitted within the timeframe set forth in guidance issued by the Secretary.
(ii) Content of petition. The individual, provider, facility, provider of air ambulance services, plan, or issuer seeking denial or revocation of certification must submit a written petition using the standard form issued by the Secretary including the following information:
(A) The identity of the IDR entity seeking certification or certified IDR entity that is the subject of the petition;
(B) The reason(s) for the petition;
(C) Whether the petition seeks denial or revocation of a certification;
(D) Documentation to support the reasons outlined in the petition; and
(E) Other information as may be required by the Secretary.
(iii) Process. (A) The Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, will acknowledge receipt of the petition within 10 business days of receipt of the petition.
(B) If the Secretary finds that the petition adequately shows a failure of the IDR entity seeking certification or the certified IDR entity to follow the requirements of this paragraph (e), the Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, will notify the IDR entity seeking certification or the certified IDR entity by providing a de-identified copy of the petition. Following the notification, the IDR entity seeking certification or certified IDR entity will have 10 business days to provide a response. After the time period for providing the response has passed, the Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, will review the response (if any), determine whether a denial or revocation of a certification is warranted, and issue a notice of the decision to the IDR entity or certified IDR entity and to the petitioner. This decision will be subject to the appeal requirements of paragraph (e)(6)(v) of this section.
(C) Effect on certification under petition. Regarding a petition for revocation of a certified IDR entity's certification, if the Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, finds that the petition adequately shows a failure to comply with the requirements of this paragraph (e), following the Secretary's notification of the failure to the certified IDR entity under paragraph (e)(5)(iii)(B) of this section, the certified IDR entity may continue to work on previously assigned determinations but may not accept new determinations until the Secretary issues a notice of the decision to the certified IDR entity finding that a revocation of certification is not warranted.
(6) Denial of IDR entity certification or revocation of certified IDR entity certification—(i) Denial of IDR entity certification. The Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, may deny the certification of an IDR entity under paragraph (e)(1) of this section if, during the process of certification, including as a result of a petition described in paragraph (e)(5) of this section, the Secretary determines the following:
(A) The IDR entity fails to meet the applicable standards set forth under this paragraph (e);
(B) The IDR entity has committed or participated in fraudulent or abusive activities, including, during the certification process, submitting fraudulent data, or submitting information or data the IDR entity knows to be false to the Secretary, the Secretary of Health and Human Services, or the Secretary of Labor;
(C) The IDR entity has failed to comply with requests for information from the Secretary, the Secretary of Health and Human Services, or the Secretary of Labor as part of the certification process;
(D) In conducting payment determinations, including those outside the Federal IDR process, the IDR entity has failed to meet the standards that applied to those determinations or reviews, including standards of independence and impartiality; or
(E) The IDR entity is otherwise not fit or qualified to make determinations under the Federal IDR process.
(ii) Revocation of certification of a certified IDR entity. The Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, may revoke the certification of a certified IDR entity under paragraph (e)(1) of this section if, as a result of an audit, a petition described in paragraph (e)(5) of this section, or otherwise, the Secretary determines the following:
(A) The certified IDR entity has a pattern or practice of noncompliance with any requirements of this paragraph (e);
(B) The certified IDR entity is operating in a manner that hinders the efficient and effective administration of the Federal IDR process;
(C) The certified IDR entity no longer meets the applicable standards for certification set forth under this paragraph (e);
(D) The certified IDR entity has committed or participated in fraudulent or abusive activities, including submission of false or fraudulent data to the Secretary, the Secretary of Health and Human Services, or the Secretary of Labor;
(E) The certified IDR entity lacks the financial viability to provide arbitration under the Federal IDR process;
(F) The certified IDR entity has failed to comply with requests from the Secretary, the Secretary of Health and Human Services, or the Secretary of Labor made as part of an audit, including failing to submit all records of the certified IDR entity that pertain to its activities within the Federal IDR process; or
(G) The certified IDR entity is otherwise no longer fit or qualified to make determinations.
(iii) Notice of denial or revocation. The Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, will issue a written notice of denial to the IDR entity or revocation to the certified IDR entity within 10 business days of the Secretary's decision, including the effective date of denial or revocation, the reason(s) for denial or revocation, and the opportunity to request appeal of the denial or revocation.
(iv) Request for appeal of denial or revocation. To request an appeal, the IDR entity or certified IDR entity must submit a request for appeal to the Secretary within 30 business days of the date of the notice under paragraph (e)(6)(iii) of this section of denial or revocation and in the manner prescribed by the instructions to the notice. During this time period, the Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, will not issue a notice of final denial or revocation and a certified IDR entity may continue to work on previously assigned determinations but may not accept new determinations. If the IDR entity or certified IDR entity does not timely submit a request for appeal of the denial or revocation, the Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, will issue a notice of final denial or revocation to the IDR entity or certified IDR entity (if applicable) and the petitioner.
(v) Denial or final revocation. Upon notice of denial or final revocation, the IDR entity shall not be considered a certified IDR entity and therefore shall not be eligible to accept payment determinations under the Federal IDR process. Moreover, after a notice of final revocation, the IDR entity may not re-apply to be a certified IDR entity until on or after the 181st day after the date of the notice of denial or final revocation.
(f) Reporting of information relating to the Federal IDR process—(1) Reporting of information. Within 30 business days of the close of each month, for qualified IDR items and services furnished on or after January 1, 2022, each certified IDR entity must, in a form and manner specified by the Secretary, report:
(i) The number of notices of IDR initiation submitted under paragraph (b)(2) of this section to the certified IDR entity during the immediately preceding month;
(ii) The size of the provider practices and the size of the facilities submitting notices of IDR initiation under paragraph (b)(2) of this section during the immediately preceding month, as required to be provided to the certified IDR entity under paragraph (c)(4)(i)(A)(2) of this section;
(iii) The number of such notices of IDR initiation with respect to which a determination was made under paragraph (c)(4)(ii) of this section;
(iv) The number of times during the month that the out-of-network rate determined (or agreed to) under this section has exceeded the qualifying payment amount, specified by qualified IDR items and services;
(v) With respect to each notice of IDR initiation under paragraph (b)(2) of this section for which such a determination was made, the following information:
(A) A description of the qualified IDR items and services included with respect to the notification, including the relevant billing and service codes;
(B) The relevant geographic region for purposes of the qualifying payment amount for the qualified IDR items and services with respect to which the notification was provided;
(C) The amount of the offer submitted under paragraph (c)(4)(i) of this section by the plan and by the provider or facility (as applicable) expressed as a dollar amount and as a percentage of the qualifying payment amount;
(D) Whether the offer selected by the certified IDR entity under paragraph (c)(4) of this section was the offer submitted by the plan or by the provider or facility (as applicable);
(E) The amount of the selected offer expressed as a dollar amount and as a percentage of the qualifying payment amount;
(F) For further guidance see § 54.9816-8(f)(1)(v)(F);
(G) The practice specialty or type of each provider or facility, respectively, involved in furnishing each qualified IDR item or service;
(H) The identity for each plan, and provider or facility, with respect to the notification. Specifically, each certified IDR entity must provide each party's name and address, as applicable; and
(I) For each determination, the number of business days elapsed between selection of the certified IDR entity and the determination of the out-of-network rate by the certified IDR entity.
(vi) The total amount of certified IDR entity fees paid to the certified IDR entity under paragraph (d)(1) of this section during the month.
(2) [Reserved]
(g) Extension of time periods for extenuating circumstances—(1) General. The time periods specified in this section (other than the time for payment, if applicable, under paragraph (c)(4)(ix) of this section) may be extended in extenuating circumstances at the Secretary's discretion if:
(i) An extension is necessary to address delays due to matters beyond the control of the parties or for good cause; and
(ii) The parties attest that prompt action will be taken to ensure that the determination under this section is made as soon as administratively practicable under the circumstances.
(2) Process to request an extension. The parties may request an extension by submitting a request for extension due to extenuating circumstances through the Federal IDR portal if the extension is necessary to address delays due to matters beyond the control of the parties or for good cause.
(h) Applicability date. The provisions of this section are applicable with respect to plan years beginning on or after January 1, 2022, except that the provisions regarding IDR entity certification at paragraphs (a) and (e) of this section are applicable beginning on October 7, 2021; and paragraphs (c)(4)(ii) through (iv) of this section regarding payment determinations, paragraph (c)(4)(vi)(B) of this section regarding written decisions, and paragraph (f)(1)(v)(F) of this section regarding reporting of information relating to the Federal IDR process are applicable with respect to items or services provided or furnished on or after October 25, 2022, for plan years beginning on or after January 1, 2022.
[T.D. 9955, 86 FR 56100, Oct. 7, 2021, as amended by T.D. 9965, 87 FR 52647, Aug. 26, 2022; T.D. 9985, 88 FR 88524, Dec. 21, 2023]
§ 54.9816-9 Federal independent dispute resolution registry of group health plans, health insurance issuers, and Federal Employees Health Benefits Program Carriers.
(a) Establishment of Federal independent dispute resolution registry. The Secretary of the Treasury (Secretary), jointly with the Secretary of the Health and Human Services and the Secretary of Labor, will establish a Federal independent dispute resolution (IDR) registry consisting of the information described in paragraph (b)(2) of this section, and will assign a registration number for each self-insured group health plan, self- or fully-insured non-Federal governmental plan, health insurance issuer offering group or individual health insurance coverage, and contract held by a Federal Employees Health Benefits (FEHB) Program carrier. The information contained in the registry will be made available to parties seeking to initiate an open negotiation or a dispute through the Federal IDR portal.
(b) Federal IDR registration—(1) Registration requirement. Each self-insured group health plan, each FEHB Program carrier, and each health insurance issuer offering group or individual health insurance coverage subject to the Federal IDR process must register with the Federal IDR registry as specified by the Departments in guidance. Initial registration must be completed by the later of the date that is 90 business days after the Departments issue guidance announcing that the functionality supporting the registry has become available, or the date the plan sponsor or health insurance issuer begins offering a group health plan or health insurance coverage or FEHB Program carrier begins offering an FEHB plan subject to the Federal IDR process.
(2) Required data elements. Self-insured group health plans, FEHB Program carriers, and health insurance issuers offering group or individual health insurance coverage subject to the registration requirement must include the following information with their registration:
(i) The legal business name (if any) of the self-insured group health plan, FEHB Program carrier, or issuer and, if applicable, the legal business name of the self-insured group health plan sponsor;
(ii) Whether the registrant is a self-insured group health plan subject to ERISA, an FEHB Program carrier, an issuer offering individual or group market insurance coverage, a self-insured non-Federal governmental plan, or a self-insured church plan;
(iii) For issuers offering individual or group market insurance coverage and for self-insured non-Federal governmental plans, the State(s) in which the plan is offered or the coverage is licensed;
(iv) For self-insured group health plans not otherwise subject to State law, including self-insured church plans and self-insured non-Federal governmental plans, any State(s) in which the group health plan has properly effectuated an election to opt in to a specified State law as defined in 29 CFR 2590.716-3, or an All-Payer Model Agreement under section 1115A of the Social Security Act, if the terms of that agreement allow a plan not otherwise subject to the agreement to opt in; and for FEHB Program plans that adopt a specified State law or All-Payer Model Agreement pursuant to their FEHB Program carrier's contract terms, any State(s) in which they have made such an adoption;
(v) Contact information, including a telephone number and email address, for the appropriate office or person to initiate open negotiation for purposes of determining an amount of payment (including cost sharing) for such item or service; and contact information, including a telephone number and email address, for the appropriate office or person to initiate the Federal IDR process;
(vi) The 5-digit Health Insurance Oversight System (HIOS) identifier, if available; and, for self-insured group health plans, the plan's or the plan sponsor's Employer Identification Number (EIN) and the plan's plan number (PN), if a PN is available, and for FEHB Program carriers, the applicable contract number(s) and plan code(s);
(vii) Additional information needed to identify the plan or issuer and the applicable Federal and State requirements for determining appropriate out-of-network payment rates for items or services to which the protections against balance billing in this part apply, as specified by the Secretary in guidance, or such additional information needed for FEHB Program carriers as specified by OPM in guidance; and
(viii) Additional information needed for purposes of administrative or certified IDR entity fee collection, as specified by the Secretary in guidance, or such additional information needed for FEHB Program carriers as specified by OPM in guidance.
(3) Updating disclosures. A plan or issuer must timely report to the Secretary changes to the information required under this section within 30 calendar days after the information changes. A plan or issuer must confirm the accuracy of its registration annually in the fourth quarter of each calendar year.
(4) Third party authority. The requirements of paragraphs (b)(1) through (3) of this section may be performed by a third party administrator or service provider with authority to act on behalf of the self-insured group health plan, health insurance issuer offering group or individual health insurance coverage, or FEHB carrier offering an FEHB plan subject to the Federal IDR process. If the registration requirements are performed by such third party administrator or service provider, the group health plan or health insurance issuer offering group or individual health insurance coverage must require that such third party administrator or service provider clearly delineate each group health plan or health insurance issuer offering group health insurance coverage for which it has authority to act. If such third party administrator or service provider fails to provide the information in compliance with the requirements of paragraphs (b)(1) through (3) of this section, the plan or issuer will be in violation of the requirements of this section.
(c) Severability. (1) Any provision of this section held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, will be construed so as to continue to give maximum effect to the provision permitted by law, unless such holding is one of utter invalidity or unenforceability, in which event the provision will be severable from this section and will not affect the remainder thereof or the application of the provision to persons not similarly situated or to dissimilar circumstances.
(2) The provisions in this section are intended to be severable from the provisions in §§ 54.9816- 6A, 54.9816-6, and 54.9816-8, from any grant of forbearance from removal resulting from this subpart, and from any provision referenced in §§ 54.9816- 6A, 54.0916-6, and 54.9816-8.
[T.D. 10049, 91 FR 34057, June 4, 2026]
§ 54.9817-1T Preventing surprise medical bills for air ambulance services (temporary).
(a) In general. If a group health plan provides or covers any benefits for air ambulance services, the plan must cover such services from a nonparticipating provider of air ambulance services in accordance with paragraph (b) of this section.
(b) Coverage requirements. A plan described in paragraph (a) of this section must provide coverage of air ambulance services in the following manner—
(1) The cost-sharing requirements with respect to the services must be the same requirements that would apply if the services were provided by a participating provider of air ambulance services.
(2) The cost-sharing requirement must be calculated as if the total amount that would have been charged for the services by a participating provider of air ambulance services were equal to the lesser of the qualifying payment amount (as determined in accordance with § 54.9816-6T) or the billed amount for the services.
(3) The cost-sharing amounts must be counted towards any in-network deductible and in-network out-of-pocket maximums (including the annual limitation on cost sharing under section 2707(b) of the Public Health Service Act) (as applicable) applied under the plan (and the in-network deductible and out-of-pocket maximums must be applied) in the same manner as if the cost-sharing payments were made with respect to services furnished by a participating provider of air ambulance services.
(4) The plan must—
(i) Not later than 30 calendar days after the bill for the services is transmitted by the provider of air ambulance services, determine whether the services are covered under the plan and, if the services are covered, send to the provider an initial payment or a notice of denial of payment. For purposes of this paragraph (b)(4)(i), the 30-calendar-day period begins on the date the plan receives the information necessary to decide a claim for payment for the services.
(ii) Pay a total plan payment directly to the nonparticipating provider furnishing such air ambulance services that is equal to the amount by which the out-of-network rate for the services exceeds the cost-sharing amount for the services (as determined in accordance with paragraphs (b)(1) and (2) of this section), less any initial payment amount made under paragraph (b)(4)(i) of this section. The total plan payment must be made in accordance with the timing requirement described in section 9817(b)(6), or in cases where the out-of-network rate is determined under a specified State law or All-Payer Model Agreement, such other timeframe as specified by the State law or All-Payer Model Agreement.
(c) Applicability date. The provisions of this section are applicable with respect to plan years beginning on or after January 1, 2022.
[T.D. 9951, 86 FR 36950, July 13, 2021]
§ 54.9817-2 Independent dispute resolution process for air ambulance services.
(a) For further guidance see § 54.9817-2T(a).
(b) For further guidance see § 54.9817-2T(b) introductory text.
(1) In general. Except as provided in paragraphs (b)(2) and (3) of this section and § 54.9817-2T(b)(2) and (4), in determining the out-of-network rate to be paid by group health plans and health insurance issuers offering group health insurance coverage for out-of-network air ambulance services, plans and issuers must comply with the requirements of §§ 54.9816-8T and 54.9816-8, except that references in §§ 54.9816-8T and 54.9816-8 to the additional circumstances in § 54.9816-8(c)(4)(iii)(B) shall be understood to refer to paragraph (b)(2) of this section and § 54.9817-2T(b)(2).
(2) Considerations for air ambulance services. In determining which offer to select, in addition to considering the applicable qualifying payment amount(s), the certified IDR entity must consider information submitted by a party that relates to the following circumstances:
(i) For further guidance see § 54.9817-2T(b)(2)(i) through (vi).
(ii) For further guidance see § 54.9817-2T(b)(2)(i) through (vi).
(iii) For further guidance see § 54.9817-2T(b)(2)(i) through (vi).
(vi) For further guidance see § 54.9817-2T(b)(2)(i) through (vi).
(3) Weighing considerations. In weighing the considerations described in paragraph (b)(2) of this section and § 54.9817-2T(b)(2), the certified IDR entity should evaluate whether the information is credible and relates to the offer submitted by either party for the payment amount for the qualified IDR service that is the subject of the payment determination. The certified IDR entity should not give weight to information to the extent it is not credible, it does not relate to either party's offer for the payment amount for the qualified IDR service, or it is already accounted for by the qualifying payment amount under § 54.9816-8(c)(4)(iii)(A) or other credible information under § 54.9816-8(c)(4)(iii)(B) through (D), except that the additional circumstances in § 54.9816-8(c)(4)(iii)(B) shall be understood to refer to paragraph (b)(2) of this section and § 54.9817-2T(b)(2).
(4) For further guidance see § 54.9817-2T(b)(4) introductory text through (b)(4)(iii).
(i)-(iii) [Reserved]
(iv) For further guidance see § 54.9817-2T(b)(4)(iv) introductory text through (b)(4)(iv)(E).
(A)-(E) [Reserved]
(F) The rationale for the certified IDR entity's decision, including the extent to which the decision relied on the criteria in paragraph (b)(2) of this section and § 54.9816-8(c)(4)(iii)(C) and (D).
(G) For further guidance see § 54.9817-2T(b)(4)(iv)(G) through (I).
(H) For further guidance see § 54.9817-2T(b)(4)(iv)(G) through (I).
(I) For further guidance see § 54.9817-2T(b)(4)(iv)(G) through (I).
(c) Applicability date. The provisions of this section are applicable with respect to plan years beginning on or after January 1, 2022, except that paragraphs (b)(1), (2), and (3) and (b)(4)(iv)(F) of this section regarding payment determinations are applicable with respect to services provided or furnished on or after October 25, 2022, for plan years beginning on or after January 1, 2022.
[T.D. 9965, 87 FR 52648, Aug. 26, 2022]
§ 54.9817-2T Independent dispute resolution process for air ambulance services (temporary).
(a) Definitions. Unless otherwise stated, the definitions in § 54.9816-3T apply.
(b) Determination of out-of-network rates to be paid by group health plans; independent dispute resolution process. (1) For further guidance see § 54.9817-2(b)(1).
(2) For further guidance see § 54.9817-2(b)(2).
(3) For further guidance see § 54.9817-2(b)(3).
(4) Reporting of information relating to the IDR process. In applying the requirements of § 54.9816-8T(f), within 30 business days of the close of each month, for services furnished on or after January 1, 2022, the information the certified IDR entity must report, in a form and manner specified by the Secretary, with respect to the Federal IDR process involving air ambulance services is:
(i) The number of notices of IDR initiation submitted under the Federal IDR process to the certified IDR entity that pertain to air ambulance services during the immediately preceding month;
(ii) The number of such notices of IDR initiation with respect to which a final determination was made under § 54.9816-8T(c)(4)(ii) (as applied by paragraph (b)(1) of this section);
(iii) The number of times the payment amount determined (or agreed to) under this subsection has exceeded the qualifying payment amount, specified by services;
(iv) With respect to each notice of IDR initiation under § 54.9816-8T(b)(2) (as applied by paragraph (b)(1) of this section) for which a determination was made, the following information:
(A) A description of each air ambulance service included in such notification, including the relevant billing and service codes;
(B) The point of pick-up (as defined in 42 CFR 414.605) for the services included in such notification;
(C) The amount of the offers submitted under § 54.9816-8T(c)(4)(i) (as applied by paragraph (b)(1) of this section) by the group health plan and by the nonparticipating provider of air ambulance services, expressed as a dollar amount and as a percentage of the qualifying payment amount;
(D) Whether the offer selected by the certified IDR entity under § 54.9816-8T(c)(4)(ii) (as applied by paragraph (b)(1) of this section) to be the payment amount applied was the offer submitted by the plan or by the provider of air ambulance services;
(E) The amount of the selected offer expressed as a dollar amount and as a percentage of the qualifying payment amount;
(F) For further guidance see § 54.9817-2(b)(4)(iv)(F);
(G) Air ambulance vehicle type, including the clinical capability level of such vehicle (to the extent this information has been provided to the certified IDR entity);
(H) The identity for each plan and provider of air ambulance services, with respect to the notification. Specifically, each certified IDR entity must provide each party's name and address, as applicable; and
(I) For each determination, the number of business days elapsed between selection of the certified IDR entity and the selection of the payment amount by the certified IDR entity.
(v) The total amount of certified IDR entity fees paid to the certified IDR entity under paragraph § 54.9816-8T(d)(1) (as applied by paragraph (b)(1) of this section) during the month for determinations involving air ambulance services.
(c) Applicability date. The provisions of this section are applicable with respect to plan years beginning on or after January 1, 2022, except that paragraphs (b)(1), (2), and (3) and (b)(4)(iv)(F) of this section regarding payment determinations are applicable with respect to services provided or furnished on or after October 25, 2022, for plan years beginning on or after January 1, 2022.
[T.D. 9955, 86 FR 56109, Oct. 7, 2021, as amended by T.D. 9965, 87 FR 52648, Aug. 26, 2022]
§ 54.9822-1T Choice of health care professional (temporary).
(a) Choice of health care professional—(1) Designation of primary care provider—(i) In general. If a group health plan, requires or provides for designation by a participant or beneficiary of a participating primary care provider, then the plan must permit each participant or beneficiary to designate any participating primary care provider who is available to accept the participant or beneficiary. In such a case, the plan must comply with the rules of paragraph (a)(4) of this section by informing each participant of the terms of the plan regarding designation of a primary care provider.
(ii) Construction. Nothing in paragraph (a)(1)(i) of this section is to be construed to prohibit the application of reasonable and appropriate geographic limitations with respect to the selection of primary care providers, in accordance with the terms of the plan, the underlying provider contracts, and applicable State law.
(iii) Example. The rules of this paragraph (a)(1) are illustrated by the following example:
(A) Facts. A group health plan requires individuals covered under the plan to designate a primary care provider. The plan permits each individual to designate any primary care provider participating in the plan's network who is available to accept the individual as the individual's primary care provider. If an individual has not designated a primary care provider, the plan designates one until the individual has made a designation. The plan provides a notice that satisfies the requirements of paragraph (a)(4) of this section regarding the ability to designate a primary care provider.
(B) Conclusion. In this Example, the plan has satisfied the requirements of this paragraph (a).
(2) Designation of pediatrician as primary care provider—(i) In general. If a group health plan requires or provides for the designation of a participating primary care provider for a child by a participant or beneficiary, the plan must permit the participant or beneficiary to designate a physician (allopathic or osteopathic) who specializes in pediatrics (including pediatric subspecialties, based on the scope of that provider's license under applicable State law) as the child's primary care provider if the provider participates in the network of the plan and is available to accept the child. In such a case, the plan must comply with the rules of paragraph (a)(4) of this section by informing each participant of the terms of the plan regarding designation of a pediatrician as the child's primary care provider.
(ii) Construction. Nothing in paragraph (a)(2)(i) of this section is to be construed to waive any exclusions of coverage under the terms and conditions of the plan with respect to coverage of pediatric care.
(iii) Examples. The rules of this paragraph (a)(2) are illustrated by the following examples:
(A) Example 1—(1) Facts. A group health plan's HMO designates for each participant a physician who specializes in internal medicine to serve as the primary care provider for the participant and any beneficiaries. Participant A requests that Pediatrician B be designated as the primary care provider for A's child. B is a participating provider in the HMO's network and is available to accept the child.
(2) Conclusion. In this Example 1, the HMO must permit A's designation of B as the primary care provider for A's child in order to comply with the requirements of this paragraph (a)(2).
(B) Example 2—(1) Facts. Same facts as Example 1 (paragraph (a)(2)(iii)(A) of this section), except that A takes A's child to B for treatment of the child's severe shellfish allergies. B wishes to refer A's child to an allergist for treatment. The HMO, however, does not provide coverage for treatment of food allergies, nor does it have an allergist participating in its network, and it therefore refuses to authorize the referral.
(2) Conclusion. In this Example 2, the HMO has not violated the requirements of this paragraph (a)(2) because the exclusion of treatment for food allergies is in accordance with the terms of A's coverage.
(3) Patient access to obstetrical and gynecological care—(i) General rights—(A) Direct access. A group health plan described in paragraph (a)(3)(ii) of this section, may not require authorization or referral by the plan, or any person (including a primary care provider) in the case of a female participant or beneficiary who seeks coverage for obstetrical or gynecological care provided by a participating health care professional who specializes in obstetrics or gynecology. In such a case, the plan must comply with the rules of paragraph (a)(4) of this section by informing each participant that the plan may not require authorization or referral for obstetrical or gynecological care by a participating health care professional who specializes in obstetrics or gynecology. The plan may require such a professional to agree to otherwise adhere to the plan's policies and procedures, including procedures regarding referrals and obtaining prior authorization and providing services pursuant to a treatment plan (if any) approved by the plan. For purposes of this paragraph (a)(3), a health care professional who specializes in obstetrics or gynecology is any individual (including a person other than a physician) who is authorized under applicable State law to provide obstetrical or gynecological care.
(B) Obstetrical and gynecological care. A group health plan described in paragraph (a)(3)(ii) of this section must treat the provision of obstetrical and gynecological care, and the ordering of related obstetrical and gynecological items and services, pursuant to the direct access described under paragraph (a)(3)(i)(A) of this section, by a participating health care professional who specializes in obstetrics or gynecology as the authorization of the primary care provider.
(ii) Application of paragraph. A group health plan is described in this paragraph (a)(3) if the plan—
(A) Provides coverage for obstetrical or gynecological care; and
(B) Requires the designation by a participant or beneficiary of a participating primary care provider.
(iii) Construction. Nothing in paragraph (a)(3)(i) of this section is to be construed to—
(A) Waive any exclusions of coverage under the terms and conditions of the plan with respect to coverage of obstetrical or gynecological care; or
(B) Preclude the group health plan involved from requiring that the obstetrical or gynecological provider notify the primary care health care professional or the plan of treatment decisions.
(iv) Examples. The rules of this paragraph (a)(3) are illustrated by the following examples:
(A) Example 1—(1) Facts. A group health plan requires each participant to designate a physician to serve as the primary care provider for the participant and the participant's family. Participant A, a female, requests a gynecological exam with Physician B, an in-network physician specializing in gynecological care. The group health plan requires prior authorization from A's designated primary care provider for the gynecological exam.
(2) Conclusion. In this Example 1, the group health plan has violated the requirements of this paragraph (a)(3) because the plan requires prior authorization from A's primary care provider prior to obtaining gynecological services.
(B) Example 2—(1) Facts. Same facts as Example 1 (paragraph (a)(3)(iv)(A) of this section) except that A seeks gynecological services from C, an out-of-network provider.
(2) Conclusion. In this Example 2, the group health plan has not violated the requirements of this paragraph (a)(3) by requiring prior authorization because C is not a participating health care provider.
(C) Example 3—(1) Facts. Same facts as Example 1 (paragraph (a)(3)(iv)(A) of this section) except that the group health plan only requires B to inform A's designated primary care physician of treatment decisions.
(2) Conclusion. In this Example 3, the group health plan has not violated the requirements of this paragraph (a)(3) because A has direct access to B without prior authorization. The fact that the group health plan requires the designated primary care physician to be notified of treatment decisions does not violate this paragraph (a)(3).
(D) Example 4—(1) Facts. A group health plan requires each participant to designate a physician to serve as the primary care provider for the participant and the participant's family. The group health plan requires prior authorization before providing benefits for uterine fibroid embolization.
(2) Conclusion. In this Example 4, the plan requirement for prior authorization before providing benefits for uterine fibroid embolization does not violate the requirements of this paragraph (a)(3) because, though the prior authorization requirement applies to obstetrical services, it does not restrict access to any providers specializing in obstetrics or gynecology.
(4) Notice of right to designate a primary care provider—(i) In general. If a group health plan requires the designation by a participant or beneficiary of a primary care provider, the plan must provide a notice informing each participant of the terms of the plan regarding designation of a primary care provider and of the rights—
(A) Under paragraph (a)(1)(i) of this section, that any participating primary care provider who is available to accept the participant or beneficiary can be designated;
(B) Under paragraph (a)(2)(i) of this section, with respect to a child, that any participating physician who specializes in pediatrics can be designated as the primary care provider; and
(C) Under paragraph (a)(3)(i) of this section, that the plan may not require authorization or referral for obstetrical or gynecological care by a participating health care professional who specializes in obstetrics or gynecology.
(ii) Timing. In the case of a group health plan, the notice described in paragraph (a)(4)(i) of this section must be included whenever the plan provides a participant with a summary plan description or other similar description of benefits under the plan.
(iii) Model language. The following model language can be used to satisfy the notice requirement described in paragraph (a)(4)(i) of this section:
(A) For plans that require or allow for the designation of primary care providers by participants or beneficiaries, insert:
[Name of group health plan] generally [requires/allows] the designation of a primary care provider. You have the right to designate any primary care provider who participates in our network and who is available to accept you or your family members. [If the plan designates a primary care provider automatically, insert: Until you make this designation, [name of group health plan] designates one for you.] For information on how to select a primary care provider, and for a list of the participating primary care providers, contact the [plan administrator] at [insert contact information].
(B) For plans that require or allow for the designation of a primary care provider for a child, add:
For children, you may designate a pediatrician as the primary care provider.
(C) For plans that provide coverage for obstetric or gynecological care and require the designation by a participant or beneficiary of a primary care provider, add:
You do not need prior authorization from [name of group health plan] or from any other person (including a primary care provider) in order to obtain access to obstetrical or gynecological care from a health care professional in our network who specializes in obstetrics or gynecology. The health care professional, however, may be required to comply with certain procedures, including obtaining prior authorization for certain services, following a pre-approved treatment plan, or procedures for making referrals. For a list of participating health care professionals who specialize in obstetrics or gynecology, contact the [plan administrator] at [insert contact information].
(b) Applicability date. The provisions of this section are applicable with respect to plan years beginning on or after January 1, 2022.
[T.D. 9951, 86 FR 36950, July 13, 2021]
§ 54.9825-1T Basis and scope (temporary).
(a) Basis. This section and §§ 54.9825-2T through 54.9825-6T implement subchapter B of chapter 100 of the Internal Revenue Code of 1986.
(b) Scope. This part establishes standards for group health plans with respect to surprise medical bills, transparency in health care coverage, and additional patient protections.
[T.D. 9958, 86 FR 66696, Nov. 23, 2021]
§ 54.9825-2T Applicability (temporary).
(a) In general. The requirements in §§ 54.9825-4T through 54.9825-6T apply to group health plans (including grandfathered health plans as defined in § 54.9815-1251), except as specified in paragraph (b) of this section.
(b) Exceptions. The requirements in §§ 54.9825-4T through 54.9825-6T do not apply to the following:
(1) Excepted benefits as described in § 54.9831-1(c).
(2) Short-term, limited-duration insurance as defined in § 54.9801-2.
(3) Health reimbursement arrangements or other account-based group health plans as described in § 54.9815-2711(d).
[T.D. 9958, 86 FR 66696, Nov. 23, 2021]
§ 54.9825-3T Definitions (temporary).
The definitions in § 54.9816-3T apply to §§ 54.9825-4T through 54.9825-6T unless otherwise specified. In addition, for purposes of §§ 54.9825-4T through 54.9825-6T, the following definitions apply:
Brand prescription drug means a drug for which an application is approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 355(c)), or under section 351 of the PHS Act (42 U.S.C. 262), and that is generally marketed under a proprietary, trademark-protected name. The term “brand prescription drug” includes a drug with Emergency Use Authorization issued pursuant to section 564 of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 360bbb-3), and that is generally marketed under a proprietary, trademark-protected name. The term “brand prescription drug” includes drugs that the U.S. Food and Drug Administration determines to be interchangeable biosimilar products under sections 351(i)(3) and 351(k)(4) of the PHS Act (42 U.S.C. 262).
Dosage unit means the smallest form in which a pharmaceutical product is administered or dispensed, such as a pill, tablet, capsule, ampule, or measurement of grams or milliliters.
Federal Employees Health Benefits (FEHB) line of business refers to all health benefit plans that are offered to eligible enrollees pursuant to a contract between the Office of Personnel Management and Federal Employees Health Benefits (FEHB) Program carriers. Such plans are Federal governmental plans offered pursuant to 5 U.S.C. chapter 89.
Life-years means the total number of months of coverage for participants and beneficiaries, as applicable, divided by 12.
Market segment means one of the following: The individual market (excluding the student market), the student market, the fully-insured small group market, the fully-insured large group market (excluding the FEHB line of business), self-funded plans offered by small employers, self-funded plans offered by large employers, and the FEHB line of business.
Premium amount means, with respect to individual health insurance coverage and fully-insured group health plans, earned premium as that term is defined in 45 CFR 158.130, excluding the adjustments specified in 45 CFR 158.130(b)(5). Premium amount means, with respect to self-funded group health plans and other arrangements that do not rely exclusively or primarily on payments of premiums as defined in 45 CFR 158.130, the premium equivalent amount representing the total cost of providing and maintaining coverage, including claims costs, administrative costs, and stop-loss premiums, as applicable.
Prescription drug (drug) means a set of pharmaceutical products that have been assigned a National Drug Code (NDC) by the Food and Drug Administration and are grouped by name and ingredient in the manner specified by the Secretary, jointly with the Secretary of Labor and the Secretary of Health and Human Services.
Prescription drug rebates, fees, and other remuneration means all remuneration received by or on behalf of a plan or issuer, its administrator or service provider, including remuneration received by and on behalf of entities providing pharmacy benefit management services to the plan or issuer, with respect to prescription drugs prescribed to participants and beneficiaries in the plan or coverage, as applicable, regardless of the source of the remuneration (for example, pharmaceutical manufacturer, wholesaler, retail pharmacy, or vendor). Prescription drug rebates, fees, and other remuneration also include, for example, discounts, chargebacks or rebates, cash discounts, free goods contingent on a purchase agreement, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits. Prescription drug rebates, fees, and other remuneration include bona fide service fees. Bona fide service fees mean fees paid by a drug manufacturer to an entity providing pharmacy benefit management services to the plan or issuer that represent fair market value for a bona fide, itemized service actually performed on behalf of the manufacturer that the manufacturer would otherwise perform (or contract for) in the absence of the service arrangement, and that are not passed on in whole or in part to a client or customer of the entity, whether or not the entity takes title to the drug.
Reference year means the calendar year immediately preceding the calendar year in which data submissions under this section are required.
Reporting entity means an entity that submits some or all of the information required under §§ 54.9825-4T through 54.9825-6T with respect to a plan or issuer, and that may be different from the plan or issuer that is subject to the requirements of §§ 54.9825-4T through 54.9825-6T.
Student market has the meaning given in 45 CFR 158.103.
Therapeutic class means a group of pharmaceutical products that have similar mechanisms of action or treat the same types of conditions, grouped in the manner specified by the Secretary, jointly with the Secretary of Labor and the Secretary of Health and Human Services, in guidance. The Secretary may require plans and issuers to classify drugs according to a commonly available public or commercial therapeutic classification system, a therapeutic classification system provided by the Secretary of Health and Human Services, or a combination thereof.
Total annual spending means incurred claims, as that term is defined in 45 CFR 158.140, excluding the adjustments specified in 45 CFR 158.140(b)(1)(i), (b)(2)(iv), and (b)(4), and including cost sharing. With respect to prescription drugs, total annual spending is net of prescription drug rebates, fees, and other remuneration.
[T.D. 9958, 86 FR 66696, Nov. 23, 2021]
§ 54.9825-4T Reporting requirements related to prescription drug and health care spending (temporary).
(a) General requirement. A group health plan or a health insurance issuer offering group health insurance coverage must submit an annual report to the Secretary, the Secretary of Health and Human Services, and the Secretary of Labor, on prescription drug and health care spending, premiums, and enrollment under the plan or coverage.
(b) Timing and form of report. The report for the 2020 reference year must be submitted to the Secretary by December 27, 2021. Beginning with the 2021 reference year, the report for each reference year is due by June 1 of the year following the reference year. The report must be submitted in the form and manner prescribed by the Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor.
(c) Transfer of business. Issuers that acquire a line or block of business from another issuer during a reference year are responsible for submitting the information and report required by this section for the acquired business for that reference year, including for the part of the reference year that was prior to the acquisition.
(d) Reporting entities and special rules to prevent unnecessary duplication—(1) Special rule for insured group health plans. To the extent coverage under a group health plan consists of group health insurance coverage, the plan may satisfy the requirements of paragraph (a) of this section if the plan requires the health insurance issuer offering the coverage to report the information required by this section in compliance with this subpart pursuant to a written agreement. Accordingly, if a health insurance issuer and a group health plan sponsor enter into a written agreement under which the issuer agrees to provide the information required under paragraph (a) of this section in compliance with this section, and the issuer fails to do so, then the issuer, but not the plan, violates the reporting requirements of paragraph (a) of this section with respect to the relevant information.
(2) Other contractual arrangements. A group health plan or health insurance issuer offering group health insurance coverage may satisfy the requirements under paragraph (a) of this section by entering into a written agreement under which one or more other parties (such as health insurance issuers, pharmacy benefit managers, third-party administrators, or other third parties) report some or all of the information required under paragraph (a) of this section in compliance with this section. Notwithstanding the preceding sentence, if a group health plan or health insurance issuer chooses to enter into such an agreement and the party with which it contracts fails to provide the information in accordance with paragraph (a) of this section, the plan or issuer violates the reporting requirements of paragraph (a) of this section.
(e) Applicability date. The provisions of this section are applicable beginning December 27, 2021.
[T.D. 9958, 86 FR 66696, Nov. 23, 2021]
§ 54.9825-5T Aggregate reporting (temporary).
(a) General requirement. A group health plan or a health insurance issuer offering group health insurance coverage must submit, or arrange to be submitted, the information required in § 54.9825-6T(b) separately for each State in which group health coverage or group health insurance coverage was provided in connection with the group health plan or by the health insurance issuer. The report must include the experience of all plans and policies in the State during the reference year covered by the report, and must include the experience separately for each market segment as defined in § 54.9825-3T.
(b) Aggregation by reporting entity—(1) In general. If a reporting entity submits data on behalf of more than one group health plan in a State and market segment, the reporting entity may aggregate the data required in § 54.9825-6T(b) for the group health plans for each market segment in the State.
(2) Multiple reporting entities. (i) If multiple reporting entities submit the required data related to one or more plans or issuers in a State and market segment, the data submitted by each of these reporting entities must not be aggregated at a less granular level than the aggregation level used by the reporting entity that submits the data on total annual spending on health care services, as required by § 54.9825-6T(b)(4), on behalf of these plans or issuers.
(ii) The Secretary, jointly with the Secretary of Health and Human Services and the Secretary of Labor, may specify in guidance alternative or additional aggregation methods for data submitted by multiple reporting entities, to ensure a balance between compliance burdens and a data aggregation level that facilitates the development of the biannual public report required under section 9825(b) of the Code.
(3) Group health insurance coverage with dual contracts. If a group health plan involves health insurance coverage obtained from two affiliated issuers, one providing in-network coverage only and the second providing out-of-network coverage only, the plan's out-of-network experience may be treated as if it were all related to the contract provided by the in-network issuer.
(c) Aggregation by State. (1) Experience with respect to each fully-insured policy must be included on the report for the State where the contract was issued, except as specified in paragraphs (c)(3) and (4) of this section.
(2) Experience with respect to each self-funded group health plan must be included on the report for the State where the plan sponsor has its principal place of business.
(3) For individual market business sold through an association, experience must be attributed to the issue State of the certificate of coverage.
(4) For health coverage provided to plans through a group trust or multiple employer welfare arrangement, the experience must be included in the report for the State where the employer (if the plan is sponsored at the individual employer level) or the association (if the association qualifies as an employer under ERISA section 3(5)) has its principal place of business or the state where the association is incorporated, in the case of an association with no principal place of business.
(d) Applicability date. The provisions of this section are applicable beginning December 27, 2021.
[T.D. 9958, 86 FR 66696, Nov. 23, 2021]
§ 54.9825-6T Required information (temporary).
(a) Information for each plan or coverage. The report required under § 54.9825-4T must include the following information for each plan or coverage, at the plan or coverage level:
(1) The identifying information for plans, issuers, plan sponsors, and any other reporting entities.
(2) The beginning and end dates of the plan year that ended on or before the last day of the reference year.
(3) The number of participants and beneficiaries, as applicable, covered on the last day of the reference year.
(4) Each State in which the plan or coverage is offered.
(b) Information for each state and market segment. The report required under § 54.9825-4T must include the following information with respect to plans or coverage for each State and market segment for the reference year, unless otherwise specified:
(1) The 50 brand prescription drugs most frequently dispensed by pharmacies, and for each such drug, the data elements listed in paragraph (b)(5) of this section. The most frequently dispensed drugs must be determined according to total number of paid claims for prescriptions filled during the reference year for each drug.
(2) The 50 most costly prescription drugs and for each such drug, the data elements listed in paragraph (b)(5) of this section. The most costly drugs must be determined according to total annual spending on each drug.
(3) The 50 prescription drugs with the greatest increase in expenditures between the year immediately preceding the reference year and the reference year, and for each such drug: The data elements listed in paragraph (b)(5) of this section for the year immediately preceding the reference year, and the data elements listed in paragraph (b)(5) of this section for the reference year. The drugs with the greatest increase in expenditures must be determined based on the increase in total annual spending from the year immediately preceding the reference year to the reference year. A drug must be approved for marketing or issued an Emergency Use Authorization by the Food and Drug Administration for the entirety of the year immediately preceding the reference year and for the entirety of the reference year to be included in the data submission as one of the drugs with the greatest increase in expenditures.
(4) Total annual spending on health care services by the plan or coverage and by participants and beneficiaries, as applicable, broken down by the type of costs, including—
(i) Hospital costs;
(ii) Health care provider and clinical service costs, for primary care and specialty care separately;
(iii) Costs for prescription drugs, separately for drugs covered by the plan's or issuer's pharmacy benefit and drugs covered by the plan's or issuer's hospital or medical benefit; and
(iv) Other medical costs, including wellness services.
(5) Prescription drug spending and utilization, including—
(i) Total annual spending by the plan or coverage;
(ii) Total annual spending by the participants and beneficiaries, as applicable, enrolled in the plan or coverage, as applicable;
(iii) The number of participants and beneficiaries, as applicable, with a paid prescription drug claim;
(iv) Total dosage units dispensed; and
(v) The number of paid claims.
(6) Premium amounts, including—
(i) Average monthly premium amount paid by employers and other plan sponsors on behalf of participants and beneficiaries, as applicable;
(ii) Average monthly premium amount paid by participants and beneficiaries, as applicable; and
(iii) Total annual premium amount and the total number of life-years.
(7) Prescription drug rebates, fees, and other remuneration, including—
(i) Total prescription drug rebates, fees, and other remuneration, and the difference between total amounts that the plan or issuer pays the entity providing pharmacy benefit management services to the plan or issuer and total amounts that such entity pays to pharmacies.
(ii) Prescription drug rebates, fees, and other remuneration, excluding bona fide service fees, broken down by the amounts passed through to the plan or issuer, the amounts passed through to participants and beneficiaries, as applicable, and the amounts retained by the entity providing pharmacy benefit management services to the plan or issuer; and the data elements listed in paragraph (b)(5) of this section—
(A) For each therapeutic class; and
(B) For each of the 25 prescription drugs with the greatest amount of total prescription drug rebates and other price concessions for the reference year.
(8) The method used to allocate prescription drug rebates, fees, and other remuneration, if applicable.
(9) The impact of prescription drug rebates, fees, and other remuneration on premium and cost sharing amounts.
(c) Applicability date. The provisions of this section are applicable beginning December 27, 2021.
[T.D. 9958, 86 FR 66696, Nov. 23, 2021]
§ 54.9831-1 Special rules relating to group health plans.
(a) Group health plan—(1) Defined. A group health plan means a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.
(2) Determination of number of plans. [Reserved]
(b) General exception for certain small group health plans. (1) Subject to paragraph (b)(2) of this section, the requirements of §§ 54.9801-1 through 54.9801-6, 54.9802-1, 54.9802-2, 54.9811-1, 54.9812-1, 54.9815-1251 through 54.9815-2719A, and 54.9833-1 do not apply to any group health plan for any plan year if, on the first day of the plan year, the plan has fewer than two participants who are current employees.
(2) The exception of paragraph (b)(1) of this section does not apply with respect to the following requirements:
(i) Section 54.9802-1(b), as such paragraph applies with respect to genetic information as a health factor.
(ii) Section 54.9802-1(c), as such paragraph applies with respect to genetic information as a health factor.
(iii) Section 54.9802-1(e), as such paragraph applies with respect to genetic information as a health factor.
(iv) Section 54.9802-3T(b).
(v) Section 54.9802-3T(c).
(vi) Section 54.9802-3T(d).
(vii) Section 54.9802-3T(e).
(c) Excepted benefits—(1) In general. The requirements of §§ 54.9801-1 through 54.9801-6, 54.9802-1, 54.9802-2, 54.9811-1, 54.9812-1, 54.9815-1251 through 54.9815-2719A, and 54.9833-1 do not apply to any group health plan in relation to its provision of the benefits described in paragraph (c)(2), (3), (4), or (5) of this section (or any combination of these benefits).
(2) Benefits excepted in all circumstances. The following benefits are excepted in all circumstances—
(i) Coverage only for accident (including accidental death and dismemberment);
(ii) Disability income coverage;
(iii) Liability insurance, including general liability insurance and automobile liability insurance;
(iv) Coverage issued as a supplement to liability insurance;
(v) Workers' compensation or similar coverage;
(vi) Automobile medical payment insurance;
(vii) Credit-only insurance (for example, mortgage insurance);
(viii) Coverage for on-site medical clinics; and
(ix) Travel insurance, within the meaning of § 54.9801-2.
(3) Limited excepted benefits—(i) In general. Limited-scope dental benefits, limited-scope vision benefits, or long-term care benefits are excepted if they are provided under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a group health plan as described in paragraph (c)(3)(ii) of this section. In addition, benefits provided under a health flexible spending arrangement (health FSA) are excepted benefits if they satisfy the requirements of paragraph (c)(3)(v) of this section; benefits provided under an employee assistance program are excepted benefits if they satisfy the requirements of paragraph (c)(3)(vi) of this section; benefits provided under limited wraparound coverage are excepted benefits if they satisfy the requirements of paragraph (c)(3)(vii) of this section; and benefits provided under a health reimbursement arrangement or other account-based group health plan, other than a health FSA, are excepted benefits if they satisfy the requirements of paragraph (c)(3)(viii) of this section.
(ii) Not an integral part of a group health plan. For purposes of this paragraph (c)(3), benefits are not an integral part of a group health plan (whether the benefits are provided through the same plan, a separate plan, or as the only plan offered to participants) if either paragraph (c)(3)(ii)(A) or (B) are satisfied.
(A) Participants may decline coverage. For example, a participant may decline coverage if the participant can opt out of the coverage upon request, whether or not there is a participant contribution required for the coverage.
(B) Claims for the benefits are administered under a contract separate from claims administration for any other benefits under the plan.
(iii) Limited scope—(A) Dental benefits. Limited scope dental benefits are benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth).
(B) Vision benefits. Limited scope vision benefits are benefits substantially all of which are for treatment of the eye.
(iv) Long-term care. Long-term care benefits are benefits that are either—
(A) Subject to State long-term care insurance laws;
(B) For qualified long-term care services, as defined in section 7702B(c)(1), or provided under a qualified long-term care insurance contract, as defined in section 7702B(b); or
(C) Based on cognitive impairment or a loss of functional capacity that is expected to be chronic.
(v) Health flexible spending arrangements. Benefits provided under a health flexible spending arrangement (as defined in section 106(c)(2)) are excepted for a class of participants only if they satisfy the following two requirements—
(A) Other group health plan coverage, not limited to excepted benefits, is made available for the year to the class of participants by reason of their employment; and
(B) The arrangement is structured so that the maximum benefit payable to any participant in the class for a year cannot exceed two times the participant's salary reduction election under the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant's salary reduction election). For this purpose, any amount that an employee can elect to receive as taxable income but elects to apply to the health flexible spending arrangement is considered a salary reduction election (regardless of whether the amount is characterized as salary or as a credit under the arrangement).
(vi) Employee assistance programs. Benefits provided under employee assistance programs are excepted if they satisfy all of the requirements of this paragraph (c)(3)(vi).
(A) The program does not provide significant benefits in the nature of medical care. For this purpose, the amount, scope and duration of covered services are taken into account.
(B) The benefits under the employee assistance program are not coordinated with benefits under another group health plan, as follows:
(1) Participants in the other group health plan must not be required to use and exhaust benefits under the employee assistance program (making the employee assistance program a gatekeeper) before an individual is eligible for benefits under the other group health plan; and
(2) Participant eligibility for benefits under the employee assistance program must not be dependent on participation in another group health plan.
(C) No employee premiums or contributions are required as a condition of participation in the employee assistance program.
(D) There is no cost sharing under the employee assistance program.
(vii) Limited wraparound coverage. Limited benefits provided through a group health plan that wrap around eligible individual health insurance (or Basic Health Plan coverage described in section 1331 of the Patient Protection and Affordable Care Act); or that wrap around coverage under a Multi-State Plan described in section 1334 of the Patient Protection and Affordable Care Act, collectively referred to as “limited wraparound coverage,” are excepted benefits if all of the following conditions are satisfied. For this purpose, eligible individual health insurance is individual health insurance coverage that is not a grandfathered health plan (as described in section 1251 of the Patient Protection and Affordable Care Act and 29 CFR 2590.715-1251), not a transitional individual health insurance plan (as described in the March 5, 2014 Insurance Standards Bulletin Series—Extension of Transitional Policy through October 1, 2016), and does not consist solely of excepted benefits (as defined in paragraph (c) of this section).
(A) Covers additional benefits. The limited wraparound coverage provides meaningful benefits beyond coverage of cost sharing under either the eligible individual health insurance, Basic Health Program coverage, or Multi-State Plan coverage. The limited wraparound coverage must not provide benefits only under a coordination-of-benefits provision and must not consist of an account-based reimbursement arrangement.
(B) Limited in amount. The annual cost of coverage per employee (and any covered dependents, as defined in § 54.9801-2) under the limited wraparound coverage does not exceed the greater of the amount determined under either paragraph (c)(3)(vii)(B)(1) or (2) of this section. Making a determination regarding the annual cost of coverage per employee must occur on an aggregate basis relying on sound actuarial principles.
(1) The maximum permitted annual salary reduction contribution toward health flexible spending arrangements, indexed in the manner prescribed under section 125(i)(2). For this purpose, the cost of coverage under the limited wraparound includes both employer and employee contributions towards coverage and is determined in the same manner as the applicable premium is calculated under a COBRA continuation provision.
(2) Fifteen percent of the cost of coverage under the primary plan. For this purpose, the cost of coverage under the primary plan and under the limited wraparound coverage includes both employer and employee contributions towards the coverage and each is determined in the same manner as the applicable premium is calculated under a COBRA continuation provision.
(C) Nondiscrimination. All of the conditions of this paragraph (c)(3)(vii)(C) are satisfied.
(1) No preexisting condition exclusion. The limited wraparound coverage does not impose any preexisting condition exclusion, consistent with the requirements of section 2704 of the PHS Act (incorporated by reference into section 9815) and 29 CFR 2590.715-2704.
(2) No discrimination based on health status. The limited wraparound coverage does not discriminate against individuals in eligibility, benefits, or premiums based on any health factor of an individual (or any dependent of the individual, as defined in § 54.9801-2), consistent with the requirements of section 9802 and section 2705 of the PHS Act (incorporated by reference into section 9815).
(3) No discrimination in favor of highly compensated individuals. Neither the limited wraparound coverage, nor any other group health plan coverage offered by the plan sponsor, fails to comply with section 2716 of the PHS Act (incorporated by reference into section 9815) or fails to be excludible from income for any individual due to the application of section 105(h) (as applicable).
(D) Plan eligibility requirements. Individuals eligible for the wraparound coverage are not enrolled in excepted benefit coverage under paragraph (c)(3)(v) of this section (relating to health FSAs). In addition, the conditions set forth in either paragraph (c)(3)(vii)(D)(1) or (2) of this section are met.
(1) Limited wraparound coverage that wraps around eligible individual insurance for persons who are not full-time employees. Coverage that wraps around eligible individual health insurance (or that wraps around Basic Health Plan coverage) must satisfy all of the conditions of this paragraph (c)(3)(vii)(D)(1).
(i) For each year for which limited wraparound coverage is offered, the employer that is the sponsor of the plan offering limited wraparound coverage, or the employer participating in a plan offering limited wraparound coverage, offers to its full-time employees coverage that is substantially similar to coverage that the employer would need to offer to its full-time employees in order not to be subject to a potential assessable payment under the employer shared responsibility provisions of section 4980H(a), if such provisions were applicable; provides minimum value (as defined in section 36B(c)(2)(C)(ii)); and is reasonably expected to be affordable (applying the safe harbor rules for determining affordability set forth in § 54.4980H-5(e)(2)). If a plan or issuer providing limited wraparound coverage takes reasonable steps to ensure that employers disclose to the plan or issuer necessary information regarding their coverage offered and affordability information, the plan or issuer is permitted to rely on reasonable representations by employers regarding this information, unless the plan or issuer has specific knowledge to the contrary. In the event that the employer that is the sponsor of the plan offering wraparound coverage, or the employer participating in a plan offering wraparound coverage, has no full-time employees for any plan year limited wraparound coverage is offered, the requirement of this paragraph (c)(3)(vii)(D)(1)(i) is considered satisfied.
(ii) Eligibility for the limited wraparound coverage is limited to employees who are reasonably determined at the time of enrollment to not be full-time employees (and their dependents, as defined in § 54.9801-2), or who are retirees (and their dependents, as defined in § 54.9801-2). For this purpose, full-time employees are employees who are reasonably expected to work at least an average of 30 hours per week.
(iii) Other group health plan coverage, not limited to excepted benefits, is offered to the individuals eligible for the limited wraparound coverage. Only individuals eligible for the other group health plan coverage are eligible for the limited wraparound coverage.
(2) Limited coverage that wraps around Multi-State Plan coverage. Coverage that wraps around Multi-State Plan coverage must satisfy all of the conditions of this paragraph (c)(3)(vii)(D)(2). For this purpose, the term “full-time employee” means a “full-time employee” as defined in § 54.4980H-1(a)(21) who is not in a limited non-assessment period for certain employees (as defined in § 54.4980H-1(a)(26)). Moreover, if a plan or issuer providing limited wraparound coverage takes reasonable steps to ensure that employers disclose to the plan or issuer necessary information regarding their coverage offered and contribution levels for 2013 or 2014 (as applicable), and for any year in which limited wraparound coverage is offered, the plan or issuer is permitted to rely on reasonable representations by employers regarding this information, unless the plan or issuer has specific knowledge to the contrary. Consistent with the reporting and evaluation criteria of paragraph (c)(3)(vii)(E) of this section, the Office of Personnel Management may verify that plans and issuers have reasonable mechanisms in place to ensure that contributing employers meet these standards.
(i) The limited wraparound coverage is reviewed and approved by the Office of Personnel Management, consistent with the reporting and evaluation criteria of paragraph (c)(3)(vii)(E) of this section, to provide benefits in conjunction with coverage under a Multi-State Plan authorized under section 1334 of the Patient Protection and Affordable Care Act. The Office of Personnel Management may revoke approval if it determines that continued approval is inconsistent with the reporting and evaluation criteria of paragraph (c)(3)(vii)(E) of this section.
(ii) The employer offered coverage in the plan year that began in either 2013 or 2014 that is substantially similar to coverage that the employer would need to have offered to its full-time employees in order to not be subject to an assessable payment under the employer shared responsibility provisions of section 4980H(a), if such provisions had been applicable. In the event that a plan that offered coverage in 2013 or 2014 has no full-time employees for any plan year limited wraparound coverage is offered, the requirement of this paragraph (c)(3)(vii)(D)(2)(ii) is considered satisfied.
(iii) In the plan year that began in either 2013 or 2014, the employer offered coverage to a substantial portion of full-time employees that provided minimum value (as defined in section 36B(c)(2)(C)(ii)) and was affordable (applying the safe harbor rules for determining affordability set forth in § 54.4980H-5(e)(2)). In the event that the plan that offered coverage in 2013 or 2014 has no full-time employees for any plan year limited wraparound coverage is offered, the requirement of this paragraph (c)(3)(vii)(D)(2)(iii) is considered satisfied.
(iv) For the duration of the pilot program, as described in paragraph (c)(3)(vii)(F) of this section, the employer's annual aggregate contributions for both primary and limited wraparound coverage are substantially the same as the employer's total contributions for coverage offered to full-time employees in 2013 or 2014.
(E) Reporting—(1) Reporting by group health plans and group health insurance issuers. A self-insured group health plan, or a health insurance issuer, offering or proposing to offer limited wraparound coverage in connection with Multi-State Plan coverage pursuant to paragraph (c)(3)(vii)(D)(2) of this section reports to the Office of Personnel Management (OPM), in a form and manner specified in guidance, information OPM reasonably requires to determine whether the plan or issuer qualifies to offer such coverage or complies with the applicable requirements of this section.
(2) Reporting by group health plan sponsors. The plan sponsor of a group health plan offering limited wraparound coverage under paragraph (c)(3)(vii) of this section, must report to the Department of Health and Human Services (HHS), in a form and manner specified in guidance, information HHS reasonably requires.
(F) Pilot program with sunset. The provisions of paragraph (c)(3)(vii) of this section apply to limited wraparound coverage that is first offered no earlier than January 1, 2016 and no later than December 31, 2018 and that ends no later than on the later of:
(1) The date that is three years after the date limited wraparound coverage is first offered; or
(2) The date on which the last collective bargaining agreement relating to the plan terminates after the date limited wraparound coverage is first offered (determined without regard to any extension agreed to after the date limited wraparound coverage is first offered).
(viii) Health reimbursement arrangements (HRAs) and other account-based group health plans. Benefits provided under an HRA or other account-based group health plan, other than a health FSA, are excepted if they satisfy all of the requirements of this paragraph (c)(3)(viii). See paragraph (c)(3)(v) of this section for the circumstances in which benefits provided under a health FSA are excepted benefits. For purposes of this paragraph (c)(3)(viii), the term “HRA or other account-based group health plan” has the same meaning as “account-based group health plan” set forth in § 54.9815-2711(d)(6)(i) of this part, except that the term does not include health FSAs. For ease of reference, an HRA or other account-based group health plan that satisfies the requirements of this paragraph (c)(3)(viii) is referred to as an excepted benefit HRA.
(A) Otherwise not an integral part of the plan. Other group health plan coverage that is not limited to excepted benefits and that is not an HRA or other account-based group health plan must be made available by the same plan sponsor for the plan year to the participant.
(B) Benefits are limited in amount—(1) Limit on annual amounts made available. The amounts newly made available for each plan year under the HRA or other account-based group health plan do not exceed $1,800. In the case of any plan year beginning after December 31, 2020, the dollar amount in the preceding sentence shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment. The cost of living adjustment is the percentage (if any) by which the C-CPI-U for the preceding calendar year exceeds the C-CPI-U for calendar year 2019. The term “C-CPI-U” means the Chained Consumer Price Index for All Urban Consumers as published by the Bureau of Labor Statistics of the Department of Labor. The C-CPI-U for any calendar year is the average of the C-CPI-U as of the close of the 12-month period ending on March 31 of such calendar year. The values of the C-CPI-U used for any calendar year shall be the latest values so published as of the date on which the Bureau publishes the initial value of the C-CPI-U for the month of March for the preceding calendar year. Any such increase that is not a multiple of $50 shall be rounded down to the next lowest multiple of $50. The Department of the Treasury and the Internal Revenue Service will publish the adjusted amount for plan years beginning in any calendar year no later than June 1 of the preceding calendar year.
(2) Carryover amounts. If the terms of the HRA or other account-based group health plan allow unused amounts to be made available to participants and dependents in later plan years, such carryover amounts are disregarded for purposes of determining whether benefits are limited in amount.
(3) Multiple HRAs or other account-based group health plans. If the plan sponsor provides more than one HRA or other account-based group health plan to the participant for the same time period, the amounts made available under all such plans are aggregated to determine whether the benefits are limited in amount, except that HRAs or other account-based group health plans that reimburse only excepted benefits are not included in determining whether the benefits are limited in amount.
(C) Prohibition on reimbursement of certain health insurance premiums. The HRA or other account-based group health plan must not reimburse premiums for individual health insurance coverage, group health plan coverage (other than COBRA continuation coverage or other continuation coverage), or Medicare Part A, B, C, or D, except that the HRA or other account-based group health plan may reimburse premiums for such coverage that consists solely of excepted benefits. See also, paragraph (c)(3)(viii)(F) of this section.
(D) Uniform availability. The HRA or other account-based group health plan is made available under the same terms to all similarly situated individuals, as defined in § 54.9802-1(d) of this part, regardless of any health factor (as described in § 54.9802-1(a)).
(E) Notice requirement. See 29 CFR 2520.102-3(j)(2) and (3) and 29 CFR 2520.104b-2(a) for rules regarding the time, manner, and content for summary plan descriptions (including a description of conditions pertaining to eligibility to receive benefits; annual or lifetime caps or other limits on benefits under the plan; and a description or summary of the benefits) applicable to plans subject to Tile I of the Employee Retirement Income Security Act of 1974, as amended.
(F) Special rule. The HRA or other account-based group health plan must not reimburse premiums for short-term, limited-duration insurance (as defined in § 54.9801-2 of this part) if the conditions of this paragraph (c)(3)(viii)(F) are satisfied.
(1) The HRA or other account-based group health plan is offered by a small employer (as defined in PHS Act section 2791(e)(4)).
(2) The other group health plan coverage offered by the employer pursuant to paragraph (c)(3)(viii)(A) of this section is either fully-insured or partially-insured.
(3) The Secretary of Health and Human Services (HHS) makes a finding, in consultation with the Secretaries of Labor and the Treasury, that the reimbursement of premiums for short-term, limited-duration insurance by excepted benefit HRAs has caused significant harm to the small group market in the state that is the principal place of business of the small employer.
(4) The finding by the Secretary of HHS is made after submission of a written recommendation by the applicable state authority of such state, in a form and manner specified by HHS. The written recommendation must include evidence that the reimbursement of premiums for short-term, limited-duration insurance by excepted benefit HRAs established by insured or partially-insured small employers in the state has caused significant harm to the state's small group market, including with respect to premiums.
(5) The restriction shall be imposed or discontinued by publication by the Secretary of HHS of a notice in the Federal Register and shall apply only prospectively and with a reasonable time for plan sponsors to comply.
(4) Noncoordinated benefits—(i) Excepted benefits that are not coordinated. Coverage for only a specified disease or illness (for example, cancer-only policies) or hospital indemnity or other fixed indemnity insurance is excepted only if it meets each of the conditions specified in paragraph (c)(4)(ii) of this section. To be hospital indemnity or other fixed indemnity insurance, the insurance must pay a fixed dollar amount per day (or per other period) of hospitalization or illness (for example, $100/day) regardless of the amount of expenses incurred.
(ii) Conditions. Benefits are described in paragraph (c)(4)(i) of this section only if—
(A) The benefits are provided under a separate policy, certificate, or contract of insurance;
(B) There is no coordination between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor; and
(C) The benefits are paid with respect to an event without regard to whether benefits are provided with respect to the event under any group health plan maintained by the same plan sponsor.
(D) For plan years beginning on or after January 1, 2025, with respect to hospital indemnity or other fixed indemnity insurance:
(1) The plan or issuer displays prominently on the first page (in either paper or electronic form, including on a website) of any marketing, application, and enrollment materials that are provided to participants at or before the time participants are given the opportunity to enroll in the coverage, in at least 14-point font, the language in the following notice:
(2) If participants are required to reenroll (in either paper or electronic form) for purposes of renewal or reissuance of the insurance, the notice described in paragraph (c)(4)(ii)(D)(1) of this section is prominently displayed in any marketing and reenrollment materials provided at or before the time participants are given the opportunity to reenroll in coverage.
(3) If a plan or issuer provides a notice satisfying the requirements in paragraphs (c)(4)(ii)(D)(1) and (2) of this section to a participant, the obligation to provide the notice is considered to be satisfied for both the plan and issuer.
(iii) Example. The rules of this paragraph (c)(4) are illustrated by the following example:
Example. (i) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits only for hospital stays at a fixed percentage of hospital expenses up to a maximum of $100 a day.
(ii) Conclusion. In this Example, even though the benefits under the policy satisfy the conditions in paragraph (c)(4)(ii) of this section, because the policy pays a percentage of expenses incurred rather than a fixed dollar amount, the benefits under the policy are not excepted benefits under this paragraph (c)(4). This is the result even if, in practice, the policy pays the maximum of $100 for every day of hospitalization.
(iv) Severability. If any provision of this paragraph (c)(4) is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of this paragraph (c)(4) and shall not affect the remainder thereof.
(5) Supplemental benefits. (i) The following benefits are excepted only if they are provided under a separate policy, certificate, or contract of insurance—
(A) Medicare supplemental health insurance (as defined under section 1882(g)(1) of the Social Security Act; also known as Medigap or MedSupp insurance);
(B) Coverage supplemental to the coverage provided under Chapter 55, title 10 of the United States Code (also known as TRICARE supplemental programs); and
(C) Similar supplemental coverage provided to coverage under a group health plan. To be similar supplemental coverage, the coverage must be specifically designed to fill gaps in the primary coverage. The preceding sentence is satisfied if the coverage is designed to fill gaps in cost sharing in the primary coverage, such as coinsurance or deductibles, or the coverage is designed to provide benefits for items and services not covered by the primary coverage and that are not essential health benefits (as defined under section 1302(b) of the Patient Protection and Affordable Care Act) in the State where the coverage is issued, or the coverage is designed to both fill such gaps in cost sharing under, and cover such benefits not covered by, the primary coverage. Similar supplemental coverage does not include coverage that becomes secondary or supplemental only under a coordination-of-benefits provision.
(ii) The rules of this paragraph (c)(5) are illustrated by the following example:
Example. (i) Facts. An employer sponsors a group health plan that provides coverage for both active employees and retirees. The coverage for retirees supplements benefits provided by Medicare, but does not meet the requirements for a supplemental policy under section 1882(g)(1) of the Social Security Act.
(ii) Conclusion. In this Example, the coverage provided to retirees does not meet the definition of supplemental excepted benefits under this paragraph (c)(5) because the coverage is not Medicare supplemental insurance as defined under section 1882(g)(1) of the Social Security Act, is not a TRICARE supplemental program, and is not supplemental to coverage provided under a group health plan.
(d) Treatment of partnerships. For purposes of this part:
(1) Treatment as a group health plan. (See 29 CFR 2590.732(d)(1) and 45 CFR 146.145(d)(1), under which a plan providing medical care, maintained by a partnership, and usually not treated as an employee welfare benefit plan under ERISA is treated as a group health plan for purposes of Part 7 of Subtitle B of title I of ERISA and title XXVII of the PHS Act.)
(2) Employment relationship. In the case of a group health plan, the term employer also includes the partnership in relation to any bona fide partner. In addition, the term employee also includes any bona fide partner. Whether or not an individual is a bona fide partner is determined based on all the relevant facts and circumstances, including whether the individual performs services on behalf of the partnership.
(3) Participants of group health plans. In the case of a group health plan, the term participant also includes any individual described in paragraph (d)(3)(i) or (ii) of this section if the individual is, or may become, eligible to receive a benefit under the plan or the individual's beneficiaries may be eligible to receive any such benefit.
(i) In connection with a group health plan maintained by a partnership, the individual is a partner in relation to the partnership.
(ii) In connection with a group health plan maintained by a self-employed individual (under which one or more employees are participants), the individual is the self-employed individual.
(e) Determining the average number of employees. [Reserved]
[T.D. 9166, 69 FR 78746, Dec. 30, 2004; 70 FR 21146, Apr. 25, 2005, as amended by T.D. 9299, 71 FR 75057, Dec. 13, 2006; T.D. 9427, 73 FR 62422, Oct. 20, 2008; T.D. 9464, 74 FR 51678, Oct. 7, 2009; T.D. 9656, 79 FR 10308, Feb. 24, 2014; T.D. 9697, 79 FR 59135, Oct. 1, 2014; T.D. 9714, 80 FR 14004, Mar. 18, 2015; T.D. 9791, 81 FR 75324, Oct. 31, 2016; T.D. 9867, 84 FR 28999, June 20, 2019; T.D. 9990, 89 FR 23412, Apr. 3, 2024]
§ 54.9833-1 Applicability dates.
Sections 54.9801-1 through 54.9801-6, and 54.9831-1 and this section are applicable for plan years beginning on or after July 1, 2005. Notwithstanding the previous sentence, for short-term, limited-duration insurance sold or issued on or after September 1, 2024, the definition of short-term, limited-duration insurance in § 54.9801-2 applies for coverage periods beginning on or after September 1, 2024. For short-term, limited-duration insurance sold or issued before September 1, 2024 (including any subsequent renewal or extension consistent with applicable law), the definition of short-term, limited-duration insurance in 26 CFR 54.9801-2, revised as of April 1, 2023, continues to apply, except that paragraph (2) of the definition of short-term, limited-duration insurance in § 54.9801-2 applies for coverage periods beginning on or after September 1, 2024.
[T.D. 9990, 89 FR 23413, Apr. 3, 2024]
PART 55 EXCISE TAX ON REAL ESTATE INVESTMENT TRUSTS AND REGULATED INVESTMENT COMPANIES
Authority: 26 U.S.C. 6001, 6011, 6071, 6091, and 7805. Section 55.6011-1 also issued under 26 U.S.C. 6011(a); Section 55.6060-1 also issued under 26 U.S.C. 6060(a); Section 55.6071-1 also issued under 26 U.S.C. 6071(a); Section 55.6081-1 also issued under 26 U.S.C. 6081(a); Section 55.6091-1 also issued under 26 U.S.C. 6091(a); Section 55.6109-1 also issued under 26 U.S.C. 6109(a); Section 55.6109-2 also issued under 26 U.S.C. 6109(a); Section 55.6151-1 also issued under 26 U.S.C. 6151; Section 55.6695-1 also issued under 26 U.S.C. 6695(b).
Source: T.D. 7767, 46 FR 11282, Feb. 6, 1981; 46 FR 15263, Mar. 5, 1981, unless otherwise noted.
Subpart A Excise Tax on Real Estate Investment Trusts
§ 55.4981-1 [Reserved]
§ 55.4981-2 Imposition of excise tax with respect to certain undistributed income of real estate investment trusts; calendar years beginning after December 31, 1986.
Section 4981, as amended by the Tax Reform Act of 1986, imposes an excise tax on a real estate investment trust in the amount of four percent of the excess, if any, of the required distribution for a calendar year over the distributed amount for such calendar year. Section 4981, as so amended, applies only to calendar years that begin after December 31, 1986.
[T.D. 8180, 53 FR 6148, Mar. 1, 1988, as amended by T.D. 9849, 84 FR 9239, Mar. 14, 2019]
Subpart B Excise Tax on Regulated Investment Companies
§ 55.4982-1 Imposition of excise tax on undistributed income of regulated investment companies.
Section 4982 imposes an excise tax on a regulated investment company in the amount of four percent of the excess, if any, of the required distribution for a calendar year over the distributed amount for such calendar year. Section 4982 applies only to calendar years beginning after December 31, 1986.
[T.D. 8180, 53 FR 6148, Mar. 1, 1988]
Subpart C Procedure and Administration
Source: T.D. 7767, 46 FR 11282, Feb. 6, 1981; 46 FR 15263, Mar. 5, 1981, unless otherwise noted. Redesignated by T.D. 8180, 53 FR 6148, Mar. 1, 1988.
§ 55.6001-1 Notice or regulations requiring records, statements, and special returns.
(a) In general. Any person subject to tax under Chapter 44 of the Code shall keep such complete and detailed records as are sufficient to enable the district director to determine accurately the amount of liability under Chapter 44.
(b) Notice by district director requiring returns, statements, or the keeping of records. The district director may require any person, by notice served upon him, to make such returns, render such statements, or keep such specific records as will enable the district director to determine whether or not such person is liable for tax under Chapter 44.
(c) Retention of records. The records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law.
§ 55.6011-1 General requirement of return, statement, or list.
Every person liable for tax under Chapter 44 shall file an annual return with respect to the tax on the form prescribed by the Internal Revenue Service for such purpose and shall include therein the information required by the form and the instructions issued with respect thereto. For calendar years beginning after December 31, 1986, the return, which must be made on a calendar year basis, shall be filed by a real estate investment trust on Form 8612 and by a regulated investment company on Form 8613.
[T.D. 8180, 53 FR 6148, Mar. 1, 1988]
§ 55.6060-1 Reporting requirements for tax return preparers.
(a) In general. A person that employs one or more tax return preparers to prepare a return or claim for refund under chapter 44 of subtitle D of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in § 1.6060-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 55.6061-1 Signing of returns and other documents.
Any return required to be made by a real estate investment trust or a regulated investment company with respect to the tax imposed by Chapter 44 shall be signed by a person authorized by section 6062 of the Code to sign the income tax return of the real estate investment trust or the regulated investment company. Any statement or other document required to be made with respect to the tax imposed by Chapter 44 shall be signed by the person required or duly authorized to sign in accordance with the regulations, forms, or instructions prescribed with respect to such statement or document. An individual's signature on a return, statement, or other document made by or for the real estate investment trust or the regulated investment company shall be prima facie evidence that the individual is authorized to sign the return, statement, or other document.
[T.D. 8180, 53 FR 6148, Mar. 1, 1988]
§ 55.6065-1 Verification of returns.
If a return, statement, or other document made under the provisions of Chapter 44 or Subtitle F or the Code or the regulations thereunder with respect to any tax imposed by Chapter 44 of the Code, or the form and instructions issued with respect to such return, statement, or other document, requires that it shall contain or be verified by a written declaration that it is made under the penalties of perjury, it must be so verified by the person or persons required to sign such return, statement, or other document. In addition, any other statement or document submitted under any provision of Chapter 44 or Subtitle F of the Code or regulations thereunder with respect to any tax imposed by Chapter 44 of the Code may be required to contain or be verified by a written declaration that it is made under the penalties of perjury.
§ 55.6071-1 Time for filing returns.
(a) Returns for calendar years beginning after December 31, 1986. A return required by § 55.6011-1 for any calendar year beginning after December 31, 1986, shall be filed on or before March 15 of the following calendar year. See § 55.6081-1 for rules relating to extensions of time for filing a return required by § 55.6011-1.
(b) Returns for excise tax under section 4981 as in effect before amendment by the Tax Reform Act of 1986. A return required by § 55.6011-1 for any excise tax under section 4981, as in effect before amendment by the Tax Reform Act of 1986, shall be filed at the time (including any extension of time granted or allowed under section 6081) that the real estate investment trust is required to file its income tax return under section 6012 for the taxable year for which the tax under section 4981, as in effect before amendment by the Tax Reform Act of 1986, is imposed.
[T.D. 8180, 53 FR 6148, Mar. 1, 1988]
§ 55.6081-1 Automatic extension of time for filing a return due under Chapter 44.
(a) In general. A Real Estate Investment Trust (REIT) required to file a return on Form 8612, “Return of Excise Tax on Undistributed Income of Real Estate Investment Trusts,” or a Regulated Investment Company (RIC) required to file a return on Form 8613, “Return of Excise Tax on Undistributed Income of Regulated Investment Companies,” will be allowed an automatic 6-month extension of time to file the return after the date prescribed for filing the return if the REIT or RIC files an application under this section in accordance with paragraph (b) of this section.
(b) Requirements. To satisfy this paragraph (b), a REIT or RIC must—
(1) Submit a complete application on Form 7004, “Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns,” or in any other manner prescribed by the Commissioner;
(2) File the application on or before the date prescribed for filing the return with the Internal Revenue Service office designated in the application's instructions; and
(3) Remit the amount of the properly estimated unpaid tax liability on or before the date prescribed for payment.
(c) No extension of time for the payment of tax. An automatic extension of time for filing a return granted under paragraph (a) of this section will not extend the time for payment of any tax due on such return.
(d) Termination of automatic extension. The Commissioner may terminate an automatic extension at any time by mailing to the REIT or RIC a notice of termination at least 10 days prior to the termination date designated in such notice. The Commissioner must mail the notice of termination to the address shown on the Form 7004 or to the REIT or RIC's last known address. For further guidance regarding the definition of last known address, see § 301.6212-2 of this chapter.
(e) Penalties. See section 6651 for failure to file or failure to pay the amount shown as tax on the return.
(f) Effective/applicable dates. This section is applicable for applications for an automatic extension of time to file a return due under chapter 44, filed after July 1, 2008.
[T.D. 9407, 73 FR 37369, July 1, 2008]
§ 55.6091-1 Place for filing Chapter 44 tax returns.
Except as provided in § 55.6091-2 (relating to exceptional cases):
(a) In general. Chapter 44 tax returns shall be filed with any person assigned the responsibility to receive returns in the local Internal Revenue Service office serving the principal place of business or principal office or agency of the real estate investment trust or regulated investment company.
(b) Returns filed with service centers or by hand carrying. Notwithstanding paragraph (a) of this section, unless a return is filed by hand carrying, whenever instructions applicable to Chapter 44 tax returns provide that the returns be filed with a service center, the returns must be so filed in accordance with the instructions. Returns which are filed by hand carrying shall be filed with any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office in accordance with paragraph (a) of this section.
[T.D. 7767, 46 FR 11282, Feb. 6, 1981; 46 FR 15263, Mar. 5, 1981. Redesignated and amended by T.D. 8180, 53 FR 6148, Mar. 1, 1988; T.D. 9156, 69 FR 55746, Sept. 16, 2004]
§ 55.6091-2 Exceptional cases.
Notwithstanding the provisions of § 55.6091-1, the Commissioner may permit the filing of any Chapter 44 tax return in any local Internal Revenue Service office.
[T.D. 7767, 46 FR 11282, Feb. 6, 1981; 46 FR 15263, Mar. 5, 1981. Redesignated by T.D. 8180, 53 FR 6148, Mar. 1, 1988, as amended by T.D. 9156, 69 FR 55746, Sept. 16, 2004]
§ 55.6107-1 Tax return preparer must furnish copy of return or claim for refund to taxpayer and must retain a copy or record.
(a) In general. A person who is a signing tax return preparer of any return or claim for refund of tax under Chapter 44 of subtitle D of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer, and retain a completed copy or record in the manner stated in § 1.6107-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 55.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund.
(a) In general. Each tax return or claim for refund of tax under chapter 44 of Subtitle D prepared by one or more signing tax return preparers must include the identifying number of the preparer required by § 1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in § 1.6109-2 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 55.6151-1 Time and place for paying of tax shown on returns.
The tax shown on any return which is imposed by Chapter 44 shall, without notice or assessment and demand, be paid to the internal revenue officer with whom the return is filed at the time and place for filing such return (determined without regard to any extension of time for filing the return). For provisions relating to the time and place for filing such return, see §§ 55.6071-1 and 55.6091-1. For provisions relating to the extension of time for paying the tax see § 55.6161-1.
[T.D. 8180, 53 FR 6148, Mar. 1, 1988]
§ 55.6161-1 Extension of time for paying tax or deficiency.
(a) In general—(1) Tax shown or required to be shown on return. A reasonable extension of the time for payment of the amount of any tax imposed by Chapter 44 and shown or required to be shown on any return, may be granted by the district directors at the request of the taxpayer. The period of such extension shall not be in excess of 6 months from the date fixed for payment of such tax.
(2) Deficiency. The time for payment of any amount determined as a deficiency in respect of tax imposed by Chapter 44 may, at the request of the taxpayer, be extended by the internal revenue officer to whom the tax is required to be paid. The extension may be for a period not to exceed 18 months from the date fixed for payment of the deficiency, as shown on the notice and demand. In exceptional cases, a further extension for a period not in excess of 12 months may be granted. No extension of time for payment of a deficiency shall be granted if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.
(3) Extension of time for filing distinguished. The granting of an extension of time for filing a return does not operate to extend the time for the payment of the tax or any part thereof unless so specified in the extension.
(b) Certain rules relating to extension of time for paying income tax to apply. The provisions of § 1.6161-1 (b), and (c), and (d) of this chapter (relating to a requirement for undue hardship, the application for extension, and payment pursuant to an extension) shall apply to extensions of time for payment of the tax imposed by Chapter 44.
§ 55.6165-1 Bonds where time to pay tax or deficiency has been extended.
If an extension of time for payment of tax or deficiency is granted under section 6161, the district director or the director of the service center may, if he deems it necessary, require a bond for the payment of the amount in respect of which the extension is granted in accordance with the terms of the extension. However, the bond shall not exceed double the amount with respect to which the extension is granted. For provisions relating to form of bonds, see the regulations under section 7101 contained in part 301 of this chapter (Regulations on Procedure and Administration).
§ 55.6694-1 Section 6694 penalties applicable to tax return preparer.
(a) In general. For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund of tax under chapter 44 of Subtitle D see § 1.6694-1 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 55.6694-2 Penalties for understatement due to an unreasonable position.
(a) In general. A person who is a tax return preparer of any return or claim for refund of excise tax under chapter 44 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in § 1.6694-2 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 55.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under chapter 44 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in § 1.6694-3 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78459, Dec. 22, 2008]
§ 55.6694-4 Extension of period of collection when tax return preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters.
(a) In general. For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for excise tax under chapter 44 of subtitle D of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under § 1.6694-4 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
§ 55.6695-1 Other assessable penalties with respect to the preparation of tax returns or claims for refund for other persons.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under chapter 44 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in § 1.6695-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
§ 55.6696-1 Claims for credit or refund by tax return preparers.
(a) In general. For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax under chapter 44 of subtitle D of the Internal Revenue Code, the rules under § 1.6696-1 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
§ 55.7701-1 Tax return preparer.
(a) In general. For the definition of a tax return preparer, see § 301.7701-15 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
PART 56 PUBLIC CHARITY EXCISE TAXES
Authority: 26 U.S.C. 7805. Section 56.4911-7 also issued under 26 U.S.C. 4911(f)(3); Section 56.6060-1 also issued under 26 U.S.C. 6060(a); Section 56.6109-1 also issued under 26 U.S.C. 6109(a); Section 56.6109-2 also issued under 26 U.S.C. 6109(a); Section 56.6695-1 also issued under 26 U.S.C. 6695(b).
Source: T.D. 8308, 55 FR 35598, Aug. 31, 1990, unless otherwise noted.
§ 56.4911-0 Outline of regulations under section 4911.
Immediately following is an outline of the regulations under section 4911 of the Internal Revenue Code relating to an excise tax on electing public charities' excess lobbying expenditures.
§ 56.4911-0 Outline of regulations under section 4911. § 56.4911-1 Tax on excess lobbying expenditures.
(a) In general.
(b) Excess lobbying expenditures.
(c) Nontaxable amounts.
(1) Lobbying nontaxable amount.
(2) Grass roots nontaxable amount.
(d) Examples.
§ 56.4911-2 Lobbying expenditures, direct lobbying communications, and grass roots lobbying communications.
(a) Lobbying expenditures.
(1) In general.
(2) Overview of § 56.4911 and the definitions of “direct lobbying communication” and “grass roots lobbying communication”.
(b) Influencing legislation: direct and grass roots lobbying communications defined.
(1) Direct lobbying communication.
(2) Grass roots lobbying communication.
(3) Exceptions to the definition of influencing legislation.
(4) Examples.
(5) Special rule for certain mass media advertisements.
(c) Exceptions to the definitions of direct lobbying communication and grass roots lobbying communication.
(1) Nonpartisan analysis, study, or research exception.
(2) Examinations and discussions of broad social, economic, and similar problems.
(3) Requests for technical advice.
(4) Communications pertaining to “self-defense” by the organization.
(d) Definitions.
(1) Legislation.
(2) Action.
(3) Legislative body.
(4) Administrative bodies.
§ 56.4911-3 Expenditures for direct and/or grass roots lobbying communications.
(a) Definition of term “expenditures for”.
(1) In general.
(2) Allocation of mixed purpose expenditures.
(3) Allocation of mixed lobbying.
(b) Examples.
(c) Certain transfers treated as lobbying expenditures.
(1) Transfer earmarked for grass roots purposes.
(2) Transfer earmarked for direct and grass roots lobbying.
(3) Certain transfers to noncharities that lobby.
§ 56.4911-4 Exempt purpose expenditures.
(a) Application.
(b) Included expenditures.
(c) Excluded expenditures.
(d) Certain transfers treated as exempt purpose expenditures.
(e) Transfers not exempt purpose expenditures.
(f) Definitions.
(g) Example.
§ 56.4911-5 Communications with members.
(a) In general.
(b) Communications (directed only to members) that are not lobbying communications.
(c) Communications (directed only to members) that are direct lobbying communications.
(d) Communications (directed only to members) that are grass roots lobbying communications.
(e) Written communications directed to members and nonmembers.
(1) In general.
(2) Direct lobbying directly encouraged.
(3) Grass roots expenditure if grass roots lobbying directly encouraged.
(4) No direct encouragement of direct lobbying or of grass roots lobbying.
(f) Definitions and special rules.
(1) Member; general rule.
(2) Member; special rule.
(3) Member; affiliated group of organizations.
(4) Member; limited affiliated group of organizations.
(5) Subscriber.
(6) Directly encourages.
(7) Percentages of total distribution.
(8) Reasonable allocation rule.
§ 56.4911-6 Records of lobbying and grass roots expenditures.
(a) Records of lobbying expenditures.
(b) Records of grass roots expenditures.
§ 56.4911-7 Affiliated group of organizations.
(a) Affiliation between two organizations.
(1) In general.
(2) Organizations not described in section 501(c)(3).
(3) Action on legislative issues.
(b) Interlocking governing boards.
(1) In general.
(2) Majority or quorum.
(3) Votes required under governing instrument or local law.
(4) Representatives constituting less than 15% of governing board.
(5) Representatives.
(c) Governing instrument.
(d) Three or more organizations affiliated.
(1) Two controlled organizations affiliated.
(2) Chain rule.
(e) Affiliated group of organizations.
(1) Defined.
(2) Multiple membership.
(3) Taxable year of affiliated group.
(4) Electing member organization.
(5) Election of member's year as group's taxable year.
(f) Examples.
§ 56.4911-8 Excess lobbying expenditures of affiliated group.
(a) Application.
(b) Affiliated group treated as one organization.
(c) Tax imposed on excess lobbying expenditures of affiliated group.
(d) Liability for tax.
(1) Electing organizations.
(2) Tax based on excess lobbying expenditures.
(3) Tax based on excess grass roots expenditures.
(4) Tax based on exempt purpose expenditures.
(5) Taxable year for which liable.
(6) Organization a member of more than one affiliated group.
(e) Former member organizations.
§ 56.4911-9 Application of section 501(h) to affiliated groups of organizations.
(a) Scope.
(b) Determination required.
(c) Member organizations that are not electing organizations.
(d) Filing of information relating to affiliated group of organizations.
(1) Scope.
(2) In general.
(3) Additional information required.
(4) Information required of electing member organization.
(e) Example.
(f) Cross reference.
§ 56.4911-10 Members of a limited affiliated group of organizations.
(a) Scope.
(b) Members of limited affiliated group.
(c) Controlling and controlled organizations.
(d) Expenditures of controlling organization.
(1) Scope.
(2) Expenditures for direct lobbying.
(3) Grass roots expenditures.
(4) Exempt purpose expenditures.
(e) Expenditures of controlled member.
(f) Reports of members of limited affiliated groups.
(1) Controlling member organization's additional information on annual return.
(2) Reports of controlling members to other members.
(3) Reports of controlled member organizations.
(g) National legislative issues.
(h) Examples.
§ 56.6001-1 Notice or regulations requiring records, statements, and special returns.
(a) In general.
(b) Cross references.
§ 56.6011-1 General requirement of return, statement, or list.
§ 56.4911-1 Tax on excess lobbying expenditures.
(a) In general. Section 4911(a) imposes an excise tax of 25 percent on the excess lobbying expenditures (as defined in paragraph (b) of this section) for a taxable year of an organization for which the expenditure test election under section 501(h) is in effect (an “electing public charity”). An electing public charity's annual limit on expenditures for influencing legislation (i.e., the amount of lobbying expenditures on which no tax is due) is the lobbying nontaxable amount or, on expenditures for influencing legislation through grass roots lobbying, the grass roots nontaxable amount (see paragraph (c) of this section). For rules concerning the application of the excise tax imposed by section 4911(a) to the members of an affiliated group of organizations (as defined in § 56.4911-7(e)), see § 56.4911-8.
(b) Excess lobbying expenditures. For any taxable year for which the expenditure test election under section 501(h) is in effect, the amount of an electing public charity's excess lobbying expenditures is the greater of—
(1) The amount by which the organization's lobbying expenditures (within the meaning of § 56.4911-2(a)) exceed the organization's lobbying nontaxable amount, or
(2) The amount by which the organization's grass roots expenditures (within the meaning of §§ 56.4911-2(a)) exceed the organization's grass roots nontaxable amount.
(c) Nontaxable amounts—(1) Lobbying nontaxable amount. Under section 4911(c)(2), the lobbying nontaxable amount for any taxable year for which the expenditure test election is in effect is the lesser of—
(i) $1,000,000, or
(ii) To the extent of the electing public charity's exempt purpose expenditures (within the meaning of § 56.4911-4) for that year, the sum of 20 percent of the first $500,000 of such expenditures, plus 15 percent of the second $500,000 of such expenditures, plus 10 percent of the third $500,000 of such expenditures, plus 5 percent of the remainder of such expenditures.
(2) Grass roots nontaxable amount. Under section 4911(c)(4), an electing public charity's grass roots nontaxable amount for any taxable year is 25 percent of its lobbying nontaxable amount for that year.
(d) Examples. The provisions of this section are illustrated by the examples in § 1.501(h)-3.
§ 56.4911-2 Lobbying expenditures, direct lobbying communications, and grass roots lobbying communications.
(a) Lobbying expenditures—(1) In general. An electing public charity's lobbying expenditures for a year are the sum of its expenditures during that year for direct lobbying communications (“direct lobbying expenditures”) plus its expenditures during that year for grass roots lobbying communications (“grass roots expenditures”).
(2) Overview of § 56.4911-2 and the definitions of “direct lobbying communication” and “grass roots lobbying communication”. Paragraph (b)(1) of this section defines the term “direct lobbying communication.” Paragraph (b)(2) of this section provides the general definition of the term “grass roots lobbying communication.” (But also see paragraph (b)(5) of this section (special rebuttable presumption regarding certain paid mass media communications) and § 56.4911-5 (special, more lenient, definitions for certain communications from an electing public charity to its bona fide members)). Paragraph (b)(3) of this section lists and cross-references various exceptions to the definitions set forth in paragraphs (b) (1) and (2) (the text of the exceptions, along with relevant definitions and examples, is generally set forth in paragraph (c)). Paragraph (b)(4) of this section contains numerous examples illustrating the application of paragraphs (b) (1), (2) and (3). As mentioned above, paragraph (b)(5) of this section sets forth the special rebuttable presumption regarding a limited number of paid mass media communications about highly publicized legislation. Paragraph (d) of this section contains definitions of (and examples illustrating) various terms used in this section.
(b) Influencing legislation: direct and grass roots lobbying communications defined—(1) Direct lobbying communication—(i) Definition. A direct lobbying communication is any attempt to influence any legislation through communication with:
(A) Any member or employee of a legislative body; or
(B) Any government official or employee (other than a member or employee of a legislative body) who may participate in the formulation of the legislation, but only if the principal purpose of the communication is to influence legislation.
(ii) Required elements. A communication with a legislator or government official will be treated as a direct lobbying communication under this § 56.4911-2(b)(1) if, but only if, the communication:
(A) Refers to specific legislation (see paragraph (d)(1) of this section for a definition of the term “specific legislation”); and
(B) Reflects a view on such legislation.
(iii) Special rule for referenda, ballot initiatives or similar procedures. Solely for purposes of this section 4911, where a communication refers to and reflects a view on a measure that is the subject of a referendum, ballot initiative or similar procedure, the general public in the State or locality where the vote will take place constitutes the legislative body, and individual members of the general public area, for purposes of this paragraph (b)(1), legislators. Accordingly, if such a communication is made to one or more members of the general public in that state or locality, the communication is a direct lobbying communication (unless it is nonpartisan analysis, study or research (see paragraph (c)(1) of this section).
(2) Grass roots lobbying communication—(i) Definition. A grass roots lobbying communication is any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segment thereof.
(ii) Required elements. A communication will be treated as a grass roots lobbying communication under this § 56.4911-2(b)(2)(ii) if, but only if, the communication:
(A) Refers to specific legislation (see paragraph (d)(1) of this section for a definition of the term “specific legislation”);
(B) Reflects a view on such legislation; and
(C) Encourages the recipient of the communication to take action with respect to such legislation (see paragraph (b)(2)(iii) of this section for the definition of encouraging the recipient to take action.
For special, more lenient rules regarding an organization's communications directed only or primarily to bona fide members of the organization, see § 56.4911-5. For special rules regarding certain paid mass media advertisements about highly publicized legislation, see paragraph (b)(5) of this section. For special rules regarding lobbying on referenda, ballot initiatives and similar procedures, see paragraph (b)(1)(iii) of this section).
(iii) Definition of encouraging recipient to take action. For purposes of this section, encouraging a recipient to take action with respect to legislation means that the communication:
(A) States that the recipient should contact a legislator or an employee of a legislative body, or should contact any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of urging contact with the government official or employee is to influence legislation);
(B) States the address, telephone number, or similar information of a legislator or an employee of a legislative body;
(C) Provides a petition, tear-off postcard or similar material for the recipient to communicate with a legislator or an employee of a legislative body, or with any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of so facilitating contact with the government official or employee is to influence legislation); or
(D) Specifically identifies one or more legislators who will vote on the legislation as: opposing the communication's view with respect to the legislation; being undecided with respect to the legislation; being the recipient's representative in the legislature; or being a member of the legislative committee or subcommittee that will consider the legislation. Encouraging the recipient to take action under this paragraph (b)(2)(iii)(D) does not include naming the main sponsor(s) of the legislation for purposes of identifying the legislation.
(iv) Definition of directly encouraging recipient to take action. Communications described in one or more of paragraphs (b)(2)(iii) (A) through (C) of this section not only “encourage,” but also “directly encourage” the recipient to take action with respect to legislation. Communications described in paragraph (b)(2)(iii)(D) of this section, however, do not directly encourage the recipient to take action with respect to legislation. Thus, a communication would encourage the recipient to take action with respect to legislation, but not directly encourage such action, if the communication does no more than identify one or more legislators who will vote on the legislation as: opposing the communication's view with respect to the legislation; being undecided with respect to the legislation; being the recipient's representative in the legislature; or being a member of the legislative committee or subcommittee that will consider the legislation. Communications that encourage the recipient to take action with respect to legislation but that do not directly encourage the recipient to take action with respect to legislation may be within the exception for nonpartisan analysis, study or research (se paragraph (c)(1) of this section) and thus not be grass roots lobbying communications.
(v) Subsequent lobbying use of nonlobbying communications or research materials—(A) Limited effect of application. Even though certain communications or research materials are initially not grass roots lobbying communications under the general definition set forth in paragraph (b)(2)(ii) of this section, subsequent use of the communications or research materials for grass roots lobbying may cause them to be treated as grass roots lobbying communications. This paragraph (b)(2)(v) does not cause any communications or research materials to be considered direct lobbying communications.
(B) Limited scope of application. Under this paragraph (b)(2)(v), only “advocacy communications or research materials” are potentially treated as grass roots lobbying communications. Communications or research materials that are not “advocacy communications or research materials” are not treated as grass roots lobbying communications under this paragraph (b)(2)(v). “Advocacy communications or research materials” are any communications or materials that both refer to and reflect a view on specific legislation but that do not, in their initial format, contain a direct encouragement for recipients to take action with respect to legislation.
(C) Subsequent use in lobbying. Where advocacy communications or research materials are subsequently accompanied by a direct encouragement for recipients to take action with respect to legislation, the advocacy communications or research materials themselves are treated as grass roots lobbying communications unless the organization's primary purpose in undertaking or preparing the advocacy communications or research materials was not for use in lobbying. In such a case, all expenses of preparing and distributing the advocacy communications or research materials will be treated as grass roots expenditures.
(D) Time limit on application of subsequent use rule. The characterization of expenditures as grass roots lobbying expenditures under paragraph (b)(2)(v)(C) shall apply only to expenditures paid less than six months before the first use of the advocacy communications or research materials with a direct encouragement to action.
(E) Safe harbor in determining “primary purpose”. The primary purpose of the organization in undertaking or preparing advocacy communications or research materials will not be considered to be for use in lobbying if, prior to or contemporaneously with the use of the advocacy communications or research materials with the direct encouragement to action, the organization makes a substantial nonlobbying distribution of the advocacy communications or research materials (without the direct encouragement to action). Whether a distribution is substantial will be determined by reference to all of the facts and circumstances, including the normal distribution pattern of similar nonpartisan analyses, studies or research by that and similar organizations.
(F) Special rule for partisan analysis, study or research. In the case of advocacy communications or research materials that are not nonpartisan analysis, study or research, the nonlobbying distribution thereof will not be considered “substantial” unless that distribution is at least as extensive as the lobbying distribution thereof.
(G) Factors considered in determining primary purpose. Where the nonlobbying distribution of advocacy communications or research materials is not substantial, all of the facts and circumstances must be weighed to determine whether the organization's primary purpose in preparing the advocacy communications or research materials was for use in lobbying. While not the only factor, the extent of the organization's nonlobbying distribution of the advocacy communications or research materials is particularly relevant, especially when compared to the extent of their distribution with the direct encouragement to action. Another particularly relevant factor is whether the lobbying use of the advocacy communications or research materials is by the organization that prepared the document, a related organization, or an unrelated organization. Where the subsequent lobbying distribution is made by an unrelated organization, clear and convincing evidence (which must include evidence demonstrating cooperation or collusion between the two organizations) will be required to establish that the primary purpose for preparing the communication for use in lobbying.
(H) Examples. The provisions of this paragraph (b)(2)(v) are illustrated by the following examples:
Example 1.Assume a nonlobbying “report” (that is not nonpartisan analysis, study or research) is prepared by an organization, but distributed to only 50 people. The report, in that format, refers to and reflects a view on specific legislation but does not contain a direct encouragement for the recipients to take action with respect to legislation. Two months later, the organization sends the report to 10,000 people along with a letter urging recipients to write their Senators about the legislation discussed in the report. Because the report's nonlobbying distribution is not as extensive as its lobbying distribution, the report's nonlobbying distribution is not substantial for purposes of this paragraph (b)(2)(v). Accordingly, the organization's primary purpose in preparing the report must be determined by weighing all of the facts and circumstances. In light of the relatively minimal nonlobbying distribution and the fact that the lobbying distribution is by the preparing organization rather than by an unrelated organization, and in the absence of evidence to the contrary, both the report and the letter are grass roots lobbying communications. Assume that all costs of preparing the report were paid within the six months preceding the mailing of the letter. Accordingly, all of the organization's expenditures for preparing and mailing the two documents are grass roots lobbying expenditures.
Example 2.Assume the same facts as in Example (1), except that the costs of the report are paid over the two month period of January and February. Between January 1 and 31, the organization pays $1,000 for the report. In February, the organization pays $500 for the report. Further assume that the report is first used with a direct encouragement to action on August 1. Six months prior to August 1 is February 1. Accordingly, no costs paid for the report before February 1 are treated as grass roots lobbying expenditures under the subsequent use rule. Under these facts, the subsequent use rule treats only the $500 paid for the report in February as grass roots lobbying expenditures.
(3) Exceptions to the definition of influencing legislation. In many cases, a communication is not a direct or grass roots lobbying communication under paragraph (b)(1) or (b)(2) of this section if it falls within one of the exceptions listed in paragraph (c) of this section. See paragraph (c)(1), Nonpartisan analysis, study or research; paragraph (c)(2), Examinations and discussions of broad social, economic and similar problems; paragraph (c)(3), Requests for technical advice; and paragraph (c)(4), Communications pertaining to self-defense by the organization. In addition, see § 56.4911-5, which provides special rules regarding the treatment of certain lobbying communications directed in whole or in part to members of an electing public charity.
(4) Examples. This paragraph (b)(4) provides examples to illustrate the rules set forth in the section regarding direct and grass roots lobbying. The expenditure test election under section 501(h) is assumed to be in effect for all organizations discussed in the examples in this paragraph (b)(4). In addition, it is assumed that the special rules of § 56.4911-5, regarding certain of a public charity's communications with its members, do not apply to any of the examples in this paragraph (b)(4).
(i) Direct lobbying. The provisions of this section regarding direct lobbying communications are illustrated by the following examples:
Example 1.Organization P's employee, X, is assigned to approach members of Congress to gain their support for a pending bill. X drafts and P prints a position letter on the bill. P distributes the letter to members of Congress. Additionally, X personally contacts several members of Congress or their staffs to seek support for P's position on the bill. The letter and the personal contacts are direct lobbying communications.
Example 2.Organization M's president writes a letter to the Congresswoman representing the district in which M is headquartered, requesting that the Congresswoman write an administrative agency regarding proposed regulations recently published by that agency. M's president also requests that the Congresswoman's letter to the agency state the Congresswoman's support of M's application for a particular type of permit granted by the agency. The letter written by M's president is not a direct lobbying communication.
Example 3.Organization Z prepares a paper on a particular state's environmental problems. The paper does not reflect a view on any specific pending legislation or on any specific legislative proposal that Z either supports or opposes. Z's representatives give the paper to a state legislator. Z's paper is not a direct lobbying communication.
Example 4.State X enacts a statute that requires the licensing of all day care providers. Agency B in State X is charged with preparing rules to implement the bill enacted by State X. One week after enactment of the bill, organization C sends a letter to Agency B providing detailed proposed rules that organization C suggests to Agency B as the appropriate standards to follow in implementing the statute on licensing of day care providers. Organization C's letter to Agency B is not a lobbying communication.
Example 5.Organization B researches, prepares and prints a code of standards of minimum safety requirements in an area of common electrical wiring. Organization B sells the code of standards booklet to the public and its is widely used by professional in the installation of electrical wiring. A number of states have codified all, or part, of the code of standards as mandatory safety standards. On occasion, B lobbies state legislators for passage of the code of standards for safety reasons. Because the primary purpose of preparing the code of standards was the promotion of public safety and the standards were specifically used in a profession for that purpose, separate from any legislative requirement, the research, preparation, printing and public distribution of the code of standards is not an expenditure for a direct (or grass roots) lobbying communication. Costs, such as transportation, photocopying, and other similar expenses, incurred in lobbying state legislators for passage of the code of standards into law are expenditures for direct lobbying communications.
Example 6.On the organization's own initiative, representatives of Organization F present written testimony to a Congressional committee. The news media report on the testimony of Organization F, detailing F's opposition to a pending bill. The testimony is a direct lobbying communication but is not a grass roots lobbying communication.
Example 7.Organization R's monthly newsletter contains an editorial column that refers to and reflects a view on specific pending bills. R sends the newsletter to 10,000 nonmember subscribers. Senator Doe is among the subscribers. The editorial column in the newsletter copy sent to Senator Doe is not a direct lobbying communication because the newsletter is sent to Senator Doe in her capacity as a subscriber rather than her capacity as a legislator. (Note, though, that the editorial column may be a grass roots lobbying communication if it encourages recipients to take action with respect to the pending bills it refers to and on which it reflects a view).
Example 8.Assume the same facts as in Example (7), except that one of Senator Doe's staff members sees Senator Doe's copy of the editorial and writes to R requesting additional information. R responds with a letter that refers to and reflects a view on specific legislation. R's letter is a direct lobbying communication unless it is within one of the exceptions set forth in paragraph (c) of this section (such as the exception for nonpartisan analysis, study or research). (R's letter is not within the scope of the exception for responses to written requests from a legislative body or committee for technical advice (see paragraph (c)(3) of this section) because the letter is not in response to a written request from a legislative body or committee).
(ii) Grass roots lobbying. The provisions of this section regarding grass roots lobbying communications are illustrated in paragraph (b)(4)(ii)(A) of this section by examples of communications that are not grass roots lobbying communications and in paragraph (b)(4)(ii)(B) by examples of communications that are grass roots lobbying communications. The provisions of this section are further illustrated in paragraph (b)(4)(ii)(C), with particular regard to the exception for nonpartisan analysis, study, or research:
(A) Communications that are not grass roots lobbying communications.
Example 1.Organization L places in its newsletter an article that asserts that lack of new capital is hurting State W's economy. The article recommends that State W residents either invest more in local businesses or increase their savings so that funds will be available to others interested in making investments. The article is an attempt to influence opinions with respect to a general problem that might receive legislative attention and is distributed in a manner so as to reach and influence many individuals. However, the article does not refer to specific legislation that is pending in a legislative body, nor does the article refer to a specific legislative proposal the organization either supports or opposes. The article is not a grass roots lobbying communication.
Example 2.Assume the same facts as Example (1), except that the article refers to a bill pending in State W's legislature that is intended to provide tax incentives for private savings. The article praises the pending bill and recommends that it be enacted. However, the article does not encourage readers to take action with respect to the legislation. The article is not a grass roots lobbying communication.
Example 3.Organization B sends a letter to all persons on its mailing list. The letter includes an update on numerous environmental issues with a discussion of general concerns regarding pollution, proposed federal regulations affecting the area, and several pending legislative proposals. The letter endorses two pending bills and opposes another pending bill, but does not name any legislator involved (other than the sponsor of one bill, for purposes of identifying the bill), nor does it otherwise encourage the reader to take action with respect to the legislation. The letter is not a grass roots lobbying communication.
Example 4.A pamphlet distributed by organization Z discusses the dangers of drugs and encourages the public to send their legislators a coupon, printed with the statement “I support a drug-free America.” The term “drug-free America” is not widely identified with any of the many specific pending legislative proposals regarding drug issues. The pamphlet does not refer to any of the numerous pending legislative proposals, nor does the organization support or oppose a specific legislative proposal. The pamphlet is not a grass roots lobbying communication.
Example 5.A pamphlet distributed by organization B encourages readers to join an organization and “get involved in the fight against drugs.” The text states, in the course of a discussion of several current drug issues, that organization B supports a specific bill before Congress that would establish an expanded drug control program. The pamphlet does not encourage readers to communicate with legislators about the bill (such as by including the names of undecided or opposed legislators). The pamphlet is not a grass roots lobbying communication.
Example 6.Organization E, an environmental organization, routinely summarizes in each edition of its newsletter the new environment-related bills that have been introduced in Congress since the last edition of the newsletter. The newsletter identifies each bill by a bill number and the name of the legislation's sponsor. The newsletter also reports on the status of previously introduced environment-related bills. The summaries and status reports do not encourage recipients of the newsletter to take action with respect to legislation, as described in paragraphs (b)(2)(iii) (A) through (D) of this section. Although the summaries and status reports refer to specific legislation and often reflect a view on such legislation, they do not encourage the newsletter recipients to take action with respect to such legislation. The summaries and status reports are not grass roots lobbying communications.
Example 7. Organization B prints in its newsletter a report on pending legislation that B supports, the Family Equity bill. The report refers to and reflects a view on the Family Equity bill, but does not directly encourage recipients to take action. Nor does the report specifically identify any legislator as opposing the communication's view on the legislation, as being undecided, or as being a member of the legislative committee or subcommittee that will consider the legislation. However, the report does state the following:
Rep. Doe (D-Ky.) and Rep. Roe (R-Ma.), both ardent supporters of the Family Equity bill, spoke at B's annual convention last week. Both encouraged B's efforts to get the Family Equity bill enacted and stated that they thought the bill could be enacted even over a presidential veto. B's legislative affairs liaison questioned others, who seemed to agree with that assessment. For example, Sen. Roe (I-Ca.) said that he thinks the bill will pass with such a large majority, “the President won't even consider vetoing it.”
Assume the newsletter, and thus the report, is sent to individuals throughout the U.S., including some recipients in Kentucky, Massachusetts and California. Because the report is distributed nationally, the mere fact that the report identifies several legislators by party and state as part of its discussion does not mean the report specifically identifies the named legislators as the Kentucky, Massachusetts and California recipients' representatives in the legislature for purposes of paragraph (b)(2)(iii) of this section. The report is not a grass roots lobbying communication.
(B) Communications that are grass roots lobbying communications.
Example 1.A pamphlet distributed by organization Y states that the “President's plan for a drug-free America,” which will establish a drug control program, should be passed. The pamphlet encourages readers to “write or call your senators and representatives and tell them to vote for the President's plan.” No legislative proposal formally bears the name “President's plan for a drug-free America,” but that and similar terms have been widely used in connection with specific legislation pending in Congress that was initially proposed by the President. Thus, the pamphlet refers to specific legislation, reflects a view on the legislation, and encourages readers to take action with respect to the legislation. The pamphlet is a grass roots lobbying communication.
Example 2.Assume the same facts as in Example (1), except that the pamphlet does not encourage the public to write or call representatives, but does list the members of the committee that will consider the bill. The pamphlet is a grass roots lobbying communication.
Example 3.Assume the same facts as in Example (1), except that the pamphlet encourages readers to “write the President to urge him to make the bill a top legislative priority” rather than encouraging readers to communicate with members of Congress. The pamphlet is a grass roots lobbying communication.
Example 4.Organization B, a nonmembership organization, includes in one of three sections of its newsletter an endorsement of two pending bills and opposition to another pending bill and also identifies several legislators as undecided on the three bills. The section of the newsletter devoted to the three pending bills is a grass roots lobbying communication.
Example 5.Organization D, a nonmembership organization, sends a letter to all persons on its mailing list. The letter includes an extensive discussion concluding that a significant increase in spending for the Air Force is essential in order to provide an adequate defense of the nation. Prior to a concluding fundraising request, the letter encourages readers to write their Congressional representatives urging increased appropriations to build the B-1 bomber. The letter is a grass roots lobbying communication.
Example 6.The President nominates X for a position in the President's cabinet. Organization Y disagrees with the views of X and does not believe X has the necessary administrative capabilities to effectively run a cabinet-level department. Accordingly, Y sends a general mailing requesting recipients to write to four Senators on the Senate Committee that will consider the nomination. The mailing is a grass roots lobbying communication.
Example 7.Organization F mails letters requesting that each recipient contribute money to or join F. In addition, the letters express F's opposition to a pending bill that is to be voted upon by the U.S. House of Representatives. Although the letters are form letters sent as a mass mailing, each letter is individualized to report to the recipient the name of the recipient's congressional representative. The letters are grass roots lobbying communications.
Example 8.Organization C sends a mailing that opposes a specific legislative proposal and includes a postcard addressed to the President for the recipient to sign stating opposition to the proposal. The letter requests that the recipient send to C a contribution as well as the postcard opposing the proposal. C states in the letter that it will deliver all the postcards to the White House. The letter is a grass roots lobbying communication.
(C) Additional examples.
Example 1.The newsletter of an organization concerned with drug issues is circulated primarily to individuals who are not members of the organization. A story in the newsletter reports on the prospects for passage of a specifically identified bill, stating that the organization supports the bill. The newsletter story identifies certain legislators as undecided, but does not state that readers should contact the undecided legislators. The story does not provide a full and fair exposition sufficient to qualify as nonpartisan analysis, study or research. The newsletter story is a grass roots lobbying communication.
Example 2.Assume the same facts as in Example (1), except that the newsletter story provides a full and fair exposition sufficient to qualify as nonpartisan analysis, study or research. The newsletter story is not a grass roots lobbying communication because it is within the exception for nonpartisan analysis, study or research (since it does not directly encourage recipients to take action).
Example 3.Assume the same facts as in Example (2), except that the newsletter story explicitly asks readers to contact the undecided legislators. Because the newsletter story directly encourages readers to take action with respect to the legislation, the newsletter story is not within the exception for nonpartisan analysis, study or research. Accordingly, the newsletter story is a grass roots lobbying communication.
Example 4.Assume the same facts as in Example (1), except that the story does not identify any undecided legislators. The story is not a grass roots lobbying communication.
Example 5.X organization places an advertisement that specifically identifies and opposes a bill that X asserts would harm the farm economy. The advertisement is not a mass media communication described in paragraph (b)(5)(ii) of this section and does not directly encourage readers to take action with respect to the bill. However, the advertisement does state that Senator Y favors the legislation. Because the advertisement refers to and reflects a view on specific legislation, and also encourages the readers to take action with respect to the legislation by specifically identifying a legislator who opposes X's views on the legislation, the advertisement is a grass roots lobbying communication.
Example 6.Assume the same facts as in Example (5), except that instead of identifying Senator Y as favoring the legislation, the advertisement identifies the “junior Senator from State Z” as favoring the legislation. The advertisement is a grass roots lobbying communication.
Example 7.Assume the same facts as in Example (5), except that instead of identifying Senator Y as favoring the legislation, the advertisement states: “Even though this bill will have a devastating effect upon the farm economy, most of the Senators from the Farm Belt states are inexplicably in favor of the bill.” The advertisement does not specifically identify one or more legislators as opposing the advertisement's view on the bill in question. Accordingly, the advertisement is not a grass roots lobbying communication because it does not encourage readers to take action with respect to the legislation.
Example 8.Organization V trains volunteers to go door-to-door to seek signatures for petitions to be sent to legislators in favor of a specific bill. The volunteers are wholly unreimbursed for their time and expenses. The volunteers' costs (to the extent any are incurred) are not lobbying or exempt purpose expenditures made by V (but the volunteers may not deduct their out-of-pocket expenditures (see section 170(f)(6)). When V asks the volunteers to contact others and urge them to sign the petitions, V encourages those volunteers to take action in favor of the specific bill. Accordingly, V's costs of soliciting the volunteers' help and its costs of training the volunteers are grass roots expenditures. In addition, the costs of preparing, copying, distributing, etc. the petitions (and any other materials on the same specific subject used in the door-to-door signature gathering effort), are grass roots expenditures.
(5) Special rule for certain mass media advertisements—(i) In general. A mass media advertisement that is not a grass roots lobbying communication under the three-part grass roots lobbying definition contained in paragraph (b)(2) of this section may be a grass roots lobbying communication by virtue of paragraph (b)(5)(ii) of this section. The special rule in paragraph (b)(5)(ii) generally applies only to a limited type of paid advertisements that appear in the mass media.
(ii) Presumption regarding certain paid mass media advertisements about highly publicized legislation. If within two weeks before a vote by a legislative body, or a committee (but not a subcommittee) thereof, on a highly publicized piece of legislation, an organization's paid advertisement appears in the mass media, the paid advertisement will be presumed to be a grass roots lobbying communication, but only if the paid advertisement both reflects a view on the general subject of such legislation and either: refers to the highly publicized legislation; or encourages the public to communicate with legislators on the general subject of such legislation. An organization can rebut this presumption by demonstrating that the paid advertisement is a type of communication regularly made by the organization in the mass media without regard to the timing of legislation (that is, a customary course of business exception) or that the timing of the paid advertisement was unrelated to the upcoming legislative action. Notwithstanding the fact that an organization successfully rebuts the presumption, a mass media communication described in this paragraph (b)(5)(ii) is a grass roots lobbying communication if the communication would be a grass roots lobbying communication under the rules contained in paragraph (b)(2) of this section.
(iii) Definitions—(A) Mass media. For purposes of this paragraph (b)(5), the term “mass media” means television, radio, billboards and general circulation newspapers and magazines. General circulation newspapers and magazines do not include newspapers or magazines published by an organization for which the expenditure test election under section 501(h) is in effect, except where both: The total circulation of the newspaper or magazine is greater than 100,000; and fewer than one-half of the recipients are members of the organization (as defined in § 56.4911-5(f)).
(B) Paid advertisement. For purposes of this paragraph (b)(5), where an electing public charity is itself a mass media publisher or broadcaster, all portions of that organization's mass media publications or broadcasts are treated as paid advertisements in the mass media, except those specific portions that are advertisements paid for by another person. The term “mass media” is defined in paragraph (b)(5)(iii)(A).
(C) Highly publicized. For purposes of this paragraph (b)(5), “highly publicized” means frequent coverage on television and radio, and in general circulation newspapers, during the two weeks preceding the vote by the legislative body or committee. In the case of state or local legislation, “highly publicized” means frequent coverage in the mass media that serve the State or local jurisdiction in question. Even where legislation receives frequent coverage, it is “highly publicized” only if the pendency of the legislation or the legislation's general terms, purpose, or effect are known to a significant segment of the general public (as opposed to the particular interest groups directly affected) in the area in which the paid mass media advertisement appears.
(iv) Examples. The special rule of this paragraph (b)(5) is illustrated by the following examples. The expenditure test election under section 501(h) is assumed to be in effect for all organizations discussed in the examples in this paragraph (b)(5)(iv):
Example 1.Organization X places a television advertisement advocating one of the President's major foreign policy initiatives, as outlined by the President in a series of speeches and as drafted into proposed legislation. The initiative is popularly known as “the President's World Peace Plan,” and is voted upon by the Senate four days after X's advertisement. The advertisement concludes: “SUPPORT THE PRESIDENT'S WORLD PEACE PLAN!” The President's plan and position are highly publicized during the two weeks before the Senate vote, as evidenced by: coverage of the plan on several nightly television network news program; more than one article about the plan on the front page of a majority of the country's ten largest daily general circulation newspapers; and an editorial about the plan in four of the country's ten largest daily general circulation newspapers. Although the advertisement does not encourage readers to contact legislators or other government officials, the advertisement does refer to specific legislation and reflect a view on the general subject of the legislation. The communication is presumed to be a grass roots lobbying communication.
Example 2.Assume the same facts as in Example (1), except that the advertisement appears three weeks before the Senate's vote on the plan. Because the advertisement appears more than two weeks before the legislative vote, the advertisement is not within the scope of the special rule for mass media communications on highly publicized legislation. Accordingly, the advertisement is a grass roots lobbying communication only if it is described in the general definition contained in paragraph (b)(2) of this section. Because the advertisement does not encourage recipients to take action with respect to the legislation in question, the advertisement is not a grass roots lobbying communication.
Example 3.Organization Y places a newspaper advertisement advocating increased government funding for certain public works projects the President has proposed and that are being considered by a legislative committee. The advertisement explains the President's proposals and concludes: “SUPPORT FUNDING FOR THESE VITAL PROJECTS!” The advertisement does not encourage readers to contact legislators or other government officials nor does it name any undecided legislators, but it does name the legislation being considered by the committee. The President's proposed funding of public works, however, is not highly publicized during the two weeks before the vote: there has been little coverage of the issue on nightly television network news programs, only one front-page article on the issue in the country's ten largest daily general circulation newspapers, and only one editorial about the issue in the country's ten largest daily general circulation newspapers. Two days after the advertisement appears, the committee votes to approve funding of the projects. Although the advertisement appears less than two weeks before the legislative vote, the advertisement is not within the scope of the special rule for mass media communications on highly publicized legislation because the issue of funding for public works projects is not highly publicized. Thus, the advertisement is a grass roots lobbying communication only if it is described in the general definition contained in paragraph (b)(2) of this section. Because the advertisement does not encourage recipients to take action with respect to the legislation in question, the advertisement is not a grass roots lobbying communication.
Example 4.Organization P places numerous advertisements in the mass media about a bill being considered by the State Assembly. The bill is highly publicized, as evidenced by numerous front-page articles, editorials and letters to the editor published in the state's general circulation daily newspapers, as well as frequent coverage of the bill by the television and radio stations serving the state. The advertisements run over a three week period and, in addition to showing pictures of a family being robbed at gunpoint, say: “The State Assembly is considering a bill to make gun ownership illegal. This outrageous legislation would violate your constitutional rights and the rights of other law-abiding citizens. If this legislation is passed, you and your family will be criminals if you want to exercise your right to protect yourselves.” The advertisements refer to and reflect a view on a specific bill but do not encourage recipients to take action. Sixteen days after the last advertisement runs, a State Assembly committee votes to defeat the legislation. None of the advertisements is a grass roots lobbying communication.
Example 5.Assume the same facts as in Example (4), except that it is publicly announced prior to the advertising campaign that the committee vote is scheduled for five days after the last advertisement runs. Because of public pressure resulting from the advertising campaign, the bill is withdrawn and no vote is ever taken. None of the advertisements is a grass roots lobbying communication.
(c) Exceptions to the definitions of direct lobbying communication and grass roots lobbying communication—(1) Nonpartisan analysis, study, or research exception—(i) In general. Engaging in nonpartisan analysis, study, or research and making available to the general public or a segment or members thereof or to governmental bodies, officials, or employees the results of such work constitute neither a direct lobbying communication under § 56.4911-2(b)(1) nor a grass roots lobbying communication under § 56.4911-2(b)(2).
(ii) Nonpartisan analysis, study, or research. For purposes of this section, “nonpartisan analysis, study, or research” means an independent and objective exposition of a particular subject matter, including any activity that is “educational” within the meaning of § 1.501(c)(3)-1(d)(3). Thus, “nonpartisan analysis, study, or research” may advocate a particular position or viewpoint so long as there is a sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion. The mere presentation of unsupported opinion, however, does not qualify as “nonpartisan analysis, study, or research”.
(iii) Presentation as part of a series. Normally, whether a publication or broadcast qualifies as “nonpartisan analysis, study, or research” will be determined on a presentation-by-presentation basis. However, if a publication or broadcast is one of a series prepared or supported by an electing organization and the series as a whole meets the standards of paragraph (c)(1)(ii) of this section, then any individual publication or broadcast within the series is not a direct or grass roots lobbying communication even though such individual broadcast or publication does not, by itself, meet the standards of paragraph (c)(1)(ii) of this section. Whether a broadcast or publication is considered part of a series will ordinarily depend upon all the facts and circumstances of each particular situation. However, with respect to broadcast activities, all broadcasts within any period of six consecutive months will ordinarily be eligible to be considered as part of a series. If an electing organization times or channels a part of a series which is described in this paragraph (c)(1)(iii) in a manner designed to influence the general public or the action of a legislative body with respect to a specific legislative proposal, the expenses of preparing and distributing such part of the analysis, study, or research will be expenditures for a direct or grass roots lobbying communications, as the case may be.
(iv) Making available results of nonpartisan analysis, study, or research. An organization may choose any suitable means, including oral or written presentations, to distribute the results of its nonpartisan analysis, study, or research, with or without charge. Such means include distribution of reprints of speeches, articles and reports; presentation of information through conferences, meetings and discussions; and dissemination to the news media, including radio, television and newspapers, and to other public forums. For purposes of this paragraph (c)(1)(iv), such communications may not be limited to, or be directed toward, persons who are interested solely in one side of a particular issue.
(v) Subsequent lobbying use of certain analysis, study or research. Even though certain analysis, study or research is initially within the exception for nonpartisan analysis, study or research, subsequent use of that analysis, study or research for grass roots lobbying may cause that analysis, study or research to be treated as a grass roots lobbying communication that is not within the exception for nonpartisan analysis, study or research. This paragraph (c)(1)(v) does not cause any analysis, study or research to be considered a direct lobbying communication. For rules regarding when analysis, study or research is treated as a grass roots lobbying communication that is not within the scope of the exception for nonpartisan analysis, study or research, see paragraph (b)(2)(v) of this section.
(vi) Directly encouraging action by recipients of a communication. A communication that reflects a view on specific legislation is not within the nonpartisan analysis, study, or research exception of this paragraph (c)(1) if the communication directly encourages the recipient to take action with respect to such legislation. For purposes of this section, a communication directly encourages the recipient to take action with respect to legislation if the communication is described in one or more of paragraphs (b)(2)(iii) (A) through (C) of this section. As described in paragraph (b)(2)(iv) of this section, a communication would encourage the recipient to take action with respect to legislation, but not directly encourage such action, if the communication does no more than specifically identify one or more legislators who will vote on the legislation as: opposing the communication's view with respect to the legislation; being undecided with respect to the legislation; being the recipient's representative in the legislature; or being a member of the legislative committee or subcommittee that will consider the legislation.
(vii) Examples. The provisions of this paragraph (c)(1) may be illustrated by the following examples:
Example 1.Organization M establishes a research project to collect information for the purpose of showing the dangers of the use of pesticides in raising crops. The information collected includes data with respect to proposed legislation, pending before several State legislatures, which would ban the use of pesticides. The project takes favorable positions on such legislation without producing a sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion on the pros and cons of the use of pesticides. This project is not within the exception for nonpartisan analysis, study, or research because it is designed to present information merely on one side of the legislative controversy.
Example 2.Organization N establishes a research project to collect information concerning the dangers of the use of pesticides in raising crops for the ostensible purpose of examining and reporting information as to the pros and cons of the use of pesticides in raising crops. The information is collected and distributed in the form of a published report which analyzes the effects and costs of the use and nonuse of various pesticides under various conditions on humans, animals and crops. The report also presents the advantages, disadvantages, and economic cost of allowing the continued use of pesticides unabated, of controlling the use of pesticides, and of developing alternatives to pesticides. Even if the report sets forth conclusions that the disadvantages as a result of using pesticides are greater than the advantages of using pesticides and that prompt legislative regulation of the use of pesticides is needed, the project is within the exception for nonpartisan analysis, study, or research since it is designed to present information on both sides of the legislative controversy and presents a sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion.
Example 3.Organization O establishes a research project to collect information on the presence or absence of disease in humans from eating food grown with pesticides and the presence or absence of disease in humans from eating food not grown with pesticides. As part of the research project, O hires a consultant who prepares a “fact sheet” which calls for the curtailment of the use of pesticides and which addresses itself to the merits of several specific legislative proposals to curtail the use of pesticides in raising crops which are currently pending before State Legislatures. The “fact sheet” presents reports of experimental evidence tending to support its conclusions but omits any reference to reports of experimental evidence tending to dispute its conclusions. O distributes ten thousand copies to citizens' groups. Expenditures by O in connection with this work of the consultant are not within the exception for nonpartisan analysis, study, or research.
Example 4.P publishes a bi-monthly newsletter to collect and report all published materials, ongoing research, and new developments with regard to the use of pesticides in raising crops. The newsletter also includes notices of proposed pesticide legislation with impartial summaries of the provisions and debates on such legislation. The newsletter does not encourage recipients to take action with respect to such legislation, but is designed to present information on both sides of the legislative controversy and does present such information fully and fairly. It is within the exception for nonpartisan analysis, study, or research.
Example 5.X is satisfied that A, a member of the faculty of Y University, is exceptionally well qualified to undertake a project involving a comprehensive study of the effects of pesticides on crop yields. Consequently, X makes a grant to A to underwrite the cost of the study and of the preparation of a book on the effect of pesticides on crop yields. X does not take any position on the issues or control the content of A's output. A produces a book which concludes that the use of pesticides often has a favorable effect on crop yields, and on that basis argues against pending bills which would ban the use of pesticides. A's book contains a sufficiently full and fair exposition of the pertinent facts, including known or potential disadvantages of the use of pesticides, to enable the public or an individual to form an independent opinion or conclusion as to whether pesticides should be banned as provided in the pending bills. The book does not directly encourage readers to take action with respect to the pending bills. Consequently, the book is within the exception for nonpartisan analysis, study, or research.
Example 6.Assume the same facts as Example (2), except that, instead of issuing a report, X presents within a period of 6 consecutive months a two-program television series relating to the pesticide issue. The first program contains information, arguments, and conclusions favoring legislation to restrict the use of pesticides. The second program contains information, arguments, and conclusions opposing legislation to restrict the use of pesticides. The programs are broadcast within 6 months of each other during commensurate periods of prime time. X's programs are within the exception for nonpartisan analysis, study, or research. Although neither program individually could be regarded as nonpartisan, the series of two programs constitutes a balanced presentation.
Example 7.Assume the same facts as in Example (6), except that X arranged for televising the program favoring legislation to restrict the use of pesticides at 8:00 on a Thursday evening and for televising the program opposing such legislation at 7:00 on a Sunday morning. X's presentation is not within the exception for nonpartisan analysis, study, or research, since X disseminated its information in a manner prejudicial to one side of the legislative controversy.
Example 8.Organization Z researches, writes, prints and distributes a study on the use and effects of pesticide X. A bill is pending in the U.S. Senate to ban the use of pesticide X. Z's study leads to the conclusion that pesticide X is extremely harmful and that the bill pending in the U.S. Senate is an appropriate and much needed remedy to solve the problems caused by pesticide X. The study contains a sufficiently full and fair exposition of the pertinent facts, including known or potential advantages of the use of pesticide X, to enable the public or an individual to form an independent opinion or conclusion as to whether pesticides should be banned as provided in the pending bills. In its analysis of the pending bill, the study names certain undecided Senators on the Senate committee considering the bill. Although the study meets the three part test for determining whether a communication is a grass roots lobbying communication, the study is within the exception for nonpartisan analysis, study or research, because it does not directly encourage recipients of the communication to urge a legislator to oppose the bill.
Example 9.Assume the same facts as in Example (8), except that, after stating support for the pending bill, the study concludes: “You should write to the undecided committee members to support this crucial bill.” The study is not within the exception for nonpartisan analysis, study or research because it directly encourages the recipients to urge a legislator to support a specific piece of legislation.
Example 10. Organization X plans to conduct a lobbying campaign with respect to illegal drug use in the United States. It incurs $5,000 in expenses to conduct research and prepare an extensive report primarily for use in the lobbying campaign. Although the detailed report discusses specific pending legislation and reaches the conclusion that the legislation would reduce illegal drug use, the report contains a sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent conclusion regarding the effect of the legislation. The report does not encourage readers to contact legislators regarding the legislation. Accordingly, the report does not, in and of itself, constitute a lobbying communication.
Copies of the report are available to the public at X's office, but X does not actively distribute the report or otherwise seek to make the contents of the report available to the general public. Whether or not X's distribution is sufficient to meet the requirement in § 56.4911-2(c)(1)(iv) that a nonpartisan communication be made available, X's distribution is not substantial (for purposes of § 56.4911-2(b)(2)(v)(E)) in light of all of the facts and circumstances, including the normal distribution pattern of similar nonpartisan reports. X then mails copies of the report, along with a letter, to 10,000 individuals on X's mailing list. In the letter, X requests that individuals contact legislators urging passage of the legislation discussed in the report. Because X's research and report were primarily undertaken by X for lobbying purposes and X did not make a substantial distribution of the report (without an accompanying lobbying message) prior to or contemporaneously with the use of the report in lobbying, the report is a grass roots lobbying communication that is not within the exception for nonpartisan analysis, study or research.
Example 11.Assume the same facts as in Example (10), except that before using the report in the lobbying campaign, X sends the research and report (without an accompanying lobbying message) to universities and newspapers. At the same time, X also advertises the availability of the report in its newsletter. This distribution is similar in scope to the normal distribution pattern of similar nonpartisan reports. In light of all of the facts and circumstances, X's distribution of the report is substantial. Because of X's substantial distribution of the report, X's primary purpose will be considered to be other than for use in lobbying and the report will not be considered a grass roots lobbying communication. Accordingly, only the expenditures for copying and mailing the report to the 10,000 individuals on X's mailing list, as well as for preparing and mailing the letter, are expenditures for grass roots lobbying communications.
Example 12.Organization M pays for a bumper sticker that reads: “STOP ABORTION: Vote NO on Prop. X!” M also pays for a 30-second television advertisement and a billboard that similarly advocate opposition to Prop. X. In light of the limited scope of the communications, none of the communications is within the exception for nonpartisan analysis, study or research. First, none of the communications rises to the level of analysis, study or research. Second, none of the communications is nonpartisan because none contains a sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion. Thus, each communication is a direct lobbying communication.
(2) Examinations and discussions of broad social, economic, and similar problems. Examinations and discussions of broad social, economic, and similar problems are neither direct lobbying communications under § 56.4911-2(b)(1) nor grass roots lobbying communications under § 56.4911-2(b)(2) even if the problems are of the type with which government would be expected to deal ultimately. Thus, under §§ 56.4911-2(b) (1) and (2), lobbying communications do not include public discussion, or communications with members of legislative bodies or governmental employees, the general subject of which is also the subject of legislation before a legislative body, so long as such discussion does not address itself to the merits of a specific legislative proposal and so long as such discussion does not directly encourage recipients to take action with respect to legislation. For example, this paragraph (c)(2) excludes from grass roots lobbying under § 56.4911-2(b)(2) an organization's discussions of problems such as environmental pollution or population growth that are being considered by Congress and various State legislatures, but only where the discussions are not directly addressed to specific legislation being considered, and only where the discussions do not directly encourage recipients of the communication to contact a legislator, an employee of a legislative body, or a government official or employee who may participate in the formulation of legislation.
(3) Requests for technical advice. A communication is not a direct lobbying communication under § 56.4911-2(b)(1) if the communication is the providing of technical advice or assistance to a governmental body, a governmental committee, or a subdivision of either in response to a written request by the body, committee, or subdivision, as set forth in § 53.4945-2(d)(2).
(4) Communications pertaining to “self-defense” by the organization. A communication is not a direct lobbying communication under § 56.4911-2(b)(1) if either:
(i) The communication is an appearance before, or communication with, any legislative body with respect to a possible action by the body that might affect the existence of the electing public charity, its powers and duties, its tax-exempt status, or the deductibility of contributions to the organization, as set forth in § 53.4945-2(d)(3);
(ii) The communication is by a member of an affiliated group of organizations (within the meaning of § 56.4911-7(e)), and is an appearance before, or communication with, a legislative body with respect to a possible action by the body that might affect the existence of any other member of the group, its powers and duties, its tax-exempt status, or the deductibility of contributions to it;
(iii) The communication is by an electing public charity more than 75 percent of the members of which are other organizations that are described in section 501(c)(3), and is an appearance before, or communication with, any legislative body with respect to a possible action by the body which might affect the existence of one or more of the section 501(c)(3) member organizations, their powers, duties, or tax-exempt status, or the deductibility (under section 170) of contributions to one or more of the section 501(c)(3) member organizations, but only if the principal purpose of the appearance or communication is to defend the section 501(c)(3) member organizations (rather than the non-section 501(c)(3) member organizations); or
(iv) The communication is by an electing public charity that is a member of a limited affiliated group or organizations under § 56.4911-10, and is an appearance before, or communication with, the Congress of the United States with respect to a possible action by the Congress that might affect the existence of any member of the limited affiliated group, its powers and duties, tax-exempt status, or the deductibility of contributions to it.
(v) Under the self-defense exception of paragraphs (c)(4) (i) through (iv) of this section, a charity may communicate with an entire legislative body, with committees or subcommittees of a legislative body, with individual legislators, with legislative staff members, or with representatives of the executive branch who are involved with the legislative process, so long as such communication is limited to the prescribed subjects. Similarly, under the self-defense exception, a charity may make expenditures in order to initiate legislation if such legislation concerns only matters which might affect the existence of the charity, its powers and duties, its tax-exempt status, or the deductibility of contributions to such charity. For examples illustrating the application and scope of the self-defense exception of this paragraph (c)(4), see § 53.4945-2(d)(3)(ii).
(d) Definitions. For purposes of section 4911 and the regulations thereunder—
(1) Legislation—(i) In general. “Legislation” includes action by the Congress, any state legislature, any local council, or similar legislative body, or by the public in a referendum, ballot initiative, constitutional amendment, or similar procedure. “Legislation” includes a proposed treaty required to be submitted by the President to the Senate for its advice and consent from the time the President's representative begins to negotiate its position with the prospective parties to the proposed treaty.
(ii) Definition of specific legislation. For purposes of paragraphs (b)(1) and (b)(2) of this section, “specific legislation” includes both legislation that has already been introduced in a legislative body and a specific legislative proposal that the organization either supports or opposes. In the case of a referendum, ballot initiative, constitutional amendment, or other measure that is placed on the ballot by petitions signed by a required number or percentage of voters, an item becomes “specific legislation” when the petition is first circulated among voters for signature.
(iii) Examples. The terms “legislation” and “specific legislation” are illustrated using the following examples:
Example 1.A nonmembership organization includes in its newsletter an article about problems with the use of pesticide X that states in part: “Legislation that is pending in Congress would prohibit the use of this very dangerous pesticide. Fortunately, the legislation will probably be passed. Write your congressional representatives about this important issue.” This is a grass roots lobbying communication that refers to and reflects a view on specific legislation and that encourages recipients to take action with respect to that legislation.
Example 2.An organization based in State A notes in its newsletter that State Z has passed a bill to accomplish a stated purpose and then says that State A should pass such a bill. The organization urges readers to write their legislators in favor of such a bill. No such bill has been introduced into the State A legislature. The organization has referred to and reflected a view on a specific legislative proposal and has also encouraged readers to take action thereon.
(2) Action. The term “action” in paragraph (d)(1)(i) of this section is limited to the introduction, amendment, enactment, defeat or repeal of Acts, bills, resolutions, or similar items.
(3) Legislative body. “Legislative body” does not include executive, judicial, or administrative bodies.
(4) Administrative bodies. “Administrative bodies” includes school boards, housing authorities, sewer and water districts, zoning boards, and other similar Federal, State, or local special purpose bodies, whether elective or appointive. Thus, for example, for purposes of section 4911, the term “any attempt to influence any legislation” does not include attempts to persuade an executive body or department to form, support the formation of, or to acquire property to be used for the formation or expansion of, a public park or equivalent preserves (such as public recreation areas, game, or forest preserves, and soil demonstration areas) established or to be established by act of Congress, by executive action in accordance with an act of Congress, or by a State, municipality or other governmental unit described in section 170(c)(1), as compared with attempts to persuade a legislative body, a member thereof, or other governmental official or employee, to promote the appropriation of funds for such an acquisition or other legislative authorization of such an acquisition. Therefore, for example, an organization would not be influencing legislation for purposes of section 4911, if it proposed to a Park Authority that it purchase a particular tract of land for a new park, even though such an attempt would necessarily require the Park Authority eventually to seek appropriations to support a new park. However, in such a case, the organization would be influencing legislation, for purposes of section 4911, if it provided the Park Authority with a proposed budget to be submitted to a legislative body, unless such submission is described by one of the exceptions set forth in paragraph (c) of this section.
§ 56.4911-3 Expenditures for direct and/or grass roots lobbying communications.
(a) Definition of term “expenditures for”—(1) In general. This § 56.4911-3 contains allocation rules regarding what portion of a lobbying communication's costs is a direct lobbying expenditure, what portion is a grass roots expenditure and what portion is, in certain cases, a nonlobbying expenditure. Except as otherwise indicated in this paragraph (a), all costs of preparing a direct or grass roots lobbying communication are included as expenditures for direct or grass roots lobbying. Expenditures for a direct or grass roots lobbying communication (“lobbying expenditures”) include amounts paid or incurred as current or deferred compensation for an employee's services attributable to the direct or grass roots lobbying communication, and the allocable portion of administrative, overhead, and other general expenditures attributable to the direct or grass roots lobbying communication. For example, except as otherwise provided in this paragraph (a), all expenditures for researching, drafting, reviewing, copying, publishing and mailing a direct or grass roots lobbying communication, as well as an allocable share of overhead expenses, are included as expenditures for direct or grass roots lobbying.
(2) Allocation of mixed purpose expenditures—(i) Nonmembership communications. Except as provided in paragraph (a)(2)(ii) of this section, lobbying expenditures for a communication that also has a bona fide nonlobbying purpose must include all costs attributable to those parts of the communication that are on the same specific subject as the lobbying message. All costs attributable to those parts of the communication that are not on the same specific subject as the lobbying message are not included as lobbying expenditures for allocation purposes. Whether or not a portion of a communication is on the same specific subject as the lobbying message will depend on the surrounding facts and circumstances. In general, a portion of a communication will be on the same specific subject as the lobbying message if that portion discusses an activity or specific issue that would be directly affected by the specific legislation that is the subject of the lobbying message. Moreover, discussion of the background or consequences of the specific legislation, or discussion of the background or consequences of an activity or specific issue affected by the specific legislation, is also considered to be on the same specific subject as the lobbying communication.
(ii) Membership communications. In the case of lobbying expenditures for a communication that also has a bona fide nonlobbying purpose and that is sent only or primarily to members, an electing public charity must make a reasonable allocation between the amount expended for the lobbying purpose and the amount expended for the nonlobbying purpose. An electing public charity that includes as a lobbying expenditure only the amount expended for the specific sentence or sentences that encourage the recipient to take action with respect to legislation has not made a reasonable allocation. For purposes of this paragraph, a communication is sent only or primarily to members if more than half of the recipients of the communication are members of the electing public charity making the communication within the meaning of § 56.4911-5. See § 56.4911-5 for separate rules on communications sent only or primarily to members. Nothing in this paragraph (a) shall change any allocation required by § 56.4911-5.
(3) Allocation of mixed lobbying. If a communication (to which § 56.4911-5 does not apply) is both a direct lobbying communication and a grass roots lobbying communication, the communication will be treated as a grass roots lobbying communication except to the extent that the electing public charity demonstrates that the communication was made primarily for direct lobbying purposes, in which case a reasonable allocation shall be made between the direct and the grass roots lobbying purposes served by the communication.
(b) Examples. The provisions of paragraph (a) of this section are illustrated by the following examples. Except where otherwise explicitly stated, the expenditure test election under section 501(h) is assumed to be in effect for all organizations discussed in the examples in this paragraph (b). See § 56.4911-5 for special rules applying to the member communications described in some of the following examples.
Example 1.Organization R makes the services of E, one of its paid executives, available to S, an organization described in section 501(c)(4) of the Code. E works for several weeks to assist S in developing materials that urge voters to contact their congressional representatives to indicate their support for specific legislation. In performing this work, E uses office space and clerical assistance provided by R. R pays full salary and benefits to E during this period and receives no reimbursement from S for these payments or for the other facilities and assistance provided. All expenditures of R, including allocable office and overhead expenses, that are attributable to this assignment are grass roots expenditures because E was engaged in an attempt to influence legislation.
Example 2.An organization distributes primarily to nonmembers a pamphlet with two articles on unrelated subjects. The total cost of preparing, printing and mailing the pamphlet is $11,000, $1,000 for preparation and $10,000 for printing and mailing. The cost of preparing one article, a nonlobbying communication, is $600. The article is printed on three of the four pages in the pamphlet. The cost of preparing the second article, a grassroots lobbying communication that addresses only one specific subject, is $400. This article is printed on one page of the four page pamphlet. In this situation, $400 of preparation costs and $2,500 (25% of $10,000) of printing and mailing costs are expenditures for a grass roots lobbying communication.
Example 3.Assume the same facts as in Example (2), except that the pamphlet is distributed only to members. In addition, assume the second article states that the recipient members should contact their congressional representatives. The organization allocates $400 of preparation costs and $2,500 of printing and mailing costs as expenditures for direct lobbying (see § 56.4911-5(c)). The allocation is reasonable for purposes of § 56.4911-3(a)(2)(ii).
Example 4.Organization J places a full-page advertisement in a newspaper. The advertisement urges passage of pending legislation to build three additional nuclear powered submarines, and states that readers should write their Congressional representatives in favor of the legislation. The advertisement also provides a general description of J's purposes and activities, invites readers to become members of J and asks readers to contribute money to J. Except for the cost of the portion of the advertisement describing J's purposes and activities and the portion specifically seeking members and contributions, the entire cost of the advertisement is an expenditure for a grass roots lobbying communication, because the entire advertisement, except for the lines specifically describing J and specifically seeking members and contributions, is on the same specific subject as the grass roots lobbying message.
Example 5.Assume the same facts as in Example (4), except that J places in the newspaper two separate half-page advertisements instead of one full-page advertisement. One of the two advertisements discusses the need for three additional nuclear powered submarines and urges readers to write their Congressional representatives in favor of the pending legislation to build the three submarines. The other advertisement contains only the membership and fundraising appeals, along with a general description of J's purposes and activities. The half-page advertisement urging readers to write to Congress is a grass roots lobbying communication and all of J's expenditures for producing and placing that advertisement are expenditures for a grass roots lobbying communication. J's expenditures for the other half-page advertisement are not expenditures for a grass roots or direct lobbying communication.
Example 6.Assume the same facts as in Example (4), except that the communication by J is in a letter mailed only to members of J, rather than in newspaper advertisement, and the invitation to become a member of J is an invitation to join a new membership category. In addition, assume that the communication states that the member recipients should ask nonmembers to write their Congressional representatives. J allocates one-half of the cost of the mailing as an expenditure for a grass roots lobbying communication (see § 56.4911-5(d)). Because the communication had both bona fide nonlobbying (e.g., membership solicitation and fundraising) purposes as well as lobbying purposes, J's allocation of one-half of the cost of the communication to grass roots lobbying and one-half to nonlobbying is reasonable for purposes of § 56.4911-3(a)(2)(ii).
Example 7.A particular monthly issue of organization X's newsletter, which is distributed mainly to nonmembers of X, has three articles of equal length. The first article is a grass roots lobbying communication, the sole specific subject of which is pending legislation to help protect seals from being slaughtered in certain foreign countries. The second article discusses the rapid decline in the world's whale population, particularly because of the illegal hunting of whales by foreign countries. The third article deals with air pollution and the acid rain problem in North America. Because the first article is a grass roots lobbying communication, all of the costs allocable to that article (e.g., one-third of the newsletter's printing and mailing costs) are lobbying expenditures. The second article is not a lobbying communication and the pending legislation relating to seals addressed in the first article does not affect the illegal whale hunting activities. Because the second and third articles are not lobbying communications and are also not on the same specific subject as the first article, no portion of the costs attributable to those articles is a grass roots lobbying expenditure.
Example 8.Organization T, a nonmembership organization, prepares a three page document that is mailed to 3,000 persons on T's mailing list. The first two pages of the three page document, titled “The Need for Child Care,” support the need for additional child care programs, and include statistics on the number of children living in homes where both parents work or in homes with a single parent. The two pages also make note of the inadequacy of the number of day care providers to meet the needs of these parents. The third page of the document, titled “H.R. 1,” indicates T's support of H.R. 1, a bill pending in the U.S. House of Representatives. The document states that H.R. 1 will provide for $10,000,000 in additional subsidies to child care providers, primarily for those providers caring for lower income children. The third page of the document also notes that H.R. 1 includes new federal standards regulating the quality of child care providers. The document ends with T's request that recipients contact their congressional representative in support of H.R. 1. The entire three page document is on the same specific subject, and, therefore, all expenditures of preparing and distributing the three page document are grass roots lobbying expenditures.
Example 9.Assume the same facts as in Example (8), except that the document has a fourth page. The fourth page does not refer to the general need for child care or the specific need for additional child care providers. Instead, the fourth page advocates that a particular federal agency commence, under its existing statutory authority, licensing of day care providers in order to promote safe and effective child care. The cost of the fourth page is not a lobbying expenditure.
Example 10.Assume the same facts as in Example (8), except that T is a membership organization, 75 percent of the recipients of the three page document are members of T, and 25 percent of the recipients are nonmembers and are not subscribers within the meaning of § 56.4911-5(f)(5). Assume also that the document states that readers should write to Congress, but does not state that the readers should urge nonmembers to write to Congress. T treats the document as having a bona fide nonlobbying purpose, the purpose of educating its members about the need for child care. Accordingly, T allocates one-half of the cost of preparing and distributing the document as a lobbying expenditure (see § 56.4911-5(e)(2)(i)), of which 75 percent is a direct lobbying expenditure (see § 56.4911-5(e)(2)(iii)) and 25 percent is a grass roots lobbying expenditure (see § 56.4911-5(e)(2)(ii)). The remaining one-half is allocated as a nonlobbying expenditure. T's allocation is reasonable for purposes of § 56.4911-3(a)(2)(ii) and is correct for purposes of § 56.4911-5(e).
Example 11.Assume the same facts as in Example (10), except that T allocates one percent of the cost of preparing and distributing the document as a lobbying expenditure (for purposes of § 56.4911-5(e)(2)) and 99 percent as a nonlobbying expenditure. T's allocation is based upon the fact that out of 200 lines in the document, only two lines state that the recipient should contact legislators about the pending legislation. T's allocation is unreasonable for purposes of § 56.4911-3(a)(2)(ii).
Example 12.Organization F, a nonmembership organization, sends a one page letter to all persons on its mailing list. The only subject of the letter is the organization's opposition to a pending bill allowing private uses of certain national parks. The letter requests recipients to send letters opposing the bill to their congressional representatives. A second one page letter is sent in the same envelope. The second letter discusses the broad educational activities and publications of the organization in all areas of environmental protection and ends by requesting the recipient to make a financial contribution to organization F. Since the separate second letter is on a different subject from the lobbying letter, and the letters are of equal length, 50 percent of the mailing costs must be allocated as an expenditure for a grass roots lobbying communication.
Example 13.Assume the same facts as in Example (12), except that F is a membership organization and the letters in question are sent primarily (90 percent) to members. The other 10 percent of the recipients are nonmembers and are not subscribers within the meaning of § 56.4911-5(f)(5). Assume also that the first letter does not state that readers should urge nonmembers to write to legislators. F allocates one-half of the mailing costs as a lobbying expenditure, of which 90 percent is a direct lobbying expenditure and 10 percent is a grass roots lobbying expenditure (see § 56.4911-5(e)(2)). F's allocation is reasonable for purposes of § 56.4911-3(a)(2)(ii) and is correct for purposes of § 56.4911-5.
(c) Certain transfers treated as lobbying expenditures—(1) Transfer earmarked for grass roots purposes. A transfer is a grass roots expenditure to the extent that it is earmarked (as defined in § 56.4911-4(f)(4)) for grass roots lobbying purposes and is not described in § 56.4911-4(e).
(2) Transfer earmarked for direct and grass roots lobbying. A transfer that is earmarked for direct lobbying purposes or for direct lobbying and grass roots lobbying purposes is treated as a grass roots expenditure in full except to the extent the transferor demonstrates that all or part of the amounts transferred were expended for direct lobbying purposes, in which case that part of the amounts transferred is a direct lobbying expenditure by the transferor. This paragraph (c)(2) shall not apply to any expenditure described in § 56.4911-4(e).
(3) Certain transfers to noncharities that lobby—(i) Limited application of paragraph (c)(3)—(A) In general. This paragraph (c)(3) applies only to transfers for less than fair market value from an electing public charity to any noncharity that makes lobbying expenditures. A noncharity is any entity that is not described in section 501(c)(3). In order for this paragraph to apply, the electing public charity must transfer to a noncharity more in value than it receives in return. For example, this paragraph does not apply to an electing public charity's fair market value payment of rent to a landlord. However, this paragraph does apply where an electing public charity and a noncharity share office space and the electing public charity pays more than fair market value rent to the noncharity. Similarly, this paragraph applies where an electing public charity sells goods or services to a noncharity for less than fair market value. See paragraphs (c)(3)(i) (B), (C) and (D) of this section for exceptions where non-fair market value transfers are not covered by this paragraph (c)(3). See paragraph (c)(3)(i)(E) of this section to determine the amount of any non-fair market value transfer covered by this paragraph (c)(3). See paragraph (c)(3)(ii) of this section for the rules that apply to transfers governed by this paragraph (c)(3).
(B) Exception for controlled grants. Notwithstanding paragraph (c)(3)(i)(A) of this section, this paragraph (c)(3) does not apply where an electing public charity makes a grant to a noncharity that is a controlled grant (as defined in § 56.4911-4(f)(3)).
(C) Exception for transfers that artificially inflate exempt purpose expenditures. Notwithstanding paragraph (c)(3)(i)(A) of this section, this paragraph (c)(3) does not apply where an electing public charity makes a grant to a noncharity that is an expenditure described in § 56.4911-4(e) (relating to grants that artificially inflate exempt purpose expenditures).
(D) Exception for substantially related activity. Notwithstanding paragraph (c)(3)(i)(A) of this section, this paragraph (c)(3) does not apply where an electing public charity, in the course of an activity that is substantially related to the accomplishment of the electing public charity's exempt purposes, makes goods or services widely available for less than fair market value to individual members of the general public and those goods or services are actually purchased (or consumed for no charge) by a substantial number of wholly unrelated individual members of the general public for less than fair market value. For purposes of the preceding sentence, the term “individual member of the general public” does not include any person or entity directly or indirectly affiliated with the electing public charity in question. The following example illustrates this paragraph (c)(3)(i)(D):
Example.Organization P is an educational organization dedicated to preserving the environment. One of P's activities is educating the public about the benefits of installing cost-effective passive solar energy systems, thereby helping to preserve the environment. P charges for its extensive literature and advice, but the charges are less than the fair market value of the literature and advice. P makes its literature and advice widely available to individual members of the general public by advertising in various media and by pamphlets distributed in various areas. P annually provides its literature and advice for less than fair market value to 500 wholly unrelated families, businesses, and tax-exempt organizations. Several of the businesses and tax-exempt organizations make lobbying expenditures within the meaning of section 4911. P's provision of its goods and services to these entities is not covered by this paragraph (c)(3) (and thus does not give rise to a lobbying expenditure by P under paragraph (c)(3)(ii)).
(E) Determination of amount of transfer governed by paragraph (c)(3). Where an electing public charity receives nothing of value in return for its transfer, the amount of the transfer governed by this paragraph (c)(3) is the greater of the fair market value or the cost of the goods or services transferred to the noncharity. Where the noncharity transfers something of value to the electing public charity in return for the charity's transfer, but that payment is less than the fair market value of the charity's transfer to the noncharity, the amount of the transfer governed by this paragraph (c)(3) is the excess of: first, the greater of the fair market value or cost of the goods or services transferred to the noncharity over, second, the value of the amount transferred to the charity. For example, if an electing public charity transfers $10,000 of goods and services to a noncharity that makes lobbying expenditures in return for payment by the noncharity of $2,000, the amount of the transfer governed by this paragraph (c)(3) is $8,000.
(ii) Rules governing transfers to which paragraph (c)(3) applies. A transfer to which this paragraph (c)(3) applies is treated in whole or in part as a grass roots and/or direct lobbying expenditure by the transferor in accordance with paragraphs (c)(3)(ii) (A), (B) and (C) of this section. In applying those paragraphs, the expenditures of the transferee will be determined as if the regulations under section 4911 applied to the transferee. This paragraph (c)(3) discusses only when certain transfers are lobbying expenditures by the transferor. This paragraph does not address other issues that may arise when an electing public charity makes a noncontrolled grant to a noncharity. Nothing in this paragraph (c)(3) shall be used to interpret issues relating to noncontrolled grants by charities to noncharities, such as whether the noncontrolled grant is consistent with the continued tax-exempt status of the electing public charity.
(A) Transfers treated as grass roots expenditures. The transfer is treated as a grass roots expenditure to the extent of the lesser of two amounts: The amount of the transfer and the amount of the transferee's grass roots expenditures.
(B) Transfers treated as direct lobbying expenditures. If the transfer is greater than the transferee's grass roots expenditures, the excess is treated as a direct lobbying expenditure, but only to the extent of the transferee's direct lobbying expenditures. (If, however, the transfer is less than the transferee's grass roots expenditures, none of the transfer is a direct lobbying expenditure.)
(C) Transfers treated as nonlobbying. If the transfer is greater than the sum of the transferee's grass roots and direct lobbying expenditures, the excess of the transfer over those lobbying expenses is not a lobbying expenditure.
(iii) Example. The following example illustrates the application of this paragraph (c)(3):
Example.Organization C, an electing public charity, shares employee E with N, a noncharity that makes lobbying expenditures. N's grass roots expenditures are $5,000 and its direct lobbying expenditures are $25,000. Each organization pays one-half of the $100,000 in direct and overhead costs associated with E. E devotes one-quarter of his time to C and three-quarters of his time to N. In substance, this arrangement is a transfer (for less than fair market value) from C to N in the amount of $25,000 (one-quarter of the $100,000 of direct and overhead costs associated with E's work). Accordingly, C is treated as having made a $5,000 grass roots expenditure (the lesser of N's grass roots expenditures ($5,000) or the amount of the transfer ($25,000)). C is also treated as having made a $20,000 direct lobbying expenditure (the lesser of N's direct lobbying expenditures ($25,000) or the remaining amount of the transfer ($20,000)).
§ 56.4911-4 Exempt purpose expenditures.
(a) Application. This section provides rules under section 4911(e) for determining an electing public charity's “exempt purpose expenditures” for a taxable year for purposes of section 4911(c)(2) and § 56.4911-1(c)(2). Those two sections generally define an electing public charity's lobbying limit (lobbying nontaxable amount) as a sliding scale percentage of the organization's exempt purpose expenditures. In determining an electing public charity's exempt purpose expenditures, no expenditure shall be counted twice by an organization.
(b) Included expenditures. Amounts paid or incurred by an organization that are exempt purpose expenditures include—
(1) Amounts paid or incurred to accomplish a purpose enumerated in section 170(c)(2)(B), including (but not limited to) the amount of any transfer made by the organization (other than a transfer described in paragraph (e) of this section) to another organization to accomplish the transferor's exempt purposes, and including amounts expended by an organization out of transfers (other than a transfer described in paragraph (e) of this section) for which the organization is the transferee,
(2) Amounts paid or incurred as current or deferred compensation for an employee's services for a purpose enumerated in section 170(c)(2)(B),
(3) The allocable portion of administrative overhead, and other general expenditures attributable to the accomplishment of a purpose enumerated in section 170(c)(2)(B),
(4) Lobbying expenditures (as defined in § 56.4911-2(a)) whether or not for a purpose enumerated in section 170(c)(2)(B),
(5) Amounts paid or incurred for activities described in § 56.4911-2(c),
(6) Amounts paid or incurred for activities described in § 56.4811-5 that are not lobbying expenditures,
(7) A reasonable allowance for exhaustion, wear and tear, obsolescence or amortization, of assets to the extent used for one or more of the purposes described in paragraphs (b)(1) through (6) of this section, computed on a straight-line basis (for this purpose, an allowance for depreciation will be treated as reasonable if based on a useful life that would satisfy section 321(k)(3)(A) as in effect on January 1, 1985), and
(8) Fundraising expenditures (but see section 4911(e)(1)(C) and paragraphs (c)(3) and (4) of this section.)
(c) Excluded expenditures. Notwithstanding paragraph (b) of this section, exempt purpose expenditures do not include—
(1) Amounts paid or incurred that are neither expenditures to accomplish a purpose enumerated in section 170(c)(2)(B), lobbying expenditures (as defined in § 56.4911-2(a)), nor expenditures described in paragraph (b)(5), (6) or (8) of this section,
(2) The amounts of any transfer described in paragraph (e) of this section,
(3) Amounts paid to or incurred for a separate fundraising unit (as defined in paragraph (f)(2) of this section) of an organization or of an affiliated organization (see § 56.4911-7(a)),
(4) Amounts paid to or incurred for any person not an employee, or any organization not an affiliated organization, if paid or incurred primarily for fundraising, but only if such person or organization engages in fundraising, fundraising counselling or the provision of similar advice or services,
(5) Amounts paid or incurred that are properly chargeable to a capital account, determined in accordance with the principles that apply under section 263 or, as applicable, section 263A, with respect to an unrelated trade or business,
(6) Amounts paid or incurred for a tax that is not imposed in connection with the organization's efforts to accomplish a purpose described in section 170(c)(2)(B), such as taxes imposed under sections 511(a)(1) and 4911(a), and
(7) Amounts paid or incurred for the production of income. For purposes of this section, amounts are paid or incurred for the production of income if they are paid or incurred for a purpose or activity that is not substantially related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exercise or performance by the organization of its charitable, educational or other purpose or function constituting the basis for its exemption under section 501. For example, the costs of managing an endowment are amounts that are paid or incurred for the production of income and are thus not exempt purpose expenditures. Fundraising expenditures are not, for purposes of this section, amounts that are paid or incurred for the production of income. Instead, the determination of whether fundraising costs are exempt purpose expenditures must be made with reference to section 4911(e)(1)(C) and paragraphs (b)(8), (c)(3) and (c)(4) of this section.
(d) Certain transfers treated as exempt purpose expenditures—(1) An organization's transfer will be treated as an exempt purpose expenditure under paragraph (b)(1) of this section if it is—
(i) Described in either paragraph (d)(2) or (d)(3) of this section, and
(ii) Not described in paragraph (e) of this section.
(2) A transfer is described in this paragraph (d)(2) if it is made to an organization described in section 501(c)(3) in furtherance of the transferor's exempt purposes and is not earmarked for any purpose other than a purpose described in section 170(c)(2)(B). Thus, a payment of dues by a local or state organization to, respectively, a state or national organization that is described in section 501(c)(3) is considered an exempt purpose expenditure of the transferor to the extent it is not otherwise earmarked.
(3) A transfer is described in this paragraph (d)(3) if it is a controlled grant (as defined in paragraph (f)(3) of this section), but only to the extent of the amounts that are paid or incurred by the transferee that would be exempt purpose expenditures if paid or incurred by the transferor.
(e) Transfers not exempt purpose expenditures—(1) An organization's transfer is described in this paragraph (e) if it is described in one of paragraphs (e)(2) through (e)(4).
(2) A transfer is described in this paragraph (e)(2) if it is made to a member of any affiliated group (as defined in § 56.4911-7(e)) of which the transferor is a member.
(3) A transfer is described in this paragraph (e)(3) if the Commissioner determines that the transfer artificially inflates the amount of the transferor's or transferee's exempt purpose expenditures. In general, the Commissioner will make that determination if a substantial purpose of a transfer is to inflate those exempt purpose expenditures. A transfer described in this paragraph will not be considered an exempt purpose expenditure of the transferor, but will be an exempt purpose expenditure of the transferee to the extent that the transferee expends the transfer in the active conduct of its charitable activities or attempts to influence legislation. Standards similar to those found in § 53.4942(b)-1(b) may be applied in determining whether the transferee has expended amounts in the “active conduct” of its charitable activities or attempts to influence legislation.
(4) A transfer is described in this paragraph (e)(4) if it is not a controlled grant and is made to an organization not described in section 501(c)(3) that does not attempt to influence legislation.
(f) Definitions—(1) For purposes of paragraph (c) of this section, “fundraising” includes—
(i) Soliciting dues or contributions from members of the organization, from persons whose dues are in arrears, or from the general public,
(ii) Soliciting grants from businesses or other organizations, including organizations described in section 501(c)(3), or
(iii) Soliciting grants from a governmental unit referred to in section 170(c)(1), or any agency or instrumentality thereof.
(2) For purposes of paragraph (c) of this section, a separate fundraising unit of any organization must consist of either two or more individuals a majority of whose time is spent on fundraising for the organization, or any separate accounting unit of the organization that is devoted to fundraising. For purposes of paragraph (c) of this section, amounts paid to or incurred for a separate fundraising unit include all amounts incurred for the creation, production, copying, and distribution of the fundraising portion of a separate fundraising unit's communication. (For example, an electing public charity that has a separate fundraising unit may not count the cost of postage for a separate fundraising unit's communication as an exempt purpose expenditure even though, under the electing public charity's accounting system, that cost is attributable to the mailroom rather than to the separate fundraising unit.)
(3) For purposes of this section, a “controlled grant” is a grant made by an eligible organization described in § 1.501(h)-2(b) to an organization not described in section 501(c)(3) that meets the following requirements:
(i) The donor limits the grant to a specific project of the recipient that is in furtherance of the donor's (nonlobbying) exempt purposes; and
(ii) The donor maintains records to establish that the grant is used in furtherance of the donor's (nonlobbying) exempt purposes.
(4) A transfer, including a grant or payment of dues, is “earmarked” for a specific purpose—
(i) To the extent that the transferor directs the transferee to add the amount transferred to a fund established to accomplish the purpose, or
(ii) To the extent of the amount transferred or, if less, the amount agreed upon to the expended to accomplish the purpose, if there exists an agreement, oral or written, whereby the transferor may cause the transferee to expend amounts to accomplish the purpose or whereby the transferee agrees to expend an amount to accomplish the purpose.
(g) Example. The provisions of this section are illustrated by the following example:
Example. Organization X is an exempt organization described in section 501(c)(3) that is organized for the purpose of rehabilitating alcoholics. X elected to be subject to the provisions of section 501(h) in 1981. For 1981, X had the following expenditures that are included in its exempt purpose expenditures to the extent indicated.
Description | Total (dollars) | Includible (dollars)
Cost of real estate purchased for use as half-way house for alcoholics, attributable to the following:
Land | 30,000
Building | 200,000
Depreciation 40-year useful life | 5,000
Expenses of operating its half-way house | 170,000 | 170,000
Administrative expenses of the organization allocated to the operation of its half-way house | 95,000 | 95,000
Depreciation and allowances for equipment | 10,000 | 10,000
Expenses related to attempts to influence legislation (lobbying expenditures) | 40,000 | 40,000
Amounts paid to Z by the Organization for fundraising | 35,000
Total | 580,000 | 320,000
Note:
For 1981, X's exempt purpose expenditures total $320,000. The $35,000 paid by X to Z for fundraising is not included in the exempt purpose expenditures total. All lobbying expenses are included in full. Only depreciation computed on a straight-line basis is included in exempt purpose expenditures.
§ 56.4911-5 Communications with members.
(a) In general. For purposes of section 4911, expenditures for certain communications between an organization and its members (“membership communications”) are treated more leniently than are communications to nonmembers. This § 56.4911-5 contains rules about the more lenient treatment. In certain cases, this section provides that expenditures for a membership communication are not lobbying expenditures even though those expenditures would be lobbying expenditures if the communication were to nonmembers. In other cases, this section provides that expenditures for a membership communication are direct lobbying expenditures even though those expenditures would be grass roots expenditures if the communication were to nonmembers. Paragraphs (b), (c) and (d) of this section set forth the more lenient rules that apply for communications that are directed only to members. Paragraph (e) of this section sets forth the more lenient rules that apply for communications that are directed primarily, but not solely, to members. Paragraph (f) of this section sets forth certain definitions and special rules.
(b) Communications (directed only to members) that are not lobbying communications. Expenditures for a communication that refers to, and reflects a view on, specific legislation are not lobbying expenditures if the communication satisfies the following requirements:
(1) The communication is directed only to members of the organization;
(2) The specific legislation the communication refers to, and reflects a view on, is of direct interest to the organization and its members;
(3) The communication does not directly encourage the member to engage in direct lobbying (whether individually or through the organization); and
(4) The communication does not directly encourage the member to engage in grass roots lobbying (whether individually or through the organization).
(c) Communications (directed only to members) that are direct lobbying communications. Expenditures for a communication that refers to, and reflects a view on, specific legislation and that satisfies the requirements of paragraphs (b)(1), (b)(2), and (b)(4) of this section, but does not satisfy the requirements of paragraph (b)(3) of this section, are treated as expenditures for direct lobbying.
(d) Communications (directed only to members) that are grass roots lobbying communications. Expenditures for a communication that refers to, and reflects a view on, specific legislation and that satisfies the requirements of paragraphs (b)(1) and (b)(2) of this section, but does not satisfy the requirements of paragraph (b)(4) of this section, are treated as grass roots expenditures (whether or not the communication satisfies the requirements of paragraph (b)(3) of this section).
(e) Written communications directed to members and nonmembers—(1) In general. Expenditures for any written communication that is designed primarily for members of an organization (but not directed only to members) and that refers to, and reflects a view on, specific legislation of direct interest to the organization and its members, are treated as expenditures for direct or grass roots lobbying in accordance with paragraph (e)(2), (e)(3) or (e)(4) of this section. For purposes of this section, a communication is designed primarily for members of an organization if more than half of the recipients of the communication are members of the organization.
(2) Direct lobbying directly encouraged—(i) Lobbying expenditure amount. If a written communication described in paragraph (e)(1) of this section directly encourages readers to engage individually or through the organization in direct lobbying but does not directly encourage them to engage in grass roots lobbying, the cost of the communication is allocated between expenditures for direct lobbying and grass roots expenditures in accordance with paragraphs (e)(2) (ii) and (iii) of this section. The portion of the cost to be allocated includes all costs of preparing all the material with respect to which readers are urged to engage in direct lobbying plus the mechanical and distribution costs attributable to the lineage devoted to this material (see § 1.512(a)-1(f)(6)).
(ii) Grass roots amount. The amount allocable as a grass roots expenditure for a communication described in paragraph (e)(1) of this section is the amount calculated in paragraph (e)(2)(i) of this section multiplied by the sum of the nonmember subscribers percentage and all the other distribution percentage, both as defined in paragraph (f)(7) of this section. Solely for purposes of the allocation described in this paragraph (e)(2)(ii), the nonmember subscribers percentage is treated as zero unless it is greater than 15% of total distribution.
(iii) Direct lobbying amount. The amount allocable as an expenditure for direct lobbying for a communication described in paragraph (e)(1) of this section is the excess of the amount described in paragraph (e)(2)(i) of this section over the amount described in paragraph (e)(2)(ii) of this section.
(3) Grass roots expenditure if grass roots lobbying directly encouraged. If a written communication described in paragraph (e)(1) of this section directly encourages readers to engage individually or collectively (whether through the organization or otherwise) in grass roots lobbying (whether or not it also encourages readers to engage in direct lobbying), the grass roots expenditure includes all the costs of preparing all the material with respect to which readers are urged to engage in grass roots lobbying plus the mechanical and distribution costs attributable to the lineage devoted to this material (see § 1.512(a)-1(f)(6)).
(4) No direct encouragement of direct lobbying or of grass roots lobbying. If a written communication described in paragraph (e)(1) of this section does not directly encourage readers to engage in either direct lobbying or grass roots lobbying, expenditures for the communication are not lobbying expenditures.
(f) Definitions and special rules. For purposes of the regulations under section 4911—
(1) Member; general rule. A person is a member of an electing public charity if the person—
(i) Pays dues or makes a contribution of more than a nominal amount,
(ii) Makes a contribution of more than a nominal amount of time, or
(iii) Is one of a limited number of “honorary” or “life” members who have more than a nominal connection with the electing public charity and who have been chosen for a valid reason (such as length of service to the organization or involvement in activities forming the basis of the electing public charity's exemption) unrelated to the electing public charity's dissemination of information to its members.
(2) Member; special rule. A person not a member of an electing public charity within the meaning of paragraph (f)(1) of this section may be treated as a member if the electing public charity demonstrates to the satisfaction of the Internal Revenue Service that there is a good reason for its membership requirements not meeting the requirements of such paragraph (f)(1), and that its membership requirements do not operate to permit an abuse of the rules described in this section.
(3) Member; affiliated group of organizations. For purposes of this section, a person who is a member of an organization that is a member of an affiliated group of organizations (within the meaning of § 56.4911-7(e)) is treated as a member of each organization in the affiliated group.
(4) Member; limited affiliated group of organizations. For purposes of this section, a person who is a member of an organization that is a member of a limited affiliated group of organizations (within the meaning of § 56.4911-10(b)) is treated as a member of each organization in the limited affiliated group, but only to the extent that the communication relates to a national legislative issue (within the meaning of § 56.4911-10(g)).
(5) Subscriber. A person is a subscriber to a written communication if—
(i) The person is a member of the publishing organization and the membership dues expressly include the right to receive the written communication, or
(ii) The person has affirmatively expressed a desire to receive the written communication and has paid more than a nominal amount of the communication.
(6) Directly encourages—(i) Direct lobbying—(A) In general. For purposes of this section, a communication directly encourages a recipient to engage in direct lobbying, whether individually or through the organization, if the communication:
(1) States that the recipient should contact a legislator or an employee of a legislative body, or should contact any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of urging contact with the government official or employee is to influence legislation);
(2) States the address, telephone number, or similar information of a legislator or an employee of a legislative body; or
(3) Provides a petition, tear-off postcard or similar material for the recipient to communicate his or her views to a legislator or an employee of a legislative body, or to any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of so facilitating contact with the government official or employee is to influence legislation).
(B) “Self-defense” exception for communications with members. Notwithstanding the provisions of paragraph (f)(6)(i)(A) of this section, for purposes of paragraphs (b)(3), (e)(2)(i), (e)(3) and (e)(4) of this section, a communication that directly encourages a member to engage in direct lobbying activities that are described in section 4911(d)(2)(C) and that would not be attempts to influence legislation if engaged in directly by the organization is treated as a communication that does not directly encourage a member to engage in direct lobbying.
(ii) Grass roots lobbying. For purposes of paragraphs (b)(4), (e)(3) and (e)(4) of this section, a communication directly encourages recipients to engage individually or collectively (whether through the organization or otherwise) in grass roots lobbying if the communication:
(A) States that the recipient should encourage any nonmember to contact a legislator or an employee of a legislative body, or to contact any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of urging contact with the government official or employee is to influence legislation);
(B) States that the recipient should provide to any nonmember the address, telephone number, or similar information of a legislator or an employee of a legislative body; or
(C) Provides (or requests that the recipient provide to nonmembers) a petition, tear-off postcard or similar material for the recipient (or nonmember) to use to ask any nonmember to communicate views to a legislator or an employee of a legislative body, or to any other government official or employee who may participate in the formulation of legislation, but only if the principal purpose of so facilitating contact with the government official or employee is to influence legislation. For purposes of this paragraph (f)(6)(ii)(C), a petition is provided for the recipient to use to ask any nonmember to communicate views if, for example, the petition has an entire page of preprinted signature blocks. Similarly, for purposes of this paragraph (f)(6)(ii)(C), where a communication is distributed to a single member and provides several tear-off postcards addressed to a legislator, the postcards are presumed to be provided for the member to use to ask a nonmember to communicate with the legislator.
(7) Percentages of total distribution. With respect to a communication described in paragraph (e)(1) of this section—
(i) “Member percentage” means the percentage of total distribution that represents distribution of a single copy to any member;
(ii) “Nonmember subscribers percentage” means the percentage of total distribution that represents distribution to nonmember subscribers (including libraries); and
(iii) “All other distribution percentage” means 100% reduced by the sum of the member percentage and the nonmember subscribers percentage.
(8) Reasonable allocation rule. In the case of lobbying expenditures for a communication that also has a bona fide nonlobbying purpose and that is sent only or primarily to members, an electing public charity must make a reasonable allocation between the amount expended for the lobbying purpose and the amount expended for the nonlobbying purpose. See § 56.4911-3(a)(2)(ii).
§ 56.4911-6 Records of lobbying and grass roots expenditures.
(a) Records of lobbying expenditures. An electing public charity must keep a record of its lobbying expenditures for the taxable year. Lobbying expenditures of which an organization must keep a record include the following:
(1) Expenditures for grass roots lobbying, as described in paragraph (b) of this section;
(2) Amounts directly paid or incurred for direct lobbying, including payments to another organization earmarked for direct lobbying, fees and expenses paid to individuals or organizations for direct lobbying, and printing, mailing, and other direct costs of reproducing and distributing materials used in direct lobbying;
(3) The portion of amounts paid or incurred as current or deferred compensation for an employee's services for direct lobbying;
(4) Amounts paid for out-of-pocket expenditures incurred on behalf of the organization and for direct lobbying, whether or not incurred by an employee;
(5) The allocable portion of administrative, overhead, and other general expenditures attributable to direct lobbying;
(6) Expenditures for publications or for communications with members to the extent the expenditures are treated as expenditures for direct lobbying under § 56.4911-5; and
(7) Expenditures for direct lobbying of a controlled organization (within the meaning of § 56.4911-10(c)) to the extent included by a controlling organization (within the meaning of § 56.4911-10(c)) in its lobbying expenditures.
(b) Records of grass roots expenditures. An electing public charity must keep a record of its grass roots expenditures for the taxable year. Grass roots expenditures of which an organization must keep a record include the following:
(1) Amounts directly paid or incurred for grass roots lobbying, including payments to other organizations earmarked for grass roots lobbying, fees and expenses paid to individuals or organizations for grass roots lobbying, and the printing, mailing, and other direct costs of reproducing and distributing materials used in grass roots lobbying;
(2) The portion of amounts paid or incurred as current or deferred compensation for an employee's services for grass roots lobbying;
(3) Amounts paid for out-of-pocket expenditures incurred on behalf of the organization and for grass roots lobbying, whether or not incurred by an employee;
(4) The allocable portion of administrative, overhead and other general expenditures attributable to grass roots lobbying;
(5) Expenditures for publication or communications that are treated as expenditures for grass roots lobbying under § 56.4911-5; and
(6) Expenditures for grass roots lobbying of a controlled organization (within the meaning of § 56.4911-10(c)) to the extent included by a controlling organization (within the meaning of § 56.4911-10(c)) in its grass roots expenditures.
§ 56.4911-7 Affiliated group of organizations.
(a) Affiliation between two organizations. Sections 4911(f) (1) through (3) contain a limited anti-abuse rule for groups of affiliated organizations. In general, the rule operates to prevent numerous organizations from being created for the purpose of avoiding the sliding-scale percentage limitation on an electing public charity's lobbying expenditures (as well as avoiding the $1,000,000 cap on a single electing public charity's lobbying expenditures). This is generally accomplished by treating the members of an affiliated group as a single organization for purposes of measuring both lobbying expenditures and permitted lobbying expenditures. The anti-abuse rule is implemented by this § 56.4911-7 and §§ 56.4911-8 and 56.4911-9. This § 56.4911-7 defines the term “affiliated group of organizations” and defines the taxable year of an affiliated group of organizations. Section 56.4911-8 provides rules concerning the exempt purpose expenditures, lobbying expenditures and grass roots expenditures of an affiliated group of organizations, as well as rules concerning the application of the excise tax imposed by section 4911(a) on excess lobbying expenditures by the group. Section 56.4911-9 provides rules concerning the application of the section 501(h) lobbying expenditure limits to members of an affiliated group of organizations. (For additional rules for members of a limited affiliated group of organizations (generally, organizations that are affiliated solely by reason of governing instrument provisions that extend control solely with respect to national legislation), see section 4911(f)(4) and § 56.4911-10).
(1) In general. For purposes of the regulations under section 4911, two organizations are affiliated, subject to the limitation described in paragraph (a)(2) of this section, if one organization is able to control action on legislative issues by the other by reason of interlocking governing boards (see paragraph (b) of this section) or by reason of provisions of the governing instruments of the controlled organization (see paragraph (c) of this section). The ability of the controlling organization to control action on legislative issues by the controlled organization is sufficient to establish that the organizations are affiliated; it is not necessary that the control be exercised.
(2) Organizations not described in section 501(c)(3). Two organizations, neither of which is described in section 501(c)(3), are affiliated only if there exists at least one organization described in section 501(c)(3) that is affiliated with both organizations.
(3) Action on legislative issues. For purposes of this section, the term “action on legislative issues” includes taking a position in the organization's name on legislation, authorizing any person to take a position in the organization's name on legislation, or authorizing any lobbying expenditures. The phrase does not include actions taken merely to correct unauthorized actions taken in the organization's name.
(b) Interlocking governing boards—(1) In general. Two organizations have interlocking governing boards if one organization (the controlling organization) has a sufficient number of representatives (within the meaning of paragraph (b)(5) of this section) on the governing board of the second organization (the controlled organization) so that by aggregating their votes, the representatives of the controlling organization can cause or prevent action on legislative issues by the controlled organization. If two organizations have interlocking governing boards, the organizations are affiliated without regard to how or whether the representatives of the controlling organization vote on any particular matter.
(2) Majority or quorum. Except as provided in paragraph (b) (3) or (4) of this section, the number of representatives of an organization (the controlling organization) who are members of the governing board of a second organization (the controlled organization) will be presumed sufficient to cause or prevent action on legislative issues by the controlled organization if that number either—
(i) Constitutes a majority of incumbents on the governing board, or
(ii) Constitutes a quorum, or is sufficient to prevent a quorum, for acting on legislative issues.
(3) Votes required under governing instrument or local law. Except as provided in paragraph (b)(4) of this section, if under the governing documents of an organization (the controlled organization), it can be determined that a lesser number of votes than the number described in paragraph (b)(2) of this section is necessary or sufficient to cause or to prevent action on legislative issues, the number of representatives of the controlling organization who are members of the governing board of the controlled organization will be considered sufficient to cause or prevent action on legislative issues if it equals or exceeds that number.
(4) Representatives constituting less than 15% of governing board. Notwithstanding paragraph (b) (2) or (3) of this section, if the number of representatives of one organization is less than 15 percent of the incumbents on the governing board of a second organization, the two organizations are not affiliated by reason of interlocking governing boards.
(5) Representatives. (i) This paragraph (b)(5) describes members of the governing board of one organization (the controlled organization) who are considered representatives of a second organization (the controlling organization). Under this paragraph (b)(5), a member of the governing board of a controlled organization may be a representative of more than one controlling organization. A person with no authority to vote on any issue being considered by the governing board is not a representative of any organization.
(ii) A board member of one organization (the controlled organization) is a representative of a second organization (the controlling organization) if the controlling organization has specifically designated that person to be a board member of the controlled organization. For purposes of this paragraph (b)(5)(ii) and paragraph (b)(5)(iii) of this section, a board member of the controlled organization is specifically designated by the controlling organization if the board member is selected by virtue of the right of the controlling organization, under the governing instruments of the controlled organization, either to designate a person to be a member of the controlled organization's governing board, or to select a person for a position that entitles the holder of that position to be a member of the controlled organization's governing board.
(iii) A board member of one organization who is specifically designated by a second organization, a majority of the governing board of which is made up of representatives of a third organization, is a representative of the third organization as well as being a representative of the second organization pursuant to paragraph (b)(5)(ii) of this section.
(iv) A board member of one organization who is also a member of the governing board of a second organization is a representative of the second organization.
(v) A board member of one organization who is an officer or paid executive staff member of a second organization is a representative of the second organization. Although titles are significant in determining whether a person is a member of the executive staff of an organization, any employee of an organization who possesses authority commonly exercised by an executive is considered an executive staff member for purposes of this paragraph (b)(5)(v).
(c) Governing instrument. One organization (the “controlling” organization) is affiliated with a second organization (the “controlled” organization) by reason of the governing instruments of the controlled organization if the governing instruments of the controlled organization limit the independent action of the controlled organization on legislative issues by requiring it to be bound by decisions of the other organization on legislative issues.
(d) Three or more organizations affiliated—(1) Two controlled organizations affiliated. If a controlling organization described in this section is affiliated with each of two or more controlled organizations described in this section, then the controlled organizations are affiliated with each other.
(2) Chain rule. If one organization is a controlling organization described in this section with respect to a second organization and that second organization is a controlling organization with respect to a third organization, then the first organization is affiliated with the third.
(e) Affiliated group of organizations—(1) Defined. For purposes of the regulations under section 4911, an affiliated group of organizations is a group of organizations—
(i) Each of which is affiliated with every other member for at least thirty days of the taxable year of the affiliated group (determined without regard to the election provided for in paragraph (e)(5) of this section),
(ii) Each of which is an eligible organization (within the meaning of § 1.501(h)-2(b)(1)), and
(iii) At least one of which is an electing member organization (within the meaning of paragraph (e)(4) of this section).
Each organization in a group of organizations that satisfies the requirements of the preceding sentence is a member of the affiliated group of organizations for the taxable year of the affiliated group.
(2) Multiple membership. For any taxable year of an organization, it may be a member of two or more affiliated groups of organizations.
(3) Taxable year of affiliated group. If all members of an affiliated group have the same taxable year, that taxable year is the taxable year of the affiliated group. If the members of an affiliated group do not all have the same taxable year, the taxable year of the affiliated group is the calendar year, unless the election under paragraph (e)(5) of this section is made.
(4) Electing member organization. For purposes of the regulations under section 4911, an “electing member organization” is an organization to which the expenditure test election under section 501(h) applies on at least one day of the taxable year of the affiliated group of which it is a member. For purposes of the preceding sentence (and notwithstanding § 1.501(h)-2(a)), the expenditure test is not considered to apply to the organization on any day before the date on which it files the Form 5768 making the expenditure test election.
(5) Election of member's year as group's taxable year. The taxable year of an affiliated group may be determined according to the provisions of this paragraph (e)(5) if all of the members of the affiliated group so elect. Under this paragraph (e)(5), each member organization shall apply the provisions of section 501(h) and 4911, and the regulations thereunder (unless the regulations provide otherwise), by treating its own taxable year as the taxable year of the affiliated group. The election may be made by an electing member organization by attaching to its annual return a statement from itself and every other member of the affiliated group that contains: the organization's name, address, and employer identification number; and its signed consent to the election provided for in this paragraph (e)(5). The election must be made no later than the due date of the first annual return of any electing member for its taxable year for which the member is liable for tax under section 4911(a), determined under § 56.4911-8(d). The election may not be made or revoked after the due date of the return referred to in the preceding sentence except upon such terms and conditions as the Commissioner may prescribe.
(f) Examples. The provisions of this section are illustrated by the following examples.
Example 1.M, N, and O are eligible organizations within the meaning of § 1.501(h)-2(b)(1). Each has a governing board made up of nine members. Five members on the board of N are also members of the board of M. N designates five individuals from among its board, officers, and executive staff members to serve on the board of O. M is affiliated with N, N is affiliated with O, and M is affiliated with O.
Example 2.X, an eligible organization, has a board consisting of 10 members. Five unaffiliated tax-exempt organizations each designate two individuals to serve on the governing board of X. A simple majority of the board of X is a quorum and may establish X's position on legislative issues. X is not affiliated with any of the five autonomous organizations by reason of interlocking governing boards.
Example 3.P and Q are eligible organizations. The governing instruments of Q state that it will not take a position on legislation if P disapproves of the position. In addition, there is regular correspondence between P and Q with regard to positions on legislation. P is affiliated with Q regardless of whether P has ever vetoed a position taken by Q.
Example 4.The governing board of organization R resolves to adopt the position taken on legislative issues by organization S. R and S are eligible organizations and do not have interlocking governing boards. The governing instruments of R do not mention organization S and do not indicate that R is to be bound by the decisions of legislation of any organization. R and S are not affiliated.
Example 5.Organization Z is bound, under the terms of its governing instruments, by the legislative positions of Organization Y. Organization Y, however, is bound, under the terms of its governing instruments, by the legislative positions of Organization X. Organization X is affiliated with Y and Z; Y is affiliated with X and Z; and Z is affiliated with X and Y.
Example 6.Organizations T and U have interlocking boards of directors. T is the controlling organization. Organization V is bound, under the terms of its governing instruments, by the legislative positions of U. T and V are affiliated because T may cause or prevent action on legislative issues by U, and V is bound by U's action. If U were the controlling organization, T and V would be affiliated as two organizations controlled by the same organization.
Example 7.Organization A is described in section 501(c)(4). It is affiliated, as the controlling organization, with organizations K and L, both of which are described in section 501(c)(3) and are eligible to elect under section 501(h). If K elects under section 501(h), K and L are an affiliated group of organizations. Even though A is affiliated with K and L, A is not a member of that affiliated group of organizations because A is not an eligible organization within the meaning of § 1.501(h)-2(b)(1) (see § 56.4911-7(e)(1) for the definition of which affiliated organizations may be members of an affiliated group of organizations).
Example 8.G, H, I, and J are eligible organizations. G, H, and I have elected the expenditure test under section 501(h). The governing board of J has nine members. Under the governing instruments of J, organizations G, H, and I each designate three members of the governing board of J. Also under the governing instruments of J, action on legislative issues requires the approval of any seven board members. Because the three representatives of G may prevent action on legislative issues, J is affiliated with G. Similarly, J is affiliated with each of H and I. However, under none of the rules of affiliation is G affiliated with H, or H with I, or I with G. Therefore J is a member of one affiliated group comprising G and J, of another group comprising H and J, and of a third group comprising I and J.
Example 9.Organizations C, D, and E have been affiliated for many years and have all elected the expenditure test. Each has a taxable year ending July 31. For every day of the year ending July 31, 1992, they were eligible organizations, electing member organizations, and affiliated with each other. On no day of that year were they affiliated with any other eligible organization having a different taxable year. Therefore, the year ending July 31, 1992, is the taxable year of the affiliated group comprising C, D, and E.
§ 56.4911-8 Excess lobbying expenditures of affiliated group.
(a) Application. This section provides rules concerning the exempt purpose expenditures, lobbying expenditures, and grass roots expenditures of an affiliated group of organizations, and the application of the excise tax imposed by section 4911(a) on the excess lobbying expenditures of the group.
(b) Affiliated group treated as one organization. Under section 4911(f), an affiliated group of organizations is treated as a single organization for purposes of the tax imposed by section 4911(a). For any taxable year of the affiliated group, the group's lobbying expenditures, grass roots expenditures, and exempt purpose expenditures are equal to the sum of the lobbying expenditures, grass roots expenditures, and exempt purpose expenditures, respectively, paid or incurred by each member during the taxable year of the affiliated group. The lobbying and grass roots nontaxable amounts for the affiliated group for a taxable year are determined under section 4911(c) (2) and (4) and § 56.4911-1(c) and are based on the sum of the exempt purpose expenditures described in the preceding sentence. The lobbying and grass roots ceiling amounts for the affiliated group for a taxable year are calculated under § 1.501(h)-3(c) (3) and (6) based upon the nontaxable amounts determined pursuant to the preceding sentence.
(c) Tax imposed on excess lobbying expenditures of affiliated group. The excise tax under section 4911(a) is imposed for a taxable year of an affiliated group if the group has excess lobbying expenditures. For any taxable year of an affiliated group, the group's excess lobbying expenditures are the greater of—
(1) The amount by which the group's lobbying expenditures exceed the group's lobbying nontaxable amount, or
(2) The amount by which the group's grass roots expenditures exceed the group's grass roots nontaxable amount.
(d) Liability for tax—(1) Electing organizations. As provided in this paragraph (d), an electing member organization is liable for all or a portion of the excise tax imposed by section 4911(a) on the excess lobbying expenditures of an affiliated group of organizations. An organization that is liable under this paragraph (d) is not liable for any excise tax under section 4911 based on its own excess lobbying expenditures. A member of the affiliated group that is not an electing member organization is not liable for any portion of the excise tax that is imposed with respect to the affiliated group.
(2) Tax based on excess lobbying expenditures. If the excise tax imposed by section 4911(a) on the excess lobbying expenditures of an affiliated group of organizations is based upon the amount described in paragraph (c)(1) of this section, and at least one electing member has made lobbying expenditures, each electing member organization is liable for a portion of the tax equal to the amount of the tax multiplied by a fraction, the numerator of which is the electing member organization's lobbying expenditures paid or incurred during the taxable year of the affiliated group, and the denominator of which is the sum of the lobbying expenditures of all electing member organizations in the group paid or incurred during the taxable year of the affiliated group.
(3) Tax based on excess grass roots expenditures. If the excise tax imposed by section 4911(a) on the excess lobbying expenditures of an affiliated group of organizations is based upon the amount described in paragraph (c)(2) of this section, and at least one electing member has made grass roots expenditures, each electing member organization is liable for a portion of the tax equal to the amount of the tax multiplied by the fraction described in paragraph (d)(2) of this section, except that “grass roots expenditures” is substituted for “lobbying expenditures.”
(4) Tax based on exempt purpose expenditures. If the excise tax imposed by section 4911(a) on the excess lobbying expenditures of an affiliated group of organizations is based upon the amount described in paragraph (c)(2) of this section, and if paragraphs (d)(2) and (d)(3) of this section do not apply because no electing organization has made lobbying or grass roots expenditures, respectively, each electing member organization is liable for a portion of the tax equal to the amount of tax multiplied by a fraction the numerator of which is the electing member organization's exempt purpose expenditures and the denominator of which is the exempt purpose expenditures of all the electing member organizations in the affiliated group.
(5) Taxable year for which liable. An electing member organization that is liable for all or a portion of the excise tax imposed by section 4911(a) on the excess lobbying expenditures of an affiliated group of organizations is liable for the tax as if the tax were imposed for its taxable year with which or within which ends the taxable year of the affiliated group.
(6) Organization a member of more than one affiliated group. If, under this paragraph (d), an organization is liable for its taxable year for two or more excise taxes imposed by section 4911(a) on the excess lobbying expenditures of two or more affiliated groups, then the organization is liable only for the greater of the two or more taxes.
(e) Former member organization. An electing member organization that ceases to be a member of an affiliated group of organizations, the taxable year of which is different from its own, must thereafter determine its liability under § 56.4911-1 for the excise tax imposed by section 4911(a) as if its taxable year were the taxable year of the affiliated group of which it was formerly a member. An organization to which this paragraph (e) applies that is liable for the excise tax imposed by section 4911(a) is liable for the tax as if the tax were imposed for its taxable year within which ends the taxable year of the affiliated group of which it was formerly a member. The Commissioner may, at the Commissioner's discretion, permit an organization to disregard the rules of this paragraph (e) and to determine any liability under section 4911(a) based upon its own taxable year.
§ 56.4911-9 Application of section 501(h) to affiliated groups of organizations.
(a) Scope. This section provides rules concerning the application of the limitations of section 501(h) to members of an affiliated group of organizations (as defined in § 56.4911-7(e)(1)).
(b) Determination required. For each taxable year of an affiliated group of organizations, the calculations described in § 1.501(h)-3(b)(1) (i) and (ii) must be made, based on the expenditures of the group. If, for a taxable year of an affiliated group, it is determined that the sum of the affiliated group's lobbying or grass roots expenditures for the group's base years exceeds 150 percent of the sum of the group's corresponding nontaxable amounts for the base years, then under section 501(h), each member organization that is an electing member organization (as defined in § 56.4911-7(e)(4)) at any time in the taxable year of the affiliated group shall be denied tax exemption beginning with its first taxable year beginning after the end of such taxable year of the affiliated group. Thereafter, exemption shall be denied unless (pursuant to § 1.501(h)-3(d)) the organization reapplies and is recognized as exempt as an organization described in section 501(c)(3). For purposes of this section, the term base years generally means the taxable year of the affiliated group for which a determination is made and the group's three preceding taxable years. Base years, however, do not include any year preceding the first year in which at least one member of the group was treated as described in section 501(c)(3).
(c) Member organizations that are not electing organizations. An organization that is a member of an affiliated group of organizations but that is not an electing member organization remains subject to the “substantial part test” described in section 501(c)(3) with respect to its activities involving attempts to influence legislation.
(d) Filing of information relating to affiliated group of organizations—(1) Scope. The filing requirements described in this paragraph (d) apply to each member of an affiliated group or organizations for the taxable year of the member with which, or within which, ends the taxable year of the affiliated group.
(2) In general. Each member of an affiliated group of organizations shall provide to every other member of the group, before the first day of the second month following the close of the affiliated group's taxable year, its name, identification number, and the information required under § 1.6033-2(a)(2)(ii)(M) for its expenditures during the group's taxable year and for prior taxable years of the group that are base years under paragraph (b). For groups electing under § 56.4911-7(e)(5) to have each member file information with respect to the group based on its taxable year, each member shall provide the information required by the preceding sentence by treating each taxable year of any member of the group as a taxable year for the group.
(3) Additional information required. In addition to the information required by § 1.6033-2(a)(2)(ii)(M), each member of an affiliated group of organizations must provide on its annual return the group's taxable year and, if the election under § 56.4911-7(e)(5) is made, the name, identification number, and taxable year identifying the return with which its consent to the election was filed.
(4) Information required of electing member organization. In addition to the information required by § 1.6033-2(a)(2)(ii)(M) and paragraph (d)(3) of this section, each electing member organization (as defined in § 56.4911-7(e)(4)) must provide on its annual return—
(i) The name and identification number of each member of the group, and
(ii) The appropriate calculation described in § 56.4911-8(d), if the organization is an electing member organization liable for all or any portion of the excise tax imposed by section 4911(a).
(e) Example. The provisions of this section may be illustrated by the following example:
Example. (1) M, N, and O are affiliated organizations under § 56.4911-7(a). M's taxable year ends November 30, N's, January 31, and O's, June 30. On June 20, 1979, O files Form 5768 to elect to be governed by the expenditure test. M files Form 5768 in December of 1979. Neither M nor O revokes the election, and no organization makes the election provided for in § 56.4911-7(e)(5). M, N, and O constitute an affiliated group of organizations, the first taxable year of which is the calendar year 1979.
(2) Because the organizations did not elect under § 56.4911-7(e)(5) to use their own taxable years as the group's taxable years, the expenditures of the affiliated group for its first taxable year are the expenditures made by M, N, and O during calendar year 1979, and are reported by M, N, and O on their returns for their taxable years within which falls December 31, 1979. M reports the expenditures of the affiliated group for 1979 on its return for its taxable year ending November 30, 1980; and O, on its return for its taxable year ending June 30, 1980. N is not an electing member (as defined in § 56.4911-7(e)(4)). Accordingly, under paragraph (d)(3)(i) of this section, it reports the name and identification number of each member of the group.
(3) The following tables summarize the expenditures by the affiliated group for the calendar years indicated. None of the group's lobbying expenditures for its taxable years 1979 through 1982 were grass roots expenditures.
Table I—Group's Expenditures
Year | Exempt purpose expenditures (EPE) | Calculation | Lobbying nontaxable amount (LNTA) | Lobbying expenditures (LE)
1979 | $400,000 | (20% × $400,000=) | $80,000 | $100,000
1980 | 300,000 | (20% × $300,000=) | 60,000 | 100,000
1981 | 600,000 | (20% × $500,000 + 15% × $100,000=) | 115,000 | 120,000
1982 | 500,000 | (20% × $500,000=) | 100,000 | 220,000
Total | 1,800,000 | 355,000 | 540,000
Table II—Expenditures of M and O
Exempt purpose expenditures | Lobbying nontaxable amount | Lobbying expenditures | M plus O
M | O | M | O | M | O
1979 | 125,000 | 100,000 | 25,000 | 20,000 | 60,000 | 20,000 | 80,000
1980 | 100,000 | 50,000 | 20,000 | 10,000 | 40,000 | 40,000 | 80,000
1981 | 250,000 | 100,000 | 50,000 | 20,000 | 60,000 | 40,000 | 100,000
1982 | 200,000 | 100,000 | 40,000 | 20,000 | 160,000 | 40,000 | 200,000
(4) For the affiliated group's taxable years 1979, 1980, 1981, and 1982, the group has excess lobbying expenditures. Under section 4911(f)(1)(B) and § 56.4911-8(d), M and O, as electing member organizations, are liable for a portion of the 25 percent excise tax imposed on the group's excess lobbying expenditures, based on their respective shares of the lobbying expenditures of all electing member organizations. For 1979, the excess lobbying expenditures are $20,000 ($100,000−$80,000). The tax is 25% of $20,000 or $5,000; M must pay $3,750 (($60,000/$80,000) × $5,000 = $3,750), and O must pay $1,250 (($20,000/$80,000) × $5,000 = $1,250). For 1980, the tax is $10,000 and each must pay $5,000. For 1981, the tax is $1,250, of which M must pay $750 and O must pay $500. For 1982, the tax is $30,000. M must pay $24,000 and O must pay $6,000. M and O are not liable for any separate 4911 excise tax that otherwise would have been imposed on their separate excess lobbying expenditures.
(5) Under § 56.4911-9(b), the group must make the calculation described in § 1.501(h)-3(b)(1) for each of the group's taxable years 1979 through 1982. The following illustrates only the required calculation for the group's taxable year 1982. For its taxable year 1982, the group must determine whether it normally has made lobbying expenditures in excess of its lobbying ceiling amount. The determination takes into account the group's expenditures in base years 1979 through 1982. The sum of the group's lobbying expenditures for the base years ($540,000) exceeds 150% of the sum of the group's lobbying nontaxable amounts for the base years (150% × $355,000 = $532,500). Therefore, for its taxable year 1982, the group normally has made lobbying expenditures in excess of its lobbying ceiling amount. Under section 501(h) and § 56.4911-9(b), M is not exempt from tax under section 501(a) as an organization described in section 501(c)(3) for its taxable year beginning December 1, 1983, and O is not exempt for its year beginning July 1, 1983. Whether N's lobbying expenditures disqualify it for tax exemption at any time after January 1, 1979, is determined under the substantial part test of section 501(c)(3).
(f) Cross reference. For other provisions relating to members of an affiliated group or organizations, see §§ 56.4911-2(c)(4)(ii), 56.4911-4(c)(2), 56.4911-4(e), and 56.4911-5(f)(3).
[T.D. 8308, 55 FR 35598, Aug. 31, 1990, as amended by T.D. 9898, 85 FR 31969, May 28, 2020]
§ 56.4911-10 Members of a limited affiliated group of organizations.
(a) Scope. This section provides additional rules for members of a limited affiliated group of organizations, as defined in paragraph (b) of this section (relating generally to organizations that are affiliated solely by reason of provisions of their governing instruments that extend control solely with respect to national legislation). Except as otherwise provided in this section, §§ 56.4911-8 and 56.4911-9 do not apply to members of a limited affiliated group. Thus, as modified by this section, the regulations under sections 501(h) and 4911 apply to electing members of a limited affiliated group individually. For example, §§ 56.4911-2 through 56.4911-4, which, by their terms, include amounts described in paragraph (d) of this section, are used in applying sections 501(h) and 4911 to controlling member organizations (within the meaning of paragraph (c) of this section). Except as otherwise provided in this section, members of a limited affiliated group that are not electing organizations are subject to the substantial part test.
(b) Members of limited affiliated group. For purposes of section 4911, a limited affiliated group consists of two or more organizations that meet the following requirements:
(1) Each organization is a member of an affiliated group of organizations as defined in § 56.4911-7(e);
(2) No two members of the affiliated group described in paragraph (b)(1) of this section are affiliated by reason of interlocking governing boards under § 56.4911-7(b); and
(3) No member of the affiliated group described in paragraph (b)(1) of this section is, under its governing instrument, bound by decisions of one or more of the other such members on legislative issues other than national legislative issues.
Each organization in a group of organizations that satisfies the requirements of the preceding sentence is a member of the limited affiliated group.
(c) Controlling and controlled organizations. For purposes of this section, a member of a limited affiliated group is a controlling member organization if it controls one or more of the other members of the limited affiliated group, and a member of a limited affiliated group is a controlled member organization if it is controlled by one or more of the other members of the limited affiliated group. For purposes of the preceding sentence, whether an organization controls a second organization shall be determined by whether the second organization is bound, under its governing instruments, by actions taken by the first organization on national legislative issues.
(d) Expenditures of controlling organization—(1) Scope. This paragraph (d) applies to a controlling member organization that has the expenditure test election in effect for its taxable year. This paragraph (d) applies whether or not the organization is also a controlled member organization. In determining a controlling member organization's expenditures, no expenditure shall be counted twice.
(2) Expenditures for direct lobbying. A controlling member organization for which the expenditure test election is in effect shall include in its direct lobbying expenditures for its taxable year the direct lobbying expenditures (as defined in §§ 56.4911-2 and 56.4911-3) paid or incurred with respect to national legislative issues during such year by each organization that is a member of the limited affiliated group and is controlled (within the meaning of paragraph (c) of this section) by such controlling member organization.
(3) Grass roots expenditures. A controlling member organization for which the expenditure test election is in effect shall include in its grass roots expenditures for its taxable year the grass roots expenditures (as defined in §§ 56.4911-2 and 56.4911-3) paid or incurred with respect to national legislative issues during such year by each organization that is a member of the limited affiliated group and is controlled (within the meaning of paragraph (c) of this section) by such controlling member organization.
(4) Exempt purpose expenditures. The exempt purpose expenditures of a controlling member organization do not include the exempt purpose expenditures (other than lobbying expenditures described in paragraphs (d)(2) and (d)(3) of this section) of any organization that is a controlled member organization with respect to it.
(e) Expenditures of controlled member. A controlled member organization that is an electing organization but that does not control (within the meaning of paragraph (c) of this section) any organization in the limited affiliated group shall apply sections 501(h) and 4911 and the regulations thereunder without regard to the expenditures of any other member of the limited affiliated group.
(f) Reports of members of limited affiliated groups—(1) Controlling member organization's additional information on annual return. In addition to the information required by § 1.6033-2(a)(2)(ii)(M), each controlling member organization for which the expenditure test election is in effect must provide on its annual return the name and identification number of each member of the limited affiliated group.
(2) Reports of controlling members to other members. Each controlling member organization for which an expenditure test election is in effect must notify each member that it controls of its taxable year in order for the controlled organization to prepare the report required by paragraph (f)(3) of this section. Such notification must be made before the beginning of the second month after the close of each taxable year of the controlling member for which the election is in effect.
(3) Reports of controlled member organization. Every controlled member organization (whether or not the expenditure test election is in effect with respect to it) shall provide to each member of the limited affiliated group that controls it, before the first day of the second month following the close of the taxable year of each such controlling organization, its name, identification number, and the lobbying expenditures and grass roots expenditures on national legislative issues incurred by the controlled member organization.
(g) National legislative issues. The term “national legislative issue” means legislation, limited to action by the Congress of the United States or by the public in any national procedure. If an issue is both national and local, it is characterized as a national legislative issue if the contemplated legislation is Congressional legislation.
(h) Examples. The provisions of this section are illustrated by the following examples:
Example 1.State X has an income tax law that uses definitions contained in the Internal Revenue Code as it may be amended from time to time. Legislation to change a definition in the Internal Revenue Code is pending in Congress. This is a national legislative issue even though Congressional action may affect state law.
Example 2.Organization M takes a position favoring approval by Congress of a proposed amendment to the United States Constitution. This is a national legislative issue. After approval by Congress and submission to the states for ratification, the proposed amendment ceases to be a national legislative issue.
Example 3.N, O, and P are organizations described in section 501(c)(3) that do not have interlocking governing boards, within the meaning of § 56.4911-7(b). N has elected the expenditure test under section 501(h). By virtue of the governing instruments of O and P, any decision made by N on national legislative issues (such as issues concerning action on acts, bills, resolutions, or similar items by Congress) binds both O and P. Under their governing instruments, O and P are not bound on any other issues. Therefore, N, O, and P constitute a limited affiliated group. If P sends a series of letters and pamphlets to members of Congress in support of bill V, their cost will be included in N's and P's expenditures for direct lobbying and in N's and P's exempt purposes expenditures, but will not be included in O's lobbying expenditures. If N hires a lobbyist to solicit support for bill V, the cost of hiring the lobbyist will be includable only in N's lobbying expenditures. Any lobbying expenditures incurred by either O or P on any issue that is not a national legislative issue will not be included in N's lobbying expenditures.
Example 4.Y is an electing organization and a member of a limited affiliated group of organizations. Y controls organizations A, B, and C with respect to national legislative issues but is not controlled by any other organization.—Y's taxable year is the calendar year. During 1982, A dissolves on March 15th and D, also controlled by Y with respect to national legislative issues, is established on May 1st. For 1982 the limited affiliated group comprises Y, A, B, C, and D.
Example 5.P, Q, R, and S are electing organizations. The governing instruments of Q require it to adopt the positions on national legislative issues adopted by P. R is similarly bound by Q's positions. R and S have interlocking governing boards, within the meaning of § 56.4911-7(b), but S's governing instruments do not require it to adopt the position of any other organization on any legislative issues. Under § 56.4911-7(e)(1), P, Q, R, and S are members of an affiliated group. Applying paragraph (b) of this section, it is determined that (1) P, Q, R and S are members of an affiliated group; and (2) R and S are affiliated by reason of interlocking governing boards. Accordingly, P, Q, R and S are not a limited affiliated group. Similarly, P, Q, and R do not constitute a limited affiliated group because they are members of an affiliated group comprising P, Q, R, and S, two of whose members, R and S, are affiliated by reason of interlocking governing boards.
Example 6.T, U, V, and W are electing organizations. The governing instruments of U and V require them to adopt the positions on national legislative issues adopted by T, but do not require them to adopt the positions of any organization on any other legislative issues. The governing documents of W require it to adopt the positions of V on all legislative issues. Applying paragraph (b) of this section, it is determined that (1) T, U, V, and W are all members of an affiliated group; (2) no two of T, U, V, and W are affiliated by reason of interlocking governing boards; but (3) W is bound, under its governing instrument, by decisions of V on legislative issues that are not national legislative issues. Accordingly, T, U, V, and W do not constitute a limited affiliated group. Similarly, T, U, and V do not constitute a limited affiliated group. T, U, V, and W are an affiliated group under § 56.4911-7.
[T.D. 8308, 55 FR 35598, Aug. 31, 1990, as amended by T.D. 9898, 85 FR 31969, May 28, 2020]
§ 56.6001-1 Notice or regulations requiring records, statements, and special returns.
(a) In general. The provisions of § 53.6001-1 shall apply to any person subject to tax under chapter 41, subtitle D, of the Code, by treating each reference to chapter 42 in § 53.6001-1 as a reference to chapter 41.
(b) Cross references. See § 56.4911-6 for general information on records of lobbying expenditures. See §§ 56.4911-9(d) and 56.4911-10(f) for information that members of an affiliated group and a limited affiliated group, respectively, are to provide to other members of the group and to the Internal Revenue Service.
§ 56.6011-1 General requirement of return, statement, or list.
Every organization liable for the tax imposed by section 4911(a) shall file an annual return with respect to the tax on the form prescribed by the Internal Revenue Service for that purpose and shall include the information required by the form and its instructions.
§ 56.6011-4 Requirement of statement disclosing participation in certain transactions by taxpayers.
(a) In general. If a transaction is identified as a listed transaction or a transaction of interest as defined in § 1.6011-4 of this chapter by the Commissioner in published guidance (see § 601.601(d)(2) of this chapter), and the listed transaction or transaction of interest involves an excise tax under chapter 41 of subtitle D of the Internal Revenue Code (relating to public charities), the transaction must be disclosed in the manner stated in such published guidance.
(b) Effective date. This section applies to listed transactions entered into on or after January 1, 2003. This section applies to transactions of interest entered into on or after November 2, 2006.
[T.D. 9350, 72 FR 43154, Aug. 3, 2007]
§ 56.6060-1 Reporting requirements for tax return preparers.
(a) In general. A person that employs one or more tax return preparers to prepare a return or claim for refund of tax under chapter 41 of subtitle D of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in § 1.6060-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
§ 56.6107-1 Tax return preparer must furnish copy of return and claim for refund to taxpayer and must retain a copy or record.
(a) In general. A person who is a signing tax return preparer of any return or claim for refund of tax under Chapter 41 of subtitle D of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the public charity and retain a completed copy or record in the manner stated in § 1.6107-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
§ 56.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund.
(a) In general. Each tax return or claim for refund for tax under chapter 41 of subtitle D prepared by one or more signing tax return preparers must include the identifying number of the preparer required by § 1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in § 1.6109-2 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
§ 56.6694-1 Section 6694 penalties applicable to tax return preparer.
(a) In general. For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund of tax under chapter 41 of subtitle D see § 1.6694-1 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
§ 56.6694-2 Penalties for understatement due to an unreasonable position.
(a) In general. A person who is a tax return preparer of any return or claim for refund of excise tax under chapter 41 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in § 1.6694-2 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
§ 56.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under chapter 41 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in § 1.6694-3 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78460, Dec. 22, 2008]
§ 56.6694-4 Extension of period of collection when tax return preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters.
(a) In general. For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for tax under chapter 41 of subtitle D of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under § 1.6694-4 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 56.6695-1 Other assessable penalties with respect to the preparation of tax returns or claims for refund for other persons.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under chapter 41 of subtitle D of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in § 1.6695-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 56.6696-1 Claims for credit or refund by tax return preparers.
(a) In general. For rules relating to claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax under chapter 41 of subtitle D of the Internal Revenue Code, the rules under § 1.6696-1 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 56.7701-1 Tax return preparer.
(a) In general. For the definition of a tax return preparer, see § 301.7701-15 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
PART 57 HEALTH INSURANCE PROVIDERS FEE
Authority: 26 U.S.C. 7805; sec. 9010, Pub. L. 111-148 (124 Stat. 119 (2010)). Section 57.3 also issued under 26 U.S.C. 6071(a); Section 57.7 also issued under 26 U.S.C. 6302(a); Section 57.6302-1 also issued under 26 U.S.C. 6302(a).
Source: T.D. 9643, 78 FR 71487, Nov. 29, 2013, unless otherwise noted.
§ 57.1 Overview.
(a) The regulations in this part are designated “Health Insurance Providers Fee Regulations.”
(b) The regulations in this part provide guidance on the annual fee imposed on covered entities engaged in the business of providing health insurance by section 9010 of the Patient Protection and Affordable Care Act (PPACA), Public Law 111-148 (124 Stat. 119 (2010)), as amended by section 10905 of PPACA, and as further amended by section 1406 of the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)) (collectively, the Affordable Care Act or ACA). All references to section 9010 in this part 57 are references to section 9010 of the ACA. Unless otherwise indicated, all other references to subtitles, chapters, subchapters, and sections are references to subtitles, chapters, subchapters and sections in the Internal Revenue Code and the related regulations.
(c) Section 9010(e)(1) sets an applicable fee amount for each year, beginning with 2014, that will be apportioned among covered entities with aggregate net premiums written over $25 million for health insurance for United States health risks. Generally, each covered entity is liable for a fee in each fee year that is based on its net premiums written during the data year in an amount determined by the Internal Revenue Service (IRS) under the rules of this part.
§ 57.2 Explanation of terms.
(a) In general. This section explains the terms used in this part 57 for purposes of the fee.
(b) Covered entity—(1) In general. Except as provided in paragraph (b)(2) of this section, the term covered entity means any entity with net premiums written for health insurance for United States health risks in the fee year if the entity is—
(i) A health insurance issuer within the meaning of section 9832(b)(2), defined in section 9832(b)(2) as an insurance company, insurance service, or insurance organization that is licensed to engage in the business of insurance in a State and that is subject to State law that regulates insurance (within the meaning of section 514(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA));
(ii) A health maintenance organization within the meaning of section 9832(b)(3), defined in section 9832(b)(3) as—
(A) A Federally qualified health maintenance organization (as defined in section 1301(a) of the Public Health Service Act);
(B) An organization recognized under State law as a health maintenance organization; or
(C) A similar organization regulated under State law for solvency in the same manner and to the same extent as such a health maintenance organization;
(iii) An insurance company subject to tax under part I or II of subchapter L, or that would be subject to tax under part I or II of subchapter L but for the entity being exempt from tax under section 501(a);
(iv) An entity that provides health insurance under Medicare Advantage, Medicare Part D, or Medicaid; or
(v) A multiple employer welfare arrangement (MEWA), within the meaning of section 3(40) of ERISA, to the extent not fully insured, provided that for this purpose a covered entity does not include a MEWA that with respect to the plan year ending with or within the section 9010 data year satisfies the requirements to be exempt from reporting under 29 CFR 2520.101-2(c)(2)(ii)(A), (B), or (C).
(2) Exclusions—(i) Self-insured employer. The term covered entity does not include any entity (including a voluntary employees' beneficiary association under section 501(c)(9) (VEBA)) that is part of a self-insured employer plan to the extent that such entity self-insures its employees' health risks. The term self-insured employer means an employer that sponsors a self-insured medical reimbursement plan within the meaning of § 1.105-11(b)(1)(i) of this chapter. Self-insured medical reimbursement plans include plans that do not involve shifting risk to an unrelated third party as described in § 1.105-11(b)(1)(ii) of this chapter. A self-insured medical reimbursement plan may use an insurance company or other third party to provide administrative or bookkeeping functions. For purposes of this section, the term self-insured employer does not include a MEWA.
(ii) Governmental entity. The term covered entity does not include any governmental entity. For this purpose, the term governmental entity means—
(A) The government of the United States;
(B) Any State or a political subdivision thereof (as defined for purposes of section 103) including, for example, a State health department or a State insurance commission;
(C) Any Indian tribal government (as defined in section 7701(a)(40)) or a subdivision thereof (determined in accordance with section 7871(d)); or
(D) Any agency or instrumentality of any of the foregoing.
(iii) Certain nonprofit corporations. The term covered entity does not include any entity—
(A) That is incorporated as a nonprofit corporation under a State law;
(B) No part of the net earnings of which inures to the benefit of any private shareholder or individual (within the meaning of §§ 1.501(a)-1(c) and 1.501(c)(3)-1(c)(2) of this chapter);
(C) No substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (within the meaning of § 1.501(c)(3)-1(c)(3)(ii) of this chapter) (or which is described in section 501(h)(3) and is not denied exemption under section 501(a) by reason of section 501(h));
(D) That does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office (within the meaning of § 1.501(c)(3)-1(c)(3)(iii) of this chapter); and
(E) More than 80 percent of the gross revenues of which is received from government programs that target low-income, elderly, or disabled populations under titles XVIII, XIX, and XXI of the Social Security Act.
(iv) Certain voluntary employees' beneficiary associations (VEBAs). The term covered entity does not include any entity that is described in section 501(c)(9) that is established by an entity (other than by an employer or employers) for purposes of providing health care benefits. This exclusion applies to a VEBA that is established by a union or established pursuant to a collective bargaining agreement and having a joint board of trustees (such as in the case of a multiemployer plan within the meaning of section 3(37) of ERISA or a single-employer plan described in section 302(c)(5) of the Labor Management Relations Act, 29 U.S.C. 186(c)(5)). This exclusion does not apply to a MEWA.
(3) Application of exclusions—(i) Test year. An entity qualifies for an exclusion described in paragraphs (b)(2)(i) through (iv) of this section if it so qualifies in its test year. The term test year means either the entire data year or the entire fee year.
(ii) Consistency rule. For purposes of paragraph (b)(3)(i) of this section, an entity must use the same test year as it used in its first fee year beginning after December 31, 2014, and in each subsequent fee year. Thus, for example, if an entity used the 2014 data year as its test year for the 2015 fee year, that entity must use the data year as its test year for each subsequent fee year.
(iii) Special rule for fee year as test year. For purposes of paragraph (b)(3) of this section, any entity that uses the fee year as its test year but ultimately does not qualify for an exclusion described in paragraphs (b)(2)(i) through (iv) of this section for that entire fee year must use the data year as its test year for each subsequent fee year.
(4) State. Solely for purposes of paragraph (b) of this section, the term State means any of the 50 States, the District of Columbia, or any of the possessions of the United States, including American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the Virgin Islands.
(c) Controlled groups—(1) In general. The term controlled group means a group of two or more persons, including at least one person that is a covered entity, that is treated as a single employer under section 52(a), 52(b), 414(m), or 414(o).
(2) Treatment of controlled group. A controlled group (as defined in paragraph (c)(1) of this section) is treated as a single covered entity for purposes of the fee.
(3) Special rules. For purposes of paragraph (c)(1) of this section (related to controlled groups)—
(i) A foreign entity subject to tax under section 881 is included within a controlled group under section 52(a) or (b); and
(ii) A person is treated as being a member of the controlled group if it is a member of the group at the end of the day on December 31st of the data year. However, a person's net premiums written are included in net premiums written for the controlled group only if the person would qualify as a covered entity in the fee year if the person were not a member of the controlled group.
(d) Data year. The term data year means the calendar year immediately before the fee year. Thus, for example, 2013 is the data year for fee year 2014.
(e) Designated entity—(1) In general. The term designated entity means the person within a controlled group that is designated to act on behalf of the controlled group regarding the fee with respect to—
(i) Filing Form 8963, “Report of Health Insurance Provider Information”;
(ii) Receiving IRS communications about the fee for the group;
(iii) Filing a corrected Form 8963 for the group, if applicable, as described in § 57.6; and
(iv) Paying the fee for the group to the government.
(2) Selection of designated entity—(i) In general. Except as provided in paragraph (e)(2)(ii) of this section, each controlled group must select a designated entity by having that entity file the Form 8963 in accordance with the form instructions. The designated entity must state under penalties of perjury that all persons that provide health insurance for United States health risks that are members of the group have consented to the selection of the designated entity. Each member of a controlled group must maintain a record of its consent to the controlled group's selection of the designated entity. The designated entity must maintain a record of all member consents.
(ii) Requirement for consolidated groups; common parent. If a controlled group, without regard to foreign corporations included under section 9010(c)(3)(B), is also an affiliated group the common parent of which files a consolidated return for Federal income tax purposes, the designated entity is the agent for the group (within the meaning of § 1.1502-77 of this chapter) for the data year.
(iii) Failure to select a designated entity. Excepted as provided in paragraph (e)(2)(ii) of this section, if a controlled group fails to select a designated entity as provided in paragraph (e)(2)(i) of this section, then the IRS will select a member of the controlled group to be the designated entity. If the IRS selects the designated entity, then all members of the controlled group that provide health insurance for a United States health risk will be deemed to have consented to the IRS's selection of the designated entity.
(f) Fee. The term fee means the fee imposed by section 9010 on each covered entity engaged in the business of providing health insurance.
(g) Fee year. The term fee year means the calendar year in which the fee must be paid to the government. The first fee year is 2014.
(h) Health insurance—(1) In general. Except as provided in paragraph (h)(2) of this section, the term health insurance generally has the same meaning as the term health insurance coverage in section 9832(b)(1)(A), defined to mean benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract, when these benefits are offered by an entity that is one of the types of entities described in paragraph (b)(1)(i) through (b)(1)(v) of this section. The term health insurance includes limited scope dental and vision benefits under section 9832(c)(2)(A) and retiree-only health insurance.
(2) Exclusions. The term health insurance does not include—
(i) Coverage only for accident, or disability income insurance, or any combination thereof, within the meaning of section 9832(c)(1)(A);
(ii) Coverage issued as a supplement to liability insurance within the meaning of section 9832(c)(1)(B);
(iii) Liability insurance, including general liability insurance and automobile liability insurance, within the meaning of section 9832(c)(1)(C);
(iv) Workers' compensation or similar insurance within the meaning of section 9832(c)(1)(D);
(v) Automobile medical payment insurance within the meaning of section 9832(c)(1)(E);
(vi) Credit-only insurance within the meaning of section 9832(c)(1)(F);
(vii) Coverage for on-site medical clinics within the meaning of section 9832(c)(1)(G);
(viii) Other insurance coverage that is similar to the insurance coverage in paragraph (h)(2)(i) through (vii) of this section under which benefits for medical care are secondary or incidental to other insurance benefits, within the meaning of section 9832(c)(1)(H), to the extent such insurance coverage is specified in regulations under section 9832(c)(1)(H);
(ix) Benefits for long-term care, nursing home care, home health care, community-based care, or any combination thereof, within the meaning of section 9832(c)(2)(B), and such other similar, limited benefits to the extent such benefits are specified in regulations under section 9832(c)(2)(C);
(x) Coverage only for a specified disease or illness within the meaning of section 9832(c)(3)(A);
(xi) Hospital indemnity or other fixed indemnity insurance within the meaning of section 9832(c)(3)(B);
(xii) Medicare supplemental health insurance (as defined under section 1882(g)(1) of the Social Security Act), coverage supplemental to the coverage provided under chapter 55 of title 10, United States Code, and similar supplemental coverage provided to coverage under a group health plan, within the meaning of section 9832(c)(4);
(xiii) Coverage under an employee assistance plan, a disease management plan, or a wellness plan, if the benefits provided under the plan constitute excepted benefits under section 9832(c)(2) (or do not otherwise provide benefits consisting of health insurance under paragraph (h)(1) of this section);
(xiv) Student administrative health fee arrangements, as defined in paragraph (h)(3);
(xv) Travel insurance, as defined in paragraph (h)(4) of this section; or
(xvi) Indemnity reinsurance, as defined in paragraph (h)(5)(i) of this section.
(3) Student administrative health fee arrangement. For purposes of paragraph (h)(2)(xiv) of this section, the term student administrative health fee arrangement means an arrangement under which an educational institution, other than through an insured arrangement, charges student administrative health fees to students on a periodic basis to help cover the cost of student health clinic operations and care delivery (regardless of whether the student uses the clinic and regardless of whether the student purchases any available student health insurance coverage).
(4) Travel insurance. For purposes of paragraph (h)(2)(xv) of this section, the term travel insurance means insurance coverage for personal risks incident to planned travel, which may include, but is not limited to, interruption or cancellation of trip or event, loss of baggage or personal effects, damages to accommodations or rental vehicles, and sickness, accident, disability, or death occurring during travel, provided that the health benefits are not offered on a stand-alone basis and are incidental to other coverage. For this purpose, the term travel insurance does not include major medical plans that provide comprehensive medical protection for travelers with trips lasting 6 months or longer, including, for example, those working overseas as an expatriate or military personnel being deployed.
(5) Reinsurance—(i) Indemnity reinsurance. For purposes of paragraphs (h)(2)(xvi) and (k) of this section, the term indemnity reinsurance means an agreement between one or more reinsuring companies and a covered entity under which—
(A) The reinsuring company agrees to accept, and to indemnify the issuing company for, all or part of the risk of loss under policies specified in the agreement; and
(B) The covered entity retains its liability to, and its contractual relationship with, the individuals whose health risks are insured under the policies specified in the agreement.
(ii) Assumption reinsurance. For purposes of paragraph (k) of this section, the term assumption reinsurance means reinsurance for which there is a novation and the reinsurer takes over the entire risk of loss pursuant to a new contract.
(i) Located in the United States. The term located in the United States means present in the United States (within the meaning of paragraph (m) of this section) under section 7701(b)(7) (for presence in the 50 States and the District of Columbia) or § 1.937-1(c)(3)(i) of this chapter (for presence in a possession of the United States).
(j) NAIC. The term NAIC means the National Association of Insurance Commissioners.
(k) Net premiums written—The term net premiums written means premiums written, including reinsurance premiums written, reduced by reinsurance ceded, and reduced by ceding commissions and medical loss ratio (MLR) rebates with respect to the data year. For this purpose, MLR rebates are computed on an accrual basis in determining net premiums written. Because indemnity reinsurance within the meaning of paragraph (h)(5)(i) of this section is not health insurance under paragraph (h)(1) of this section, the term net premiums written does not include premiums written for indemnity reinsurance and is not reduced by indemnity reinsurance ceded. However, in the case of assumption reinsurance within the meaning of paragraph (h)(5)(ii) of this section, the term net premiums written does include premiums written for assumption reinsurance and is reduced by assumption reinsurance premiums ceded.
(l) SHCE. The term SHCE means the Supplemental Health Care Exhibit. The SHCE is a form published by the NAIC that most covered entities are required to file annually under State law.
(m) United States. For purposes of paragraph (i) of this section, the term United States means the 50 States, the District of Columbia, and any possession of the United States, including American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the Virgin Islands.
(n) United States health risk. The term United States health risk means the health risk of any individual who is—
(1) A United States citizen;
(2) A resident of the United States (within the meaning of section 7701(b)(1)(A)); or
(3) Located in the United States (within the meaning of paragraph (i) of this section) during the period such individual is so located.
[T.D. 9643, 78 FR 71487, Nov. 29, 2013, as amended by T.D. 9711, 80 FR 10334, Feb. 26, 2015; T.D. 9830, 83 FR 8174, Feb. 26, 2018]
§ 57.3 Reporting requirements and associated penalties.
(a) Reporting requirement—(1) In general. Annually, each covered entity, including each controlled group that is treated as a single covered entity, must report its net premiums written for health insurance of United States health risks during the data year to the IRS by April 15th of the fee year on Form 8963, “Report of Health Insurance Provider Information,” in accordance with the instructions for the form. A covered entity that has net premiums written during the data year is subject to this reporting requirement even if it does not have any amount taken into account as described in § 57.4(a)(4). If an entity is not in the business of providing health insurance for any United States health risk in the fee year, it is not a covered entity and does not have to report.
(2) Manner of reporting—(i) In general. The IRS may provide rules in guidance published in the Internal Revenue Bulletin for the manner of reporting by a covered entity under this section, including rules for reporting by a designated entity on behalf of a controlled group that is treated as a single covered entity.
(ii) Electronic Filing Required. Any Form 8963 (including corrected forms) filed pursuant to paragraph (a)(1) of this section and reporting more than $25 million in net premiums written must be filed electronically in accordance with the instructions to the form. If a Form 8963 or corrected Form 8963 is required to be filed electronically under this paragraph (a)(2)(ii), any subsequently filed Form 8963 filed for the same fee year must also be filed electronically. For purposes of § 57.3(b), any Form 8963 required to be filed electronically under this section will not be considered filed unless it is filed electronically.
(3) Disclosure of reported information. Pursuant to section 9010(g)(4), the information reported on each original and corrected Form 8963 will be open for public inspection or available upon request.
(b) Penalties—(1) Failure to report—(i) In general. A covered entity that fails to timely submit a report containing the information required by paragraph (a) of this section is liable for a failure to report penalty in the amount described in paragraph (b)(1)(ii) of this section in addition to its fee liability and any other applicable penalty, unless the failure is due to reasonable cause as defined in paragraph (b)(1)(iii) of this section.
(ii) Amount. The amount of the failure to report penalty described in paragraph (b)(1)(i) of this section is—
(A) $10,000, plus
(B) The lesser of—
(1) An amount equal to $1,000 multiplied by the number of days during which such failure continues; or
(2) The amount of the covered entity's fee for which the report was required.
(iii) Reasonable cause. The failure to report penalty described in paragraph (b)(1)(i) of this section is waived if the failure is due to reasonable cause. A failure is due to reasonable cause if the covered entity exercised ordinary business care and prudence and was nevertheless unable to submit the report within the prescribed time. In determining whether the covered entity was unable to submit the report timely despite the exercise of ordinary business care and prudence, the IRS will consider all the facts and circumstances surrounding the failure to submit the report.
(iv) Treatment of penalty. The failure to report penalty described in this paragraph (b)(1)—
(A) Is treated as a penalty under subtitle F;
(B) Must be paid on notice and demand by the IRS and in the same manner as a tax under the Internal Revenue Code; and
(C) Is a penalty for which only civil actions for refund under procedures of subtitle F apply.
(2) Accuracy-related penalty—(i) In general. A covered entity that understates its net premiums written for health insurance of United States health risks in the report required under paragraph (a)(1) of this section is liable for an accuracy-related penalty in the amount described in paragraph (b)(2)(ii) of this section, in addition to its fee liability and any other applicable penalty.
(ii) Amount. The amount of the accuracy-related penalty described in paragraph (b)(2)(i) of this section is the excess of—
(A) The amount of the covered entity's fee for the fee year that the IRS determines should have been paid in the absence of any understatement; over
(B) The amount of the covered entity's fee for the fee year that the IRS determined based on the understatement.
(iii) Understatement. An understatement of a covered entity's net premiums written for health insurance of United States health risks is the difference between the amount of net premiums written that the covered entity reported and the amount of net premiums written that the IRS determines the covered entity should have reported.
(iv) Treatment of penalty. The accuracy-related penalty is subject to the provisions of subtitle F that apply to assessable penalties imposed under chapter 68.
(3) Controlled groups. Each member of a controlled group that is required to provide information to the controlled group's designated entity for purposes of the report required to be submitted by the designated entity on behalf of the controlled group is jointly and severally liable for any penalties described in this paragraph (b) for any reporting failures by the designated entity.
[T.D. 9643, 78 FR 71487, Nov. 29, 2013, as amended by T.D. 9881, 84 FR 61547, Nov. 13, 2019]
§ 57.4 Fee calculation.
(a) Fee components—(1) In general. For every fee year, the IRS will calculate a covered entity's allocated fee as described in this section.
(2) Calculation of net premiums written. Each covered entity's allocated fee for any fee year is equal to an amount that bears the same ratio to the applicable amount as the covered entity's net premiums written for health insurance of United States health risks during the data year taken into account bears to the aggregate net premiums written for health insurance of United States health risks of all covered entities during the data year taken into account.
(3) Applicable amount. The applicable amounts for fee years are—
Fee year | Applicable amount
2014 | $8,000,000,000
2015 | $11,300,000,000
2016 | $11,300,000,000
2017 | $13,900,000,000
2018 | $14,300,000,000
2019 and thereafter | The applicable amount in the preceding fee year increased by the rate of premium growth (within the meaning of section 36B(b)(3)(A)(ii)).
(4) Net premiums written taken into account—(i) In general. A covered entity's net premiums written for health insurance of United States health risks during any data year are taken into account as follows:
Covered entity's net premiums written during the data year that are: | Percentage of net premiums written taken into account is:
Not more than $25,000,000 | 0
More than $25,000,000 but not more than $50,000,000 | 50
More than $50,000,000 | 100
(ii) Controlled groups. In the case of a controlled group, paragraph (a)(4)(i) of this section applies to all net premiums written for health insurance of United States health risks during the data year, in the aggregate, of the entire controlled group, except that any net premiums written by any member of the controlled group that is a nonprofit corporation meeting the requirements of § 57.2(b)(2)(iii) or a voluntary employees' beneficiary association meeting the requirements of § 57.2(b)(2)(iv) are not taken into account.
(iii) Partial exclusion for certain exempt activities. After the application of paragraph (a)(4)(i) of this section, if the covered entity (or any member of a controlled group treated as a single covered entity) is exempt from Federal income tax under section 501(a) and is described in section 501(c)(3), (4), (26), or (29) as of December 31st of the data year, then only 50 percent of its remaining net premiums written for health insurance of United States health risks that are attributable to its exempt activities (and not to activities of an unrelated trade or business as defined in section 513) during the data year are taken into account. If an entity to which this partial exclusion applies is a member of a controlled group, then the partial exclusion applies to that entity after first applying paragraph (a)(4)(i) on a pro rata basis to all members of the controlled group.
(b) Determination of net premiums written—(1) In general. The IRS will determine net premiums written for health insurance of United States health risks for each covered entity based on the Form 8963, “Report of Health Insurance Provider Information,” submitted by each covered entity, together with any other source of information available to the IRS. Other sources of information that the IRS may use to determine net premiums written for each covered entity include the SHCE, which supplements the annual statement filed with the NAIC pursuant to State law, the annual statement itself or the Accident and Health Policy Experience filed with the NAIC, the MLR Annual Reporting Form filed with the Center for Medicare & Medicaid Services' Center for Consumer Information and Insurance Oversight of the U.S. Department of Health and Human Services, or any similar statements filed with the NAIC, with any State government, or with the Federal government pursuant to applicable State or Federal requirements.
(2) Presumption for United States health risks. For any covered entity that files the SHCE with the NAIC, the entire amount reported on the SHCE as direct premiums written will be considered to be for health insurance of United States health risks as described in § 57.2(n) (subject to any applicable exclusions for amounts that are not health insurance as described in § 57.2(h)(2)) unless the covered entity can demonstrate otherwise.
(c) Determination of amounts taken into account. (1) For each fee year and for each covered entity, the IRS will calculate the net premiums written for health insurance of United States health risks taken into account during the data year. The resulting number is the numerator of the fraction described in paragraph (d)(1) of this section.
(2) For each fee year, the IRS will calculate the aggregate net premiums written for health insurance of United States health risks taken into account for all covered entities during the data year. The resulting number is the denominator of the fraction described in paragraph (d)(2) of this section.
(d) Allocated fee calculated. For each covered entity for each fee year, the IRS will calculate the covered entity's allocated fee by multiplying the applicable amount from paragraph (a)(3) of this section by a fraction—
(1) The numerator of which is the covered entity's net premiums written for health insurance of United States health risks during the data year taken into account (described in paragraph (c)(1) of this section); and
(2) The denominator of which is the aggregate net premiums written for health insurance of United States health risks for all covered entities during the data year taken into account (described in paragraph (c)(2) of this section).
§ 57.5 Notice of preliminary fee calculation.
(a) Content of notice. Each fee year, the IRS will make a preliminary calculation of the fee for each covered entity as described in § 57.4. The IRS will notify each covered entity of its preliminary fee calculation for that fee year. The notification to a covered entity of its preliminary fee calculation will include—
(1) The covered entity's allocated fee;
(2) The covered entity's net premiums written for health insurance of United States health risks;
(3) The covered entity's net premiums written for health insurance of United States health risks taken into account after the application of § 57.4(a)(4);
(4) The aggregate net premiums written for health insurance of United States health risks taken into account for all covered entities; and
(5) Instructions for how to submit a corrected Form 8963, “Report of Health Insurance Provider Information,” to correct any errors through the error correction process.
(b) Timing of notice. The IRS will specify in other guidance published in the Internal Revenue Bulletin the date by which it will send each covered entity a notice of its preliminary fee calculation.
§ 57.6 Error correction process.
(a) In general. Upon receipt of its preliminary fee calculation, each covered entity must review this calculation during the error correction period. If the covered entity identifies one or more errors in its preliminary fee calculation, the covered entity must timely submit to the IRS a corrected Form 8963, “Report of Health Insurance Provider Information,” during the error correction period. The corrected Form 8963 will replace the original Form 8963 for all purposes, including for the purpose of determining whether an accuracy-related penalty applies, except that a covered entity remains subject to the failure to report penalty if it fails to timely submit the original Form 8963. In the case of a controlled group, if the preliminary fee calculation for the controlled group contains one or more errors, the corrected Form 8963 must include all of the required information for the entire controlled group, including members that do not have corrections.
(b) Time and manner. The IRS will specify in other guidance published in the Internal Revenue Bulletin the time and manner by which a covered entity must submit a corrected Form 8963. The IRS will provide its final determination regarding the covered entity's submission no later than the time the IRS provides a covered entity with a final fee calculation.
(c) Finality. Covered entities must assert any basis for contesting their preliminary fee calculation during the error correction period. In the interest of providing finality to the fee calculation process, the IRS will not accept a corrected Form 8963 after the end of the error correction period or alter final fee calculations on the basis of information provided after the end of the error correction period.
§ 57.7 Notification and fee payment.
(a) Content of notice. Each fee year, the IRS will make a final calculation of the fee for each covered entity as described in § 57.4. The IRS will base its final fee calculation on each covered entity's original or corrected Form 8963, “Report of Health Insurance Provider Information,” as adjusted by other sources of information described in § 57.4(b)(1). The notification to a covered entity of its final fee calculation will include—
(1) The covered entity's allocated fee;
(2) The covered entity's net premiums written for health insurance of United States health risks;
(3) The covered entity's net premiums written for health insurance of United States health risks taken into account after the application of § 57.4(a)(4);
(4) The aggregate net premiums written for health insurance of United States health risks taken into account for all covered entities; and
(5) The final determination on the covered entity's corrected Form 8963, “Report of Health Insurance Provider Information,” if any.
(b) Timing of notice. The IRS will send each covered entity a notice of its final fee calculation by August 31st of the fee year.
(c) Differences in preliminary fee calculation and final calculation. A covered entity's final fee calculation may differ from the covered entity's preliminary fee calculation because of changes made pursuant to the error correction process described in § 57.6 or because the IRS discovered additional information relevant to the fee calculation through other information sources as described in § 57.4(b)(1). Even if a covered entity did not file a corrected Form 8963 described in § 57.6, a covered entity's final fee may differ from a covered entity's preliminary fee because of information discovered about that covered entity through other information sources. In addition, a change in aggregate net premiums written for health insurance of United States health risks can affect every covered entity's fee because each covered entity's fee is equal to a fraction of the aggregate fee collected from all covered entities.
(d) Payment of final fee. Each covered entity must pay its final fee by September 30th of the fee year. For a controlled group, the payment must be made using the designated entity's Employer Identification Number as reported on Form 8963. The fee must be paid by electronic funds transfer as required by § 57.6302-1. There is no tax return to be filed with the payment of the fee.
(e) Controlled groups. In the case of a controlled group that is liable for the fee, all members of the controlled group are jointly and severally liable for the fee. Accordingly, if a controlled group's fee is not paid, the IRS may separately assess each member of the controlled group for the full amount of the controlled group's fee.
§ 57.8 Tax treatment of fee.
(a) Treatment as an excise tax. The fee is treated as an excise tax for purposes of subtitle F (sections 6001-7874). Thus, references in subtitle F to “taxes imposed by this title,” “internal revenue tax,” and similar references, are also references to the fee. For example, the fee is assessed (section 6201), collected (sections 6301, 6321, and 6331), enforced (section 7602), and subject to examination and summons (section 7602) in the same manner as taxes imposed by the Code.
(b) Deficiency procedures. The deficiency procedures of sections 6211-6216 do not apply to the fee.
(c) Limitation on assessment. The IRS must assess the amount of the fee for any fee year within three years of September 30th of that fee year.
(d) Application of section 275. The fee is treated as a tax described in section 275(a)(6) (relating to taxes for which no deduction is allowed).
§ 57.9 Refund claims.
Any claim for a refund of the fee must be made by the entity that paid the fee to the government and must be made on Form 843, “Claim for Refund and Request for Abatement,” in accordance with the instructions for that form.
§ 57.10 Applicability date.
(a) Except as provided in paragraphs (b) and (c) of this section, §§ 57.1 through 57.9 apply to any fee that is due on or after September 30, 2014.
(b) Paragraphs (b)(3) and (c)(3)(ii) of § 57.2. Paragraphs (b)(3) and (c)(3)(ii) of § 57.2 apply on February 22, 2018.
(c) Section 57.3(a)(2)(ii) applies to Forms 8963, including corrected Forms 8963, filed after December 31, 2019.
[T.D. 9711, 80 FR 10335, Feb. 26, 2015, as amended by T.D. 9830, 83 FR 8175, Feb. 26, 2018; T.D. 9881, 84 FR 61547, Nov. 13, 2019]
§ 57.6302-1 Method of paying the health insurance providers fee.
(a) Fee to be paid by electronic funds transfer. Under the authority of section 6302(a), the fee imposed on covered entities engaged in the business of providing health insurance for United States health risks under section 9010 and § 57.4 must be paid by electronic funds transfer as defined in § 31.6302-1(h)(4)(i) of this chapter, as if the fee were a depository tax. For the time for paying the fee, see § 57.7.
(b) Effective/Applicability date. This section applies with respect to any fee that is due on or after September 30, 2014.
PART 58 STOCK REPURCHASE EXCISE TAX
Authority: 26 U.S.C. 4501(f) and 7805. Section 58.6001-1 also issued under 26 U.S.C. 6001; Section 58.6011-1 also issued under 26 U.S.C. 6011(a); Section 58.6060-1 also issued under 26 U.S.C. 6060(a); Section 58.6061-1 also issued under 26 U.S.C. 6061(a); Section 58.6065-1 also issued under 26 U.S.C. 6065; Section 58.6071-1 also issued under 26 U.S.C. 6071(a); Section 58.6091-1 also issued under 26 U.S.C. 6091(a); Section 58.6107-1 also issued under 26 U.S.C. 6107; Section 58.6109-1 also issued under 26 U.S.C. 6109(a); Section 58.6151-1 also issued under 26 U.S.C. 6151; Section 58.6694-1 also issued under 26 U.S.C. 6694; Section 58.6695-1 also issued under 26 U.S.C. 6695; Section 58.6696-1 also issued under 26 U.S.C. 6696.
Source: T.D. 10002, 89 FR 55049, July 3, 2024, unless otherwise noted.
Subpart A Excise Tax on Stock Repurchases
Source: T.D. 10037, 90 FR 53159, Nov. 24, 2025, unless otherwise noted.
§ 58.4501-0 Table of contents.
This section lists the major captions that appear in §§ 58.4501-1 through 58.4501-7.
§ 58.4501-1 Excise tax on stock repurchases.
(a) Excise tax imposed.
(b) Definitions.
(1) Acquisitive reorganization.
(2) Applicable percentage.
(3) Cessation date.
(4) Clawback.
(5) Code.
(6) Controlled corporation.
(7) Covered corporation.
(8) Covered holder.
(9) Covered non-stock instrument.
(10) De minimis exception.
(11) Distributing corporation.
(12) E reorganization.
(13) Economically similar transaction.
(14) Employee.
(15) Employer-sponsored retirement plan.
(16) Established securities market.
(17) F reorganization.
(18) Forfeiture.
(19) Gross repurchase amount.
(20) Initiation date.
(21) IRS.
(22) Netting rule.
(23) Non-RIC '40 Act fund.
(24) Non-stock instrument.
(25) Recapitalizing corporation.
(26) REIT.
(27) Reorganization exception.
(28) Repurchase.
(29) RIC.
(30) SEC.
(31) Section 317(b) redemption.
(32) Specified affiliate.
(33) Split-off.
(34) Stock.
(35) Stock repurchase excise tax.
(36) Stock repurchase excise tax base.
(37) Stock repurchase excise tax regulations.
(38) Taxable year.
(39) Treasury stock.
(c) No application for any purposes of chapter 1 of the Code.
(d) Status as a domestic or foreign corporation.
(e) F reorganizations.
§ 58.4501-2 General rules regarding excise tax on stock repurchases.
(a) Scope.
(b) Computation of excise tax liability.
(1) Imposition of tax.
(2) De minimis exception.
(c) Stock repurchase excise tax base.
(1) In general.
(2) Taxable year determination.
(3) Repurchases before January 1, 2023.
(d) Duration of covered corporation status.
(1) Initiation date.
(2) Cessation date.
(3) Inbound and outbound F reorganizations.
(e) Repurchase.
(1) Overview.
(2) Scope of repurchase.
(3) Certain section 317(b) redemptions that are not repurchases.
(4) Economically similar transactions.
(5) Transactions that are not repurchases.
(f) Specified affiliates.
(1) Acquisitions of stock of a covered corporation by a specified affiliate treated as a repurchase.
(2) Determination of specified affiliate status.
(g) Date of repurchase.
(1) General rule.
(2) Regular-way sale.
(h) Fair market value of repurchased stock.
(1) In general.
(2) Stock traded on an established securities market.
(3) Stock not traded on an established securities market.
(4) Market price of stock denominated in non-U.S. currency.
§ 58.4501-3 Exceptions.
(a) Scope.
(b) Reduction of covered corporation's stock repurchase excise tax base.
(1) In general.
(2) Coordination of exceptions.
(c) Reorganization exception.
(d) Stock contributions to an employer-sponsored retirement plan.
(1) Reductions in computing covered corporation's stock repurchase excise tax base.
(2) Classes of stock contributed to an employer-sponsored retirement plan.
(3) Same class of stock repurchased and contributed.
(4) Different class of stock repurchased and contributed.
(5) Timing of contributions.
(6) Contributions before January 1, 2023.
(e) Repurchases or acquisitions by a dealer in securities in the ordinary course of business.
(1) In general.
(2) Applicability.
(f) Repurchases by a RIC or a REIT.
(g) Repurchase treated as a dividend.
(1) In general.
(2) Rebuttable presumption of no dividend equivalence.
(3) Sufficient evidence requirement.
(4) Documentation of sufficient evidence.
(h) Repurchases by a non-RIC '40 Act fund.
§ 58.4501-4 Application of netting rule.
(a) Scope.
(b) Issuances and provisions of stock that are a reduction in computing the stock repurchase excise tax base.
(1) General rule.
(2) Stock issued or provided outside period of covered corporation status.
(3) Issuances or provisions before January 1, 2023.
(c) Stock issued or provided in connection with the performance of services.
(1) In general.
(2) Sale of shares to cover exercise price and withholding.
(d) Date of issuance.
(1) In general.
(2) Stock issued or provided in connection with the performance of services.
(e) Fair market value of issued or provided stock.
(1) In general.
(2) Stock traded on an established securities market.
(3) Stock not traded on an established securities market.
(4) Market price of stock denominated in non-U.S. currency.
(5) Stock issued or provided in connection with the performance of services.
(f) Issuances that are disregarded for purposes of applying the netting rule.
(1) Distributions by a covered corporation of its own stock.
(2) Issuances to a specified affiliate.
(3) Issuances in an E reorganization or an F reorganization.
(4) Deemed issuances under section 304(a)(1).
(5) Deemed issuance of a fractional share.
(6) Issuance by a covered corporation that is a dealer in securities.
(7) Issuance by the target corporation in a reverse triangular merger.
(8) Issuance as part of a section 1036(a) exchange.
(9) Issuance as part of a distribution under section 355.
(10) Stock contributions to an employer-sponsored retirement plan.
(11) Net exercises and share withholding.
(12) Settlement other than in stock.
(13) Instrument not in the legal form of stock.
§ 58.4501-5 Examples.
(a) Scope.
(b) In general.
(1) Example 1: Redemption of preferred stock not subject to an exception.
(2) Example 2: Debt-for-debt exchange.
(3) Example 3: Valuation of repurchase.
(4) Example 4: Acquisition partially funded by the target corporation.
(5) Example 5: Pro rata stock split.
(6) Example 6: Acquisition of a target corporation in an acquisitive reorganization.
(7) Example 7: E reorganization.
(8) Example 8: E reorganization with non-qualifying property.
(9) Example 9: Cash paid in lieu of fractional shares.
(10) Example 10: F reorganization.
(11) Example 11: Section 355 split-off.
(12) Example 12: Section 355 split-off as part of a D reorganization.
(13) Example 13: Section 355 spin-off.
(14) Example 14: Section 355 spin-off as part of a D reorganization.
(15) Example 15: Repurchase pursuant to an accelerated share repurchase agreement.
(16) Example 16: Distribution in complete liquidation of a covered corporation.
(17) Example 17: Complete liquidation of a covered corporation to which sections 331 and 332(a) both apply.
(18) Example 18: Acquisition by disregarded entity.
(19) Example 19: Multiple repurchases and contributions of same class of stock.
(20) Example 20: Multiple repurchases and contributions of different classes of stock.
(21) Example 21: Treatment of contributions after the taxable year.
(22) Example 22: Becoming a covered corporation.
(23) Example 23: Actual pro rata redemption in partial liquidation.
(24) Example 24: Constructive redemption in partial liquidation.
(25) Example 25: Non-pro rata redemption in partial liquidation.
(26) Example 26: Physical settlement of call option contract.
(27) Example 27: Net cash settlement of call option contract.
(28) Example 28: Physical settlement of put option contract.
(29) Example 29: Net cash settlement of put option contract.
(30) Example 30: Indirect ownership.
(31) Example 31: Restricted stock provided to a service provider.
(32) Example 32: Restricted stock provided to a service provider with section 83(b) election.
(33) Example 33: Forfeiture of restricted stock provided to a service provider with section 83(b) election.
(34) Example 34: Vested stock provided to a service provider with share withholding.
(35) Example 35: Stock option net exercise.
(36) Example 36: Net share settlement not in connection with performance of services.
(37) Example 37: Broker-assisted net exercise.
(38) Example 38: Stock provided by a specified affiliate to an employee.
(39) Example 39: Stock provided by a specified affiliate to a non-employee.
(40) Example 40: Corporation treated as a domestic corporation under section 7874(b).
§ 58.4501-6 Applicability dates.
(a) In general.
(b) Exceptions.
(1) Applicability date for certain rules.
(2) Early application.
(c) Special rules for acquisitions or repurchases of stock of certain foreign corporations.
§ 58.4501-7 Special rules for acquisitions or repurchases of stock of certain foreign corporations.
(a) Scope.
(b) Definitions.
(1) Application of definitions in § 58.4501-1(b).
(2) Section 4501(d) definitions.
(c) Computation of section 4501(d) excise tax liability for a section 4501(d) covered corporation.
(1) Imposition of tax.
(2) Section 4501(d) de minimis exception.
(3) Section 4501(d) excise tax base.
(4) Section 4501(d)(1) repurchases or section 4501(d)(2) repurchases before January 1, 2023.
(d) Section 4501(d)(2) coordination rules.
(1) Coordination rule for section 4501(d)(1) repurchases and section 4501(d)(2) repurchases.
(2) Coordination rule for multiple section 4501(d) covered corporations.
(e) Status as applicable foreign corporation or covered surrogate foreign corporation.
(1) Initiation date.
(2) Cessation date.
(3) Rules regarding F reorganizations.
(f) Status as an applicable specified affiliate or a specified affiliate of a covered surrogate foreign corporation.
(1) Timing of determination.
(2) Determination of indirect ownership.
(g) Foreign partnerships that are applicable specified affiliates.
(1) In general.
(2) Direct or indirect partner.
(3) Control of a foreign corporation.
(4) Indirect interests held through applicable foreign corporations.
(5) De minimis domestic entity (direct or indirect) partner.
(h) CSFC repurchase.
(1) Overview.
(2) Scope of CSFC repurchases.
(3) Certain section 317(b) redemptions that are not CSFC repurchases.
(4) Section 4501(d) economically similar transactions.
(5) Transactions that are not CSFC repurchases.
(i) [Reserved]
(j) Date of section 4501(d)(1) repurchase or section 4501(d)(2) repurchase.
(1) General rule.
(2) Regular-way sale.
(k) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is repurchased or acquired.
(1) In general.
(2) Stock traded on an established securities market.
(3) Stock not traded on an established securities market.
(4) Market price of stock denominated in non-U.S. currency.
(l) Section 4501(d) exceptions.
(1) In general.
(2) Section 4501(d) reorganization exception.
(3) Stock contributions to an employer-sponsored retirement plan.
(4) Repurchases or acquisitions by a dealer in securities in the ordinary course of business.
(5) Repurchases by a RIC or REIT.
(6) CSFC repurchase treated as a dividend.
(7) Repurchases by a non-RIC '40 Act fund.
(m) Application of section 4501(d) netting rule.
(1) In general.
(2) Stock issued or provided outside period of applicable foreign corporation or covered surrogate foreign corporation status.
(3) Issuances or provisions before January 1, 2023.
(4) Stock Issued or provided in connection with the performance of services.
(5) Date of issuance or provision for section 4501(d) netting rule.
(6) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is issued or provided to employees.
(7) Issuances that are disregarded for purposes of applying the section 4501(d) netting rule.
(n) Section 4501(d)(1) examples.
(1) Example 1: Section 4501(d) netting rule with respect to a single applicable specified affiliate.
(2) Example 2: Section 4501(d) netting rule with respect to multiple applicable specified affiliates.
(3) Example 3: Foreign partnership that is an applicable specified affiliate.
(4) Example 4: Foreign partnership that is not an applicable specified affiliate.
(5) Example 5: Foreign partnership that is directly owned by foreign corporations and is an applicable specified affiliate.
(o) Section 4501(d)(2) examples.
(1) Example 1: Section 4501(d) netting rule with respect to an expatriated entity.
(2) Example 2: Section 4501(d)(2) repurchase from the covered surrogate foreign corporation or another specified affiliate of the covered surrogate foreign corporation.
(3) Example 3: Liability with respect to multiple expatriated entities.
(p) Applicability dates.
(1) In general.
(2) Transition rule for foreign partnership de minimis rule.
(3) Early application.
§ 58.4501-1 Excise tax on stock repurchases.
(a) Excise tax imposed. Section 4501(a) of the Code imposes a stock repurchase excise tax on each covered corporation equal to the applicable percentage of the fair market value of any stock of the corporation that is repurchased by the corporation during the taxable year. This section and § 58.4501-2 provide generally applicable definitions and operating rules regarding the application of the stock repurchase excise tax and the computation of the stock repurchase excise tax liability of a covered corporation. Section 58.4501-3 provides rules regarding the application of the exceptions in section 4501(e) (other than the de minimis exception described in section 4501(e)(3), which is addressed in § 58.4501-2(b)(2)) and related exceptions. Section 58.4501-4 provides rules regarding the application of section 4501(c)(3). Section 58.4501-5 provides examples that illustrate the application of section 4501 and the stock repurchase excise tax regulations. Section 58.4501-6 provides applicability dates for the stock repurchase excise tax regulations (other than § 58.4501-7). For special rules and examples regarding the application of section 4501(d) to acquisitions or repurchases of stock of certain foreign corporations, see § 58.4501-7.
(b) Definitions. The following definitions apply for purposes of this section and §§ 58.4501-2 through 58.4501-6, and, to the extent provided in § 58.4501-7(b), for purposes of § 58.4501-7:
(1) Acquisitive reorganization. The term acquisitive reorganization means a transaction that qualifies as a reorganization under—
(i) Section 368(a)(1)(A) of the Code, including by reason of section 368(a)(2)(D) or (a)(2)(E);
(ii) Section 368(a)(1)(C);
(iii) Section 368(a)(1)(D), if the reorganization satisfies the requirements of section 354(b)(1) of the Code; or
(iv) Section 368(a)(1)(G), if the reorganization satisfies the requirements of section 354(b)(1).
(2) Applicable percentage. The term applicable percentage means the percentage provided in section 4501(a).
(3) Cessation date. The term cessation date means the date on which all stock of a covered corporation ceases to be traded on an established securities market.
(4) Clawback. The term clawback means a surrender of stock pursuant to a contractual provision that requires an employee to return vested stock.
(5) Code. The term Code means the Internal Revenue Code.
(6) Controlled corporation. The term controlled corporation has the meaning given the term in section 355(a)(1)(A) of the Code.
(7) Covered corporation. The term covered corporation means any domestic corporation (including within the meaning of paragraph (d) of this section) the stock of which is traded on an established securities market.
(8) Covered holder. The term covered holder has the meaning given the term in § 58.4501-4(f)(13)(ii)(C).
(9) Covered non-stock instrument. The term covered non-stock instrument has the meaning given the term in § 58.4501-4(f)(13)(ii)(B).
(10) De minimis exception. The term de minimis exception has the meaning given the term in § 58.4501-2(b)(2)(i).
(11) Distributing corporation. The term distributing corporation has the meaning given the term in section 355(a)(1)(A).
(12) E reorganization. The term E reorganization means a transaction that qualifies as a reorganization under section 368(a)(1)(E).
(13) Economically similar transaction. The term economically similar transaction means a transaction described in § 58.4501-2(e)(4).
(14) Employee. The term employee means an employee as defined in section 3401(c) of the Code and § 31.3401(c)-1 of this chapter, or a former employee, of a covered corporation or a specified affiliate of the covered corporation (as appropriate).
(15) Employer-sponsored retirement plan—(i) In general. The term employer-sponsored retirement plan means a plan that includes a trust that is qualified under section 401(a) of the Code and maintained by a covered corporation or a specified affiliate of the covered corporation.
(ii) ESOPs included. For the purposes of these regulations, the term employer-sponsored retirement plan includes an employee stock ownership plan defined in section 4975(e)(7) of the Code (ESOP) that is maintained by a covered corporation or a specified affiliate of the covered corporation.
(16) Established securities market. The term established securities market has the meaning given the term in § 1.7704-1(b) of this chapter.
(17) F reorganization. The term F reorganization means a transaction that qualifies as a reorganization under section 368(a)(1)(F).
(18) Forfeiture. The term forfeiture means a surrender of stock to the issuing corporation for no consideration.
(19) Gross repurchase amount. The term gross repurchase amount has the meaning given the term in § 58.4501-2(c)(1)(i).
(20) Initiation date. The term initiation date means the date on which stock of a corporation begins to be traded on an established securities market.
(21) IRS. The term IRS means the Internal Revenue Service.
(22) Netting rule. The term netting rule has the meaning given the term in § 58.4501-4(a).
(23) Non-RIC '40 Act fund. The term non-RIC '40 Act fund has the meaning given the term in § 58.4501-3(h).
(24) Non-stock instrument. The term non-stock instrument has the meaning given the term in § 58.4501-4(f)(13)(ii)(A).
(25) Recapitalizing corporation. The term recapitalizing corporation means the corporation recapitalizing its stock in an E reorganization.
(26) REIT. The term REIT has the meaning given the term real estate investment trust in section 856(a) of the Code.
(27) Reorganization exception. The term reorganization exception means the exception provided in § 58.4501-3(c).
(28) Repurchase. The term repurchase has the meaning given the term in § 58.4501-2(e)(2).
(29) RIC. The term RIC has the meaning given the term regulated investment company in section 851 of the Code.
(30) SEC. The term SEC means the U.S. Securities and Exchange Commission.
(31) Section 317(b) redemption. The term section 317(b) redemption means a redemption within the meaning of section 317(b) of the Code with regard to the stock of a covered corporation.
(32) Specified affiliate. The term specified affiliate means, with regard to any corporation—
(i) Any corporation more than 50 percent of the stock of which is owned (by vote or by value), directly or indirectly, by the corporation; and
(ii) Any partnership more than 50 percent of the capital interests or profits interests of which is held, directly or indirectly, by the corporation.
(33) Split-off. The term split-off means a distribution qualifying under section 355 (or so much of section 356 of the Code as relates to section 355) by a distributing corporation pursuant to which the shareholders of the distributing corporation exchange stock of the distributing corporation for stock of the controlled corporation and, if applicable, other property (including securities of the controlled corporation) or money.
(34) Stock—(i) In general. Except as provided in paragraph (b)(34)(ii) or (iii) of this section, the term stock means any instrument issued by a corporation that is stock (including treasury stock) or that is treated as stock for Federal tax purposes at the time of issuance, regardless of whether the instrument is traded on an established securities market.
(ii) Additional tier 1 capital. The term stock does not include preferred stock that—
(A) Qualifies as additional tier 1 capital (within the meaning of 12 CFR 3.20(c), 217.20(c), 217.608(a)(2), 324.20(c), or 628.20(c)); and
(B) Does not qualify as common equity tier 1 capital (within the meaning of 12 CFR 3.20(b), 217.20(b), 217.608(a)(3), 324.20(b), or 628.20(b)).
(iii) Section 1504(a)(4) stock. The term stock does not include preferred stock described in section 1504(a)(4) of the Code.
(35) Stock repurchase excise tax. The term stock repurchase excise tax means the excise tax imposed by section 4501(a) on each covered corporation equal to the applicable percentage of the fair market value of any stock of the corporation that is repurchased by the corporation during the taxable year.
(36) Stock repurchase excise tax base. The term stock repurchase excise tax base has the meaning given the term in § 58.4501-2(c)(1).
(37) Stock repurchase excise tax regulations. The term stock repurchase excise tax regulations means—
(i) Subparts A and B of this part; and
(ii) Section 1.1275-6(f)(12)(iii) of this chapter (providing that the integration of a qualifying debt instrument with a hedge pursuant to § 1.1275-6 of this chapter is not taken into account in determining whether and when stock is repurchased or issued).
(38) Taxable year. The term taxable year has the meaning given the term in section 7701(a)(23) of the Code.
(39) Treasury stock. The term treasury stock means treasury stock within the meaning of section 317(b).
(c) No application for any purposes of chapter 1 of the Code. The rules of this part have no application for purposes of chapter 1 of the Code.
(d) Status as a domestic or foreign corporation. If a corporation is, or is treated as, a domestic corporation for purposes of the Code or for purposes that include chapter 37 of the Code, then the corporation is a domestic corporation for purposes of the stock repurchase excise tax regulations. A corporation that is not a domestic corporation for purposes of the stock repurchase excise tax regulations is a foreign corporation for such purposes.
(e) F reorganizations. For purposes of the stock repurchase excise tax regulations, the transferor corporation and the resulting corporation (each as defined in § 1.368-2(m)(1) of this chapter) in an F reorganization are treated as the same corporation.
§ 58.4501-2 General rules regarding excise tax on stock repurchases.
(a) Scope. This section provides general rules regarding the application of the stock repurchase excise tax and the computation of the stock repurchase excise tax liability of a covered corporation. Paragraphs (b) and (c) of this section provide rules for computing a covered corporation's stock repurchase excise tax liability. Paragraph (d) of this section provides rules for determining whether a corporation is a covered corporation. Paragraph (e) of this section provides rules for determining whether a transaction is a repurchase. Paragraph (f) of this section provides rules for acquisitions of stock of a covered corporation by a specified affiliate of the covered corporation. Paragraph (g) of this section provides rules for determining when stock is repurchased. Paragraph (h) of this section provides rules for determining the fair market value of repurchased stock.
(b) Computation of excise tax liability—(1) Imposition of tax. Except as provided in paragraph (b)(2) of this section (regarding the de minimis exception), the amount of stock repurchase excise tax imposed by section 4501(a) on a covered corporation for a taxable year equals the product obtained by multiplying—
(i) The applicable percentage; by
(ii) The stock repurchase excise tax base of the covered corporation for the taxable year determined in accordance with paragraph (c)(1) of this section.
(2) De minimis exception—(i) In general. A covered corporation is not subject to the stock repurchase excise tax with regard to a taxable year if, during that taxable year, the aggregate fair market value of the stock described in paragraphs (b)(2)(i)(A) and (B) of this section does not exceed $1,000,000 (de minimis exception):
(A) The stock of the covered corporation that is repurchased by the covered corporation (as determined under paragraph (e) of this section).
(B) The stock of the covered corporation that is acquired by a specified affiliate of the covered corporation (as determined under paragraph (f) of this section).
(ii) Determination. A determination of whether the de minimis exception applies with regard to a taxable year is made before applying—
(A) Any exception under § 58.4501-3; and
(B) Any adjustments pursuant to the netting rule under § 58.4501-4.
(c) Stock repurchase excise tax base—(1) In general. With regard to a covered corporation, the term stock repurchase excise tax base means the dollar amount (not less than zero) that is obtained by—
(i) Determining (in accordance with paragraphs (e) through (h) of this section) the aggregate fair market value of the stock of the covered corporation that is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation during the covered corporation's taxable year (gross repurchase amount);
(ii) Reducing the gross repurchase amount by the fair market value of the stock of the covered corporation repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation during the covered corporation's taxable year to the extent the repurchase or acquisition qualifies for an exception in accordance with § 58.4501-3; and then
(iii) Further reducing the gross repurchase amount by the aggregate fair market value of stock of the covered corporation issued by the covered corporation or provided by a specified affiliate of the covered corporation during the covered corporation's taxable year under the netting rule in accordance with § 58.4501-4.
(2) Taxable year determination—(i) In general. The determinations under paragraph (c)(1)(i) of this section are made separately for each covered corporation and for each taxable year of the covered corporation.
(ii) No carrybacks or carryforwards. Reductions under paragraphs (c)(1)(ii) and (iii) of this section in excess of the gross repurchase amount may not be carried forward or backward to preceding or succeeding taxable years of the covered corporation.
(3) Repurchases before January 1, 2023. Stock of a covered corporation repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation before January 1, 2023 (as determined under paragraphs (e) through (g) of this section) is neither—
(i) Included in the stock repurchase excise tax base of the covered corporation; nor
(ii) Taken into account in determining the applicability of the de minimis exception.
(d) Duration of covered corporation status—(1) Initiation date. A corporation becomes a covered corporation at the beginning of the corporation's initiation date (that is, the date on which stock of the corporation begins to be traded on an established securities market).
(2) Cessation date. A corporation ceases to be a covered corporation at the end of the corporation's cessation date (that is, the date on which all stock of the corporation ceases to be traded on an established securities market).
(3) Inbound and outbound F reorganizations—(i) Inbound F reorganization. In the case of a foreign corporation that transfers its assets or that is treated as transferring its assets to a domestic corporation in an F reorganization (as described in § 1.367(b)-2(f) of this chapter), the corporation is not treated as a domestic corporation until the day after the reorganization.
(ii) Outbound F reorganization. In the case of a domestic corporation that transfers its assets or that is treated as transferring its assets to a foreign corporation in an F reorganization (as described in § 1.367(a)-1(e) of this chapter), the corporation is not treated as a foreign corporation until the day after the reorganization.
(e) Repurchase—(1) Overview. This paragraph (e) provides rules for determining whether a transaction is a repurchase. Paragraph (e)(2) of this section provides a general rule regarding the scope of the term repurchase for purposes of the stock repurchase excise tax. Paragraph (e)(3) of this section provides an exclusive list of transactions that are section 317(b) redemptions but are not repurchases. Paragraph (e)(4) of this section provides an exclusive list of transactions that are economically similar transactions. Paragraph (e)(5) of this section provides a non-exclusive list of transactions that are not repurchases.
(2) Scope of repurchase. A repurchase means solely—
(i) A section 317(b) redemption, except as provided in paragraph (e)(3) of this section; or
(ii) An economically similar transaction described in paragraph (e)(4) of this section.
(3) Certain section 317(b) redemptions that are not repurchases. This paragraph (e)(3) provides an exclusive list of section 317(b) redemptions that are not repurchases for purposes of the stock repurchase excise tax regulations.
(i) Section 304(a)(1) transactions—(A) Rule regarding deemed distributions. The deemed distribution by an acquiring corporation (within the meaning of section 304(a)(1) of the Code) that is a covered corporation in redemption of stock of the acquiring corporation (resulting from the application of section 304(a)(1) to an acquisition of stock by such acquiring corporation), regardless of whether section 302(a) or (d) of the Code applies to the acquiring corporation's deemed distribution in redemption of its stock.
(B) Rule regarding deemed issuances. For the rule addressing the treatment of any stock deemed to be issued by the acquiring corporation as a result of the application of section 304(a)(1), see § 58.4501-4(f)(4).
(ii) Leveraged buyouts and take-private transactions. A redemption by a covered corporation that occurs as part of a transaction in which the covered corporation ceases to be a covered corporation.
(iii) Stock issued prior to August 16, 2022. A redemption by a covered corporation of stock of the covered corporation issued prior to August 16, 2022, if, at the time such stock was issued and continuing until the time of the redemption, the stock was subject to—
(A) Mandatory redemption by the covered corporation; or
(B) A unilateral put option by the holder of such stock.
(iv) Payment by a covered corporation of cash in lieu of fractional shares. A payment by a covered corporation of cash in lieu of a fractional share of the covered corporation's stock, if—
(A) The payment is carried out as part of a transaction that qualifies as a reorganization under section 368(a) of the Code or a distribution to which section 355 of the Code applies, or pursuant to the settlement of an option or a similar financial instrument (for example, a convertible debt instrument or convertible preferred share);
(B) The cash received by the shareholder entitled to the fractional share is not separately bargained-for consideration (that is, the cash paid by the covered corporation in lieu of the fractional share represents a mere rounding off of the shares issued in the exchange or settlement);
(C) The payment is carried out solely for administrative convenience (and, therefore, solely for non-tax reasons); and
(D) The amount of cash paid to the shareholder in lieu of a fractional share does not exceed the fair market value of one full share of the class of stock of the covered corporation with respect to which the payment of cash in lieu of a fractional share is made.
(4) Economically similar transactions. This paragraph (e)(4) provides an exclusive list of transactions that are economically similar to section 317(b) redemptions solely for purposes of the stock repurchase excise tax (that is, economically similar transactions) and, therefore, are taken into account as repurchases for purposes of the stock repurchase excise tax regulations.
(i) E reorganizations—(A) In general. Except as provided in paragraph (e)(4)(i)(B) of this section, in the case of an E reorganization in which the recapitalizing corporation is a covered corporation, solely the recapitalizing corporation's acquisition of its stock pursuant to the plan of reorganization in exchange for property that is not permitted to be received by the recapitalizing corporation's shareholders under section 354 of the Code without the recognition of gain.
(B) Exception. Paragraph (e)(4)(i)(A) of this section does not apply to the extent that—
(1) The distribution of such property is treated as a distribution with respect to the recapitalizing corporation's stock under § 1.301-1(j) of this chapter; or
(2) The exchange is with respect to preferred stock with dividends in arrears that is treated under § 1.305-7(c)(2) or 1.368-2(e)(5) of this chapter as a deemed distribution to which sections 301 and 305(b)(4) of the Code apply.
(ii) Split-offs. In the case of a split-off by a distributing corporation that is a covered corporation, the acquisition by the distributing corporation of its stock in exchange for property.
(iii) Certain forfeitures and clawbacks of stock—(A) In general. In the case of a forfeiture or clawback of stock of a covered corporation pursuant to a legal or contractual obligation, the forfeiture to or clawback by the covered corporation or a specified affiliate of the covered corporation (as appropriate) on the date of forfeiture or clawback (as appropriate) if the stock was treated as issued or provided under § 58.4501-4(b) and the forfeiture or clawback of the stock (as appropriate) is described in paragraph (e)(4)(iii)(B), (C), or (D) of this section.
(B) Stock subject to post-closing price adjustments. The stock was issued pursuant to an acquisition of a target entity or its business, and the forfeiture of the stock was in accordance with the terms of the documents governing the transaction (for example, to compensate the acquiring corporation for breaches of representations or warranties made by the target entity, or because the business of the target entity did not achieve certain performance benchmarks agreed upon in the transaction documents).
(C) Stock for which a section 83(b) election was made. The stock was subject to a substantial risk of forfeiture within the meaning of section 83(a) of the Code on the date the stock was issued or provided, the service provider made a valid election under section 83(b) with regard to the stock, and the forfeiture resulted from the service provider failing to meet the vesting condition.
(D) Clawbacks. On the date the stock was issued or provided, the stock was subject to a clawback agreement, and a clawback of the stock resulted from the occurrence of an event specified in the clawback agreement.
(5) Transactions that are not repurchases. This paragraph (e)(5) provides a non-exclusive list of transactions each of which is not a repurchase for purposes of the stock repurchase excise tax regulations.
(i) Complete liquidations. A distribution by a covered corporation—
(A) In complete liquidation of the covered corporation to which section 331 or 332(a) (or both) applies;
(B) Pursuant to a resolution or plan of dissolution of the covered corporation that is reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Pursuant to a deemed dissolution of the covered corporation (for instance, pursuant to a deemed liquidation under § 301.7701-3 of this chapter).
(ii) Distributions during taxable year of complete liquidation or dissolution. A distribution by a covered corporation during a taxable year of the covered corporation, if the covered corporation—
(A) Completely liquidates during the taxable year (that is, has a final distribution during the taxable year in a complete liquidation to which section 331 or 332(a) (or both) applies);
(B) Dissolves during the taxable year pursuant to a resolution or plan of dissolution as reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Is deemed to dissolve during the taxable year (for instance, pursuant to a deemed liquidation under § 301.7701-3 of this chapter).
(iii) Divisive transactions under section 355 other than split-offs—(A) In general. Subject to paragraph (e)(5)(iii)(B) of this section, a distribution by a distributing corporation that is a covered corporation of stock of a controlled corporation qualifying under section 355 that is not a split-off.
(B) Exception regarding non-qualifying property in spin-offs. A distribution by a distributing corporation that is a covered corporation of other property or money in exchange for stock of the distributing corporation is a repurchase by the distributing corporation if it occurs in pursuance of a transaction qualifying under section 355 in which the distribution by the distributing corporation of stock of the controlled corporation is with respect to stock of the distributing corporation.
(iv) Non-redemptive distributions subject to section 301(c)(2) or (3). A distribution to which section 301 applies by a covered corporation to a distributee, if the distribution—
(A) Is subject to section 301(c)(2) or (3); and
(B) The distributee does not exchange stock of the covered corporation (and is not treated as exchanging stock of the covered corporation for Federal income tax purposes).
(v) Acquisitive reorganizations. In the case of an acquisitive reorganization in which the target corporation is a covered corporation, the acquisition by the target corporation of its stock pursuant to the plan of reorganization in exchange for property that is permitted to be received by the target corporation's shareholders under section 354 or 356 of the Code.
(vi) Net cash settlement of an option contract or other derivative financial instrument—(A) In general. Subject to paragraph (e)(5)(vi)(B) of this section, the net cash settlement of an option contract or other derivative financial instrument with respect to stock of a covered corporation.
(B) Exception regarding net cash settlement of an option contract or other derivative financial instrument treated as stock. The net cash settlement of an instrument in the legal form of an option contract or other derivative financial instrument that is treated as stock of a covered corporation for Federal tax purposes at the time of issuance is a repurchase.
(vii) Repurchases from a specified affiliate. The acquisition by a covered corporation of its stock from a specified affiliate of the covered corporation if the specified affiliate's acquisition of such stock of the covered corporation was treated as a repurchase under paragraph (f)(1) of this section.
(f) Specified affiliates—(1) Acquisitions of stock of a covered corporation by a specified affiliate treated as a repurchase. If a specified affiliate of a covered corporation acquires stock of the covered corporation from a person that is not the covered corporation or another specified affiliate of the covered corporation, the acquisition is treated as a repurchase of the stock of the covered corporation by the covered corporation.
(2) Determination of specified affiliate status—(i) Timing of determination. A covered corporation must determine whether another corporation or partnership is a specified affiliate of the covered corporation at the time the stock of the covered corporation is acquired or provided by the other corporation or partnership for purposes of computing the stock repurchase excise tax with regard to the covered corporation.
(ii) Indirect ownership. For purposes of determining whether a corporation or a partnership is a specified affiliate of a covered corporation, the covered corporation is treated as indirectly owning stock in the corporation or holding capital or profits interests in the partnership in the percentage equal to the covered corporation's proportionate percentage of stock owned, or capital or profits interests held, through other entities.
(g) Date of repurchase—(1) General rule. In general, stock of a covered corporation is treated as repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation on the date on which ownership of the stock transfers to the covered corporation or specified affiliate (as appropriate) for Federal income tax purposes.
(2) Regular-way sale. A regular-way sale of stock of a covered corporation (that is, a transaction in which a trade order is placed on the trade date, and settlement of the transaction, including payment and delivery of the stock, occurs a standardized period of time, as set by a regulator, after the trade date) is treated as a repurchase by the covered corporation or an acquisition by a specified affiliate of the covered corporation on the trade date.
(h) Fair market value of repurchased stock—(1) In general. The fair market value of stock of a covered corporation that is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation is the market price of the stock on the date the stock is repurchased or acquired (as determined under paragraph (g) of this section). That is, if the price at which the repurchased or acquired stock is purchased differs from the market price of the stock on the date the stock is repurchased or acquired, the fair market value of the stock is the market price on the date the stock is repurchased or acquired.
(2) Stock traded on an established securities market—(i) In general. If stock of a covered corporation that is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation is traded on an established securities market, the covered corporation must determine the market price of the repurchased or acquired stock by applying one of the methods provided in paragraph (h)(2)(ii) of this section. For purposes of this paragraph (h)(2), repurchased or acquired stock of a covered corporation is treated as traded on an established securities market if any stock of the same class and issue of stock is so traded, regardless of whether the shares repurchased or acquired are so traded.
(ii) Acceptable methods. The following are acceptable methods for determining the market price of repurchased or acquired stock of a covered corporation traded on an established securities market:
(A) The daily volume-weighted average price as determined on the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(B) The closing price on the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(C) The average of the high and low prices on the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(D) The trading price at the time the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(iii) Date of repurchase not a trading day. For purposes of each method provided in paragraph (h)(2)(ii) of this section, if the date the stock of a covered corporation is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation is not a trading day, the date on which the market price is determined is the immediately preceding trading day.
(iv) Consistency requirement—(A) Solely one method permitted for determining market price of repurchased or acquired stock. The market price of repurchased or acquired stock of a covered corporation that is traded on an established securities market must be determined by consistently applying one (but not more than one) of the methods provided in paragraph (h)(2)(ii) of this section to all stock of the covered corporation repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation throughout the covered corporation's taxable year.
(B) Application to netting rule. The method used by the covered corporation under paragraph (h)(2)(iv)(A) of this section must be consistently applied to determine the market price of all stock of the covered corporation issued or provided throughout the covered corporation's taxable year for purposes of the netting rule under § 58.4501-4 except with respect to the determination of the fair market value of stock of a covered corporation that the covered corporation issues, or that a specified affiliate of the covered corporation provides, in connection with the performance of services. See § 58.4501-4(e).
(v) Stock traded on multiple exchanges—(A) In general. A covered corporation the stock of which is traded on multiple established securities markets must determine the market price of the stock of the covered corporation by reference to trading on the established securities market in the country in which the covered corporation is organized, including a regional established securities market that trades in that country.
(B) Stock traded on multiple exchanges in country where covered corporation is organized. If a covered corporation's stock is traded on multiple established securities markets in the country in which the covered corporation is organized, the covered corporation must determine the market price of the stock by reference to trading on the established securities market in that country with the highest trading volume in that stock in the prior taxable year.
(C) Other cases in which stock is traded on multiple exchanges. If stock of a covered corporation is traded on multiple established securities markets and neither paragraph (h)(2)(v)(A) nor (B) of this section applies, the covered corporation must determine the market price of the stock in a manner that is reasonable and consistent under the facts and circumstances.
(3) Stock not traded on an established securities market—(i) General rule. If repurchased or acquired stock of a covered corporation is not traded on an established securities market, the market price of the stock is determined as of the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation under the principles of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(ii) Consistency requirement—(A) Solely one method permitted for determining market price of repurchased or acquired stock. The valuation method for determining the market price of repurchased or acquired stock of a covered corporation that is not traded on an established securities market must be used for all repurchases of stock of the covered corporation or acquisitions by a specified affiliate of the covered corporation of the same class throughout the covered corporation's taxable year, unless the application of that method to a particular repurchase or acquisition would be unreasonable under the facts and circumstances as of the valuation date within the meaning of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(B) Application to netting rule. The method used by the covered corporation under paragraph (h)(3)(ii)(A) of this section must be consistently applied to determine the market price of all stock of the covered corporation of the same class issued throughout the covered corporation's taxable year for purposes of the netting rule under § 58.4501-4 except with respect to the determination of the market price of stock of the covered corporation that is issued or provided in connection with the performance of services or if the application of that method to a particular issuance in connection with the performance of services would be unreasonable under the facts and circumstances as of the valuation date.
(4) Market price of stock denominated in non-U.S. currency. The market price of any stock of a covered corporation that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in § 1.988-1(d)(1) of this chapter) on the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
§ 58.4501-3 Exceptions.
(a) Scope. This section provides rules regarding the application of each exception set forth in section 4501(e) of the Code, other than the de minimis exception described in section 4501(e)(3) and subject to § 58.4501-2(b)(2), to a repurchase of stock of a covered corporation by the covered corporation or an acquisition of stock of a covered corporation by a specified affiliate of the covered corporation (as appropriate). This section also provides rules regarding an additional exception to the stock repurchase excise tax applicable to non-RIC '40 Act funds. For rules regarding the application of these exceptions in the context of section 4501(d), see § 58.4501-7(l).
(b) Reduction of covered corporation's stock repurchase excise tax base—(1) In general. For purposes of determining a covered corporation's stock repurchase excise tax base under § 58.4501-2(c)(1), the covered corporation reduces its gross repurchase amount by an amount equal to the aggregate fair market value of its repurchased stock that qualifies for an exception described in paragraphs (c) through (h) of this section. See § 58.4501-2(c)(1)(ii).
(2) Coordination of exceptions. If a repurchase of stock qualifies for more than one exception described in paragraphs (c) through (h) of this section, the covered corporation may reduce its gross repurchase amount under solely a single exception, as determined by the covered corporation.
(c) Reorganization exception. A covered corporation reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of its stock repurchased from a shareholder in a transaction described in § 58.4501-2(e)(4)(ii) to the extent that the repurchase is for property permitted by section 355 to be received without the recognition of gain or loss.
(d) Stock contributions to an employer-sponsored retirement plan—(1) Reductions in computing covered corporation's stock repurchase excise tax base—(i) General rule. A covered corporation reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) if the stock of the covered corporation that is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation, or an amount of stock equal to the fair market value of the stock repurchased or acquired, is contributed to an employer-sponsored retirement plan. The amount of the reduction under this paragraph (d)(1) is determined as provided in paragraph (d)(3) or (4) of this section.
(ii) Special rule for leveraged ESOPs. If a covered corporation or a specified affiliate of the covered corporation maintains an ESOP with an exempt loan (as described in section 4975(d)(3) of the Code), allocations of qualifying employer securities from the ESOP suspense account to ESOP participants' accounts that are attributable to employer contributions (and not to dividends) are treated as contributions of stock under this paragraph (d) as of the date stock attributable to repayment of the exempt loan is released from the suspense account and allocated to ESOP participants' accounts.
(2) Classes of stock contributed to an employer-sponsored retirement plan. This paragraph (d) applies to contributions of any class of covered corporation stock to an employer-sponsored retirement plan, regardless of the class of stock that was repurchased or acquired.
(3) Same class of stock repurchased and contributed. If stock of a covered corporation is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation, and stock of the covered corporation of the same class is contributed to an employer-sponsored retirement plan, the amount of the reduction under paragraph (d)(1) of this section is equal to the lesser of—
(i) The aggregate fair market value of the stock of the same class that was repurchased or acquired (as determined under § 58.4501-2(h)) during the covered corporation's taxable year; or
(ii) The amount obtained by—
(A) Determining the aggregate fair market value of all stock of that class repurchased or acquired (as determined under § 58.4501-2(h)) during the covered corporation's taxable year, reduced by the fair market value of shares of that class of stock that is a reduction to the stock repurchase excise tax base for the taxable year under an exception in this section other than the exception in this paragraph (d);
(B) Dividing the amount determined under paragraph (d)(3)(ii)(A) of this section by the number of shares of that class repurchased or acquired, reduced by the number of shares of that class of stock the fair market value of which is a reduction to the stock repurchase excise tax base for the taxable year under an exception in this section other than the exception in this paragraph (d); and
(C) Multiplying the amount determined under paragraph (d)(3)(ii)(B) of this section by the number of shares of that class contributed to an employer-sponsored retirement plan for the taxable year.
(4) Different class of stock repurchased and contributed. If stock of a covered corporation is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation, and stock of the covered corporation of a different class is contributed to an employer-sponsored retirement plan, then the amount of the reduction under paragraph (d)(1) of this section is equal to the fair market value of the contributed stock at the time the stock is contributed to the employer-sponsored retirement plan.
(5) Timing of contributions—(i) In general. The reduction under paragraph (d)(1) of this section (that is, the reduction in computing the stock repurchase excise tax base), for a taxable year applies to contributions of covered corporation stock to an employer-sponsored retirement plan during the covered corporation's taxable year.
(ii) Treatment of contributions after close of taxable year. For purposes of paragraph (d)(5)(i) of this section, a covered corporation may treat stock contributions to an employer-sponsored retirement plan made after the close of the covered corporation's taxable year as having been contributed during that taxable year if the following two requirements are satisfied:
(A) The stock must be contributed to the employer-sponsored retirement plan by the filing deadline for the form on which the stock repurchase excise tax must be reported (applicable form) for that taxable year of the covered corporation.
(B) The stock must be treated by the employer-sponsored retirement plan in the same manner that the plan would treat a contribution received on the last day of that taxable year of the covered corporation.
(iii) No duplicate reductions. Stock contributions that are treated under paragraph (d)(5)(ii) of this section as having been contributed in the taxable year to which the applicable form applies may not be treated as having been contributed for any other taxable year for purposes of the stock repurchase excise tax.
(6) Contributions before January 1, 2023. A covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, may include for that taxable year the fair market value of all contributions of its stock to an employer-sponsored retirement plan during the entirety of that taxable year for purposes of applying this paragraph (d).
(e) Repurchases or acquisitions by a dealer in securities in the ordinary course of business—(1) In general. Subject to paragraph (e)(2) of this section, a covered corporation reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of its stock repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation (as appropriate) that is a dealer in securities (within the meaning of section 475(c)(1) of the Code) to the extent the stock is acquired in the ordinary course of the dealer's business of dealing in securities.
(2) Applicability. The reduction described in paragraph (e)(1) of this section applies solely to the extent that—
(i) The dealer accounts for the stock as securities held primarily for sale to customers in the dealer's ordinary course of business;
(ii) The dealer disposes of the stock within a period of time that is consistent with the holding of the stock for sale to customers in the dealer's ordinary course of business, taking into account the terms of the stock and the conditions and practices prevailing in the markets for similar stock during the period in which the stock is held; and
(iii) The dealer (if it is a covered corporation) does not sell or otherwise transfer the stock to a specified affiliate of the covered corporation, or the dealer (if it is a specified affiliate of the covered corporation) does not sell or otherwise transfer the stock to the covered corporation or to another specified affiliate of the covered corporation, in each case other than in a sale or transfer to a dealer that also satisfies the requirements of this paragraph (e)(2).
(f) Repurchases by a RIC or REIT. A covered corporation that is a RIC or a REIT reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of any shares of its stock repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(g) Repurchase treated as a dividend—(1) In general. A covered corporation reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of the covered corporation's stock that the covered corporation repurchases (excluding stock treated as repurchased under § 58.4501-2(f)(1)) to the extent the repurchase is treated as a distribution of a dividend under section 301(c)(1) or 356(a)(2) of the Code.
(2) Rebuttable presumption of no dividend equivalence—(i) Presumption. A repurchase to which section 302 or 356(a) of the Code applies is presumed to be subject to section 302(a) or 356(a)(1), respectively (and, therefore, is presumed ineligible for the exception in paragraph (g)(1) of this section).
(ii) Rebuttal of presumption. A covered corporation may rebut the presumption described in paragraph (g)(2)(i) of this section with regard to a specific shareholder solely by establishing with sufficient evidence that the covered corporation and the shareholder treat the repurchase as a dividend for Federal income tax purposes.
(3) Sufficient evidence requirement—(i) In general. To provide sufficient evidence under paragraph (g)(2)(ii) of this section to establish that the shareholder treats the repurchase as a dividend for Federal income tax purposes, the covered corporation must—
(A) Establish, based on information known to the covered corporation (for example, through legal documentation of share ownership, publicly available information, the pro rata nature of the repurchase, or the shareholder certification safe harbor described in paragraph (g)(3)(ii) of this section), that—
(1) The repurchase either constitutes a redemption that is treated as a distribution to which section 301 applies by reason of section 302(d) or has the effect of the distribution of a dividend under section 356(a)(2); and
(2) The covered corporation has no knowledge of facts that would indicate that the treatment described in paragraph (g)(3)(i)(A)(1) of this section is incorrect;
(B) Treat the repurchase consistent with the treatment described in paragraph (g)(3)(i)(A)(1) of this section, including by withholding the applicable amounts, if required; and
(C) Demonstrate sufficient earnings and profits to treat as a dividend either the redemption under section 302 or the receipt of money or other property under section 356.
(ii) Shareholder certification safe harbor—(A) In general. To provide sufficient evidence under paragraph (g)(3)(i)(A) of this section to establish that the shareholder treats the repurchase as a dividend for Federal income tax purposes, the covered corporation—
(1) May obtain certification from the shareholder, in accordance with paragraph (g)(3)(ii)(B) of this section, that the repurchase constitutes a redemption treated as a distribution to which section 301 applies by reason of section 302(d), or that the repurchase has the effect of the distribution of a dividend under section 356(a)(2); and
(2) Must have no knowledge of facts that would indicate that the shareholder certification is incorrect.
(B) Content of shareholder certification. The shareholder certification allowed under paragraph (g)(3)(ii)(A) of this section must include the following information:
(1) The name of the shareholder.
(2) The name of the covered corporation.
(3) The total number of shares of the covered corporation outstanding immediately before and immediately after the repurchase.
(4) A statement that the shareholder treated the repurchase as a dividend for Federal income tax purposes.
(5) The number of shares actually and constructively owned by the shareholder before and after the repurchase.
(6) The shareholder's percentage ownership before and after the repurchase.
(7) If the shareholder is not a United States person (within the meaning of section 7701(a)(30) of the Code) and the shares are held through a broker (within the meaning of section 6045(c) of the Code), a statement that a copy of the certification has been provided to the shareholder's broker.
(8) Any other information described in forms or instructions or in publications or guidance published in the Internal Revenue Bulletin (see §§ 601.601(d)(2) and 601.602 of this chapter).
(9) A penalties of perjury statement.
(10) The signature of the shareholder and date of signature.
(C) Agreement to shareholder certification. After receiving the shareholder certification provided under paragraph (g)(3)(ii)(A)(1) of this section, the covered corporation must include on the shareholder certification a statement signed by the covered corporation under penalties of perjury that the covered corporation—
(1) Agrees to treat the repurchase consistent with the shareholder certification provided under paragraph (g)(3)(ii)(A)(1) of this section; and
(2) Has no knowledge of facts that would indicate that the shareholder certification provided under paragraph (g)(3)(ii)(A)(1) of this section is incorrect.
(4) Documentation of sufficient evidence—(i) Retention and availability of evidence. A covered corporation must retain the evidence described in paragraph (g)(3) of this section and make that evidence available for inspection to the IRS if any of the evidence becomes material in the administration of any internal revenue law.
(ii) Retention of supporting records. The covered corporation must retain records of all information necessary to document and substantiate all content described in paragraph (g)(3) of this section.
(h) Repurchases by a non-RIC '40 Act fund. A covered corporation that is described in section 851(a)(1)(A) of the Code, but that has not elected to be a RIC under section 851(b) (non-RIC '40 Act fund), reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of any shares of its stock repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation if—
(1) The non-RIC '40 Act fund is an open-end company as defined in section 5(a)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a-5); or
(2) The non-RIC '40 Act fund is a closed-end company as defined in section 5(a)(2) of the Investment Company Act of 1940, and the repurchase occurs as part of a periodic repurchase offer made pursuant to SEC Rule 23c-3 (17 CFR 270.23c-3).
§ 58.4501-4 Application of netting rule.
(a) Scope. This section provides rules regarding the application of section 4501(c)(3) of the Code. Paragraph (b) of this section provides general rules regarding the adjustment to a covered corporation's stock repurchase excise tax base with respect to stock that is issued by the covered corporation or provided by a specified affiliate of the covered corporation (netting rule). Paragraph (c) of this section provides special rules for stock issued or provided in connection with the performance of services. Paragraph (d) of this section provides rules for determining the date on which stock is issued or provided. Paragraph (e) of this section provides rules for determining the fair market value of stock that is issued or provided. Paragraph (f) of this section sets forth the only circumstances under which an issuance or provision of stock is disregarded for purposes of the netting rule. For rules regarding the application of the netting rule in the context of section 4501(d), see § 58.4501-7(m).
(b) Issuances and provisions of stock that are a reduction in computing the stock repurchase excise tax base—(1) General rule. The aggregate fair market value of stock of a covered corporation that is issued by the covered corporation or provided by a specified affiliate of the covered corporation during the covered corporation's taxable year is a reduction for purposes of computing the covered corporation's stock repurchase excise tax base for that taxable year in the following circumstances:
(i) The stock is issued by the covered corporation in connection with the performance of services for the covered corporation by an employee or other service provider of the covered corporation.
(ii) The stock is provided by a specified affiliate of the covered corporation in connection with the performance of services for the specified affiliate by an employee or other service provider of the specified affiliate.
(iii) The stock is issued by the covered corporation other than in connection with the performance of services.
(2) Stock issued or provided outside period of covered corporation status. Any stock of a covered corporation issued by the covered corporation or provided by a specified affiliate of the covered corporation before the initiation date or after the cessation date is not taken into account under paragraph (b)(1) of this section. See § 58.4501-2(d).
(3) Issuances or provisions before January 1, 2023. Except as provided in paragraph (b)(2) of this section, a covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, may include the fair market value of all issuances or provisions of its stock during the entirety of that taxable year for purposes of applying paragraph (b)(1) of this section to that taxable year.
(c) Stock issued or provided in connection with the performance of services—(1) In general. For purposes of this section, stock of a covered corporation is issued or provided by the covered corporation or a specified affiliate of the covered corporation in connection with the performance of services only if the issuance or provision of stock is a transfer described in section 83 of the Code, including pursuant to the exercise of a nonqualified stock option described in § 1.83-7 of this chapter, pursuant to the exercise of a stock option described in section 421 of the Code, or pursuant to stock settlement of a restricted stock unit (RSU). A specified affiliate of the covered corporation is not a service provider for purposes of this section.
(2) Sale of shares to cover exercise price and withholding—(i) Payment or advance by third party equal to exercise price. If a third party pays the exercise price of an option to acquire stock of a covered corporation on behalf of a service provider or advances to a service provider an amount equal to the exercise price of a stock option that the service provider uses to exercise the option, then any stock transferred by the covered corporation or specified affiliate to the third party upon exercise of the option in connection with exercising the option (as well as any stock transferred by the covered corporation or specified affiliate to the service provider) is treated as issued or provided in connection with the performance of the services by the service provider.
(ii) Advance by third party equal to withholding obligation. If a third party advances an amount equal to the withholding obligation of a service provider, then any stock transferred by the covered corporation or specified affiliate to the third party in connection with this arrangement (as well as any stock transferred by the covered corporation or specified affiliate to the service provider) is treated as issued or provided in connection with the performance of services by the service provider.
(d) Date of issuance—(1) In general. Except as provided in paragraph (d)(2) of this section, stock of a covered corporation is treated as issued by the covered corporation or provided by a specified affiliate of the covered corporation on the date on which ownership of the stock transfers to the recipient for Federal income tax purposes.
(2) Stock issued or provided in connection with the performance of services—(i) In general. Stock of a covered corporation is issued by the covered corporation or provided by a specified affiliate of the covered corporation in connection with the performance of services as of the date the recipient of the stock is treated as the beneficial owner of the stock for Federal income tax purposes. In general, a recipient is treated as the beneficial owner of the stock when the stock is both transferred by the covered corporation (or a specified affiliate of the covered corporation) and substantially vested within the meaning of § 1.83-3(b) of this chapter. Thus, stock transferred pursuant to a vested stock award or an RSU is issued or provided when the covered corporation or a specified affiliate of the covered corporation initiates payment of the stock. Stock transferred that is not substantially vested within the meaning of § 1.83-3(b) of this chapter is not issued or provided until it vests, except as provided in paragraph (d)(2)(iii) of this section.
(ii) Stock options and stock appreciation rights. Stock of a covered corporation transferred by the covered corporation or a specified affiliate of the covered corporation pursuant to an option described in § 1.83-7 of this chapter or section 421 or a stock appreciation right is issued by the covered corporation or provided by the specified affiliate of the covered corporation (as applicable) as of the date the stock is transferred pursuant to the exercise of the option or stock appreciation right.
(iii) Stock on which a section 83(b) election is made. Stock of a covered corporation transferred by the covered corporation or a specified affiliate of the covered corporation when it is not substantially vested within the meaning of § 1.83-3(b) of this chapter, but as to which a valid election under section 83(b) is made, is treated as issued by the covered corporation or provided by the specified affiliate of the covered corporation (as applicable) as of the transfer date.
(e) Fair market value of issued or provided stock—(1) In general. Except as provided in paragraph (e)(5) of this section, the fair market value of stock of a covered corporation issued by the covered corporation or provided by a specified affiliate of the covered corporation is the market price of the stock on the date the stock is issued or provided.
(2) Stock traded on an established securities market—(i) In general. If stock of a covered corporation that is issued by the covered corporation is traded on an established securities market, the covered corporation must determine the market price of the stock by applying one of the methods provided in paragraph (e)(2)(ii) of this section.
(ii) Acceptable methods. The following are the acceptable methods for determining the market price of stock of a covered corporation traded on an established securities market:
(A) The daily volume-weighted average price as determined on the date the stock is issued by the covered corporation.
(B) The closing price on the trading day the stock is issued by the covered corporation, or the immediately preceding trading day.
(C) The average of the high and low prices on the date the stock is issued by the covered corporation.
(D) The trading price at the time the stock is issued by the covered corporation.
(iii) Date of issuance not a trading day. For purposes of each method provided in paragraph (e)(2)(ii) of this section, if the date the stock of a covered corporation is issued by the covered corporation is not a trading day, the date on which the market price is determined is the immediately preceding trading day.
(iv) Consistency requirement—(A) Solely one method permitted for determining market price of issued stock. The market price of stock of a covered corporation that is traded on an established securities market must be determined by consistently applying solely one of the methods provided in paragraph (e)(2)(ii) of this section to all stock of the covered corporation issued by the covered corporation throughout the covered corporation's taxable year.
(B) Application to repurchased stock. The method used by the covered corporation under paragraph (e)(2)(ii)(A) of this section must be consistently applied to determine the market price of all stock of the covered corporation repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation throughout the covered corporation's taxable year. See § 58.4501-2(h)(2)(iv).
(v) Stock traded on multiple exchanges. See § 58.4501-2(h)(2)(v) for rules regarding the valuation of stock of a covered corporation traded on multiple established securities markets.
(3) Stock not traded on an established securities market—(i) General rule. If stock of a covered corporation is not traded on an established securities market, the market price of the stock is determined as of the date the stock is issued by a covered corporation under the principles of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(ii) Consistency requirement. In determining the market price of stock of a covered corporation that is not traded on an established securities market, the same valuation method must be used for all issuances of stock of the covered corporation belonging to the same class throughout the covered corporation's taxable year, unless the application of that method to a particular issuance would be unreasonable under the facts and circumstances as of the valuation date. That same method also must be consistently applied to determine the market price of all stock of the covered corporation of the same class repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation throughout the covered corporation's taxable year, unless the application of that method to a particular issuance would be unreasonable under the facts and circumstances as of the valuation date. See § 58.4501-2(h)(3)(ii).
(4) Market price of stock denominated in non-U.S. currency. The market price of any stock of a covered corporation that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in § 1.988-1(d)(1) of this chapter) on the date the stock is issued by the covered corporation or provided by a specified affiliate of the covered corporation (as applicable).
(5) Stock issued or provided in connection with the performance of services. The fair market value of stock of a covered corporation issued by the covered corporation or provided by a specified affiliate of the covered corporation (as applicable) in connection with the performance of services is the fair market value of the stock, as determined under section 83, as of the date the stock is issued by the covered corporation or provided by the specified affiliate of the covered corporation (as applicable). For purposes of this section, the fair market value of the stock is determined under the rules provided in section 83 regardless of whether an amount is includible in the service provider's income under section 83 or otherwise. For example, the fair market value of stock issued by a covered corporation pursuant to a stock option described in section 421 and stock issued by a covered corporation to a nonresident alien for services performed outside of the United States is determined using the rules provided in section 83.
(f) Issuances that are disregarded for purposes of applying the netting rule. This paragraph (f) lists the only circumstances in which an issuance of stock of a covered corporation is disregarded for purposes of the netting rule.
(1) Distributions by a covered corporation of its own stock. Stock of a covered corporation distributed by the covered corporation to its shareholders with respect to the covered corporation's stock is disregarded for purposes of the netting rule.
(2) Issuances to a specified affiliate—(i) In general. Subject to paragraphs (f)(2)(ii) through (iv) of this section, stock of a covered corporation is disregarded for purposes of the netting rule if that stock is issued by the covered corporation—
(A) To a specified affiliate of the covered corporation; or
(B) In connection with the performance of services by an employee of, or other service provider for, a specified affiliate of the covered corporation (but see paragraph (f)(2)(iv) of this section, allowing certain compensatory transfers of a specified affiliate to be regarded in accordance with paragraph (b)(1)(ii) of this section).
(ii) Subsequent transfer by specified affiliate. Stock of a covered corporation issued by the covered corporation to a specified affiliate of the covered corporation that is subsequently transferred by the specified affiliate to a person that is not a specified affiliate of the covered corporation is regarded for purposes of the netting rule, and is treated as issued by the covered corporation on the date of the subsequent transfer, only if—
(A) The subsequent transfer by the specified affiliate occurs within the same taxable year that the specified affiliate receives the stock from the covered corporation (applicable year);
(B) The covered corporation does not otherwise reduce its stock repurchase excise tax base for the applicable year with respect to the stock under this section; and
(C) The subsequent transfer by the specified affiliate is not in connection with the performance of services provided to the specified affiliate (but see paragraph (f)(2)(iv) of this section, allowing certain compensatory transfers of a specified affiliate to be regarded in accordance with paragraph (b)(1)(ii) of this section).
(iii) Specific identification of shares. For purposes of paragraph (f)(2)(ii)(A) of this section, unless specifically identified, the shares of stock of the covered corporation in a specific class of the covered corporation's stock treated as subsequently transferred by the specified affiliate are the earliest shares of that class issued by the covered corporation to the specified affiliate.
(iv) Subsequent transfers in connection with the performance of services for a specified affiliate. Stock issued by a covered corporation in connection with the performance of services for a specified affiliate is not treated as issued by the covered corporation. However, a transfer of stock of a covered corporation described in § 1.83-6(d) of this chapter (in addition to an actual provision of stock by a specified affiliate described in paragraph (b)(1)(ii) of this section) by a specified affiliate of the covered corporation to an employee or other service provider (that is not another specified affiliate of the covered corporation) of the specified affiliate is treated as a provision of stock described in paragraph (b)(1)(ii) of this section.
(3) Issuances in an E reorganization or an F reorganization. The following issuances are disregarded for purposes of the netting rule:
(i) Any stock issued by a recapitalizing corporation as part of a transaction qualifying as an E reorganization, but only to the extent such stock was issued in exchange for other stock of the recapitalizing corporation.
(ii) Any stock issued by a resulting corporation (as defined in § 1.368-2(m)(1) of this chapter) as part of a transaction qualifying as an F reorganization.
(4) Deemed issuances under section 304(a)(1). Any stock treated as issued by the acquiring corporation by reason of the application of section 304(a)(1) to a transaction (as more fully described in § 58.4501-2(e)(3)(i)) is disregarded for purposes of the netting rule.
(5) Deemed issuance of a fractional share. Any fractional share of a covered corporation's stock deemed to be issued for Federal income tax purposes (by virtue of a payment described in § 58.4501-2(e)(3)(iv)) is disregarded for purposes of the netting rule.
(6) Issuance by a covered corporation that is a dealer in securities. Any stock of a covered corporation that is a dealer in securities issued by such covered corporation is disregarded for purposes of the netting rule to the extent the stock is issued, or otherwise is used to satisfy obligations to customers arising, in the ordinary course of the covered corporation's business of dealing in securities.
(7) Issuance by the target corporation in a reverse triangular merger. Any target corporation stock that is issued by the target corporation to the merged corporation (within the meaning of section 368(a)(2)(E)) in exchange for consideration that includes the stock of the controlling corporation (within the meaning of section 368(a)(2)(E)) in a transaction qualifying as a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(E) is disregarded for purposes of the netting rule.
(8) Issuance as part of a section 1036(a) exchange. Any stock of a covered corporation issued by the covered corporation in exchange for stock of the covered corporation in a transaction that qualifies under section 1036(a) of the Code is disregarded for purposes of the netting rule.
(9) Issuance as part of a distribution under section 355. Any stock issued by a controlled corporation in a distribution qualifying under section 355 (or so much of section 356 as relates to section 355) is disregarded for purposes of the netting rule.
(10) Stock contributions to an employer-sponsored retirement plan. Any stock of a covered corporation contributed to an employer-sponsored retirement plan, any stock of a covered corporation treated as contributed to an employer-sponsored retirement plan under § 58.4501-3(d)(1)(ii) and (d)(5)(ii), and any stock of a covered corporation sold to a leveraged or non-leveraged ESOP, is disregarded for purposes of the netting rule.
(11) Net exercises and share withholding. Stock of a covered corporation withheld by the covered corporation or a specified affiliate of the covered corporation to satisfy the exercise price of a stock option, or to pay any withholding obligation, is disregarded for purposes of the netting rule. For example, stock of a covered corporation withheld by a covered corporation or a specified affiliate of the covered corporation to pay the exercise price of a stock option, to satisfy an employer's income tax withholding obligation under section 3402 of the Code, to satisfy an employer's withholding obligation under section 3102 of the Code, or to satisfy an employer's withholding obligation for State, local, or foreign taxes, is disregarded for purposes of the netting rule.
(12) Settlement other than in stock. Settlement of an option contract with respect to stock of a covered corporation using any consideration other than stock of the covered corporation (including cash) is disregarded for purposes of the netting rule.
(13) Instrument not in the legal form of stock—(i) Issuance or provision of covered non-stock instrument generally disregarded. Except as provided in paragraph (f)(13)(iii) or (iv) of this section, the issuance by a covered corporation or provision by a specified affiliate of the covered corporation of a covered non-stock instrument (as defined in paragraph (f)(13)(ii)(B) of this section), including an issuance or provision before the initiation date or after the cessation date, is disregarded for purposes of the netting rule.
(ii) Definitions. The following definitions apply for purposes of this paragraph (f)(13).
(A) Non-stock instrument. A non-stock instrument is an instrument of a covered corporation that is not in the legal form of stock but that is treated as stock for Federal tax purposes. For the avoidance of doubt, in the case of a covered corporation that is an eligible entity within the meaning of § 301.7701-3(a) of this chapter, a non-stock instrument does not include an instrument that is in the legal form of a membership, partnership, or other ownership interest of the eligible entity.
(B) Covered non-stock instrument. A covered non-stock instrument is a non-stock instrument issued by a covered corporation or provided by a specified affiliate of the covered corporation to a covered holder.
(C) Covered holder. A covered holder is any person that owns (or under the attribution rules of section 318 of the Code is considered to own) at least 10 percent of the stock of the covered corporation, either by vote or value, but only if the covered corporation has knowledge of facts that would indicate such ownership, including through legal documentation of share ownership, publicly available information, or any other means—
(1) In the case of the covered corporation's issuance of a non-stock instrument, at the time of the issuance by the covered corporation; or
(2) In the case of a specified affiliate of the covered corporation's provision of a non-stock instrument, at the time of the provision by the specified affiliate.
(iii) Certain instruments treated as issued when repurchased or acquired—(A) In general. Subject to the identification requirement in paragraph (f)(13)(iii)(B) of this section, if a covered non-stock instrument is repurchased by a covered corporation or acquired by a specified affiliate of the covered corporation, the issuance or provision of the instrument is regarded for purposes of the netting rule at the time of such repurchase or acquisition based on the fair market value of the instrument when the instrument was issued or provided. Such fair market value is determined under paragraph (e) of this section. For purposes of the stock repurchase excise tax regulations, the delivery of stock pursuant to the terms of a covered non-stock instrument is treated as a repurchase of the covered non-stock instrument in exchange for an issuance or provision of the stock that is delivered.
(B) Identification of an instrument not in the legal form of stock. The issuance or provision of a covered non-stock instrument is regarded under paragraph (f)(13)(iii)(A) of this section only if the covered corporation identifies the repurchase or acquisition of the covered non-stock instrument as the repurchase or acquisition of a covered non-stock instrument on the return on which the stock repurchase excise tax must be reported for the covered corporation's taxable year in which the repurchase or acquisition occurs.
(iv) Issuances pursuant to a public offering. Paragraph (f)(13)(i) of this section does not apply to any issuance of a covered non-stock instrument the offer and sale of which was registered with the SEC.
(v) Coordination with specified affiliate rule. This paragraph (f)(13) does not apply to the extent that paragraph (f)(2) of this section applies.
[T.D. 10037, 90 FR 53159, Nov. 24, 2025; 91 FR 6135, Feb. 11, 2026]
§ 58.4501-5 Examples.
(a) Scope. The examples in this section illustrate the application of section 4501 of the Code and the stock repurchase excise tax regulations other than the provisions of section 4501(d) and § 58.4501-7. See § 58.4501-7(n) and (o) for examples that illustrate the application of the rules in § 58.4501-7 related to section 4501(d).
(b) In general. For purposes of the examples in this section, unless otherwise stated: each of Corporation X and unrelated Target is a covered corporation that is a calendar-year taxpayer; the only outstanding stock of each of Corporation X and Target is a single class of common stock that is traded on an established securities market; any shareholder whose stock is redeemed in a section 317(b) redemption qualifies for sale or exchange treatment under section 302(a) of the Code; the de minimis exception does not apply; the covered corporation determines the fair market value of its stock repurchased or issued based on the trading price of the stock at the time it is repurchased or issued; the stock is not a non-stock instrument; and the facts set forth the only repurchases and issuances made during the taxable year.
(1) Example 1: Redemption of preferred stock not subject to an exception—(i) Facts. Corporation X has outstanding common stock that is traded on an established securities market. Corporation X also has outstanding mandatorily redeemable preferred stock issued on July 1, 2023, that is stock for Federal tax purposes but is not traded on an established securities market, is not additional tier 1 capital, and is not described in section 1504(a)(4) of the Code. On January 1, 2025, Corporation X redeems the preferred stock pursuant to its terms.
(ii) Analysis. The redemption by Corporation X of its mandatorily redeemable preferred stock is a repurchase because Corporation X redeems an instrument that is stock for purposes of the stock repurchase excise tax regulations (that is, preferred stock issued by Corporation X that is neither additional tier 1 capital nor described in section 1504(a)(4)), the redemption is a section 317(b) redemption, and the exception for mandatorily redeemable stock does not apply. See §§ 58.4501-1(b)(34) and 58.4501-2(e)(2)(i) and (e)(3)(iii).
(iii) Mandatorily redeemable preferred stock issued prior to August 16, 2022. The facts are the same as in paragraph (b)(1)(i) of this section (Example 1), except that Corporation X issues the mandatorily redeemable preferred stock on July 1, 2022. The redemption by Corporation X of such stock is not a repurchase. See § 58.4501-2(e)(3)(iii).
(2) Example 2: Debt-for-debt exchange—(i) Facts. Corporation X has outstanding securities with a principal amount of $100x. On January 1, 2024, Corporation X issues new securities with a principal amount of $100x to its security holders in exchange for the outstanding securities (debt-for-debt exchange). Neither the outstanding securities nor the new securities are treated as stock for Federal tax purposes.
(ii) Analysis. The debt-for-debt exchange is not subject to the stock repurchase excise tax because it is not a repurchase of stock. See §§ 58.4501-1(a) and (b)(34) and 58.4501-2(c)(1) and (e)(4)(i).
(3) Example 3: Valuation of repurchase—(i) Facts. On April 15, 2025, when the stock of Corporation X is trading at $0.70x per share, Corporation X purchases 50 shares of its stock for $35x from one of its shareholders on an established securities market. The shareholder is required to deliver the stock to Corporation X within the standard settlement cycle for the stock (a regular-way sale), which is one business day after execution of the sale (that is, the trade date of April 15, 2025). On April 17, 2025, the 50 shares are delivered to Corporation X.
(ii) Analysis. Corporation X's purchase of 50 shares of Corporation X stock is a repurchase, because the transaction is a section 317(b) redemption and no exception applies. See § 58.4501-2(e)(2)(i) and (e)(3). For purposes of computing Corporation X's stock repurchase excise tax base, the trade date of April 15, 2025, is the date of repurchase. See § 58.4501-2(g)(1) and (2). The fair market value of the 50 shares of stock repurchased on April 15, 2025, is the aggregate market price of those shares on the date of repurchase, or $35x ($0.70x per share × 50 shares = $35x). See § 58.4501-2(h)(1). Accordingly, the repurchase by Corporation X increases its stock repurchase excise tax base for the 2025 taxable year by $35x.
(iii) Application of netting rule. The facts are the same as in paragraph (b)(3)(i) of this section (Example 3), except that, on August 1, 2025, Corporation X issues 20 shares of its stock to an unrelated party, at which time ownership of the stock transfers to the unrelated party for Federal income tax purposes. On that date, the stock of Corporation X is trading at $0.50x per share. For purposes of computing Corporation X's stock repurchase excise tax base, Corporation X is treated as issuing the 20 shares of its stock on August 1, 2025 (that is, the date on which ownership of the stock transfers to the recipient for Federal income tax purposes). See § 58.4501-4(d)(1). The fair market value of that issued stock is its aggregate market price on the date of issuance by Corporation X, or $10x ($0.50x per share × 20 shares = $10x). See § 58.4501-4(e)(1). Accordingly, the net increase in Corporation X's stock repurchase excise tax base for its 2025 taxable year is $25x ($35x repurchase−$10x issuance = $25x). See § 58.4501-2(c)(1).
(4) Example 4: Acquisition partially funded by the target corporation—(i) Facts. On May 30, 2025, Corporation X acquires all of Target's outstanding stock (Target Stock Acquisition). To effectuate the Target Stock Acquisition, Corporation X causes the following transaction steps to occur. First, Corporation X contributes $40x to a newly formed corporation (Merger Sub). Second, Merger Sub merges into Target, with Target surviving the merger (Subsidiary Merger). At the time of the Subsidiary Merger, the stock of Target has an aggregate fair market value of $100x. In the Subsidiary Merger, Target's shareholders exchange all their Target stock for $100x of cash, of which $60x is funded by Target and $40x is funded by Corporation X. For Federal income tax purposes, the transitory existence of Merger Sub is disregarded, and Target is treated as if Target redeemed 60 percent of its outstanding stock for $60x as part of the Subsidiary Merger. (This treatment results from the fact that Target funded $60x of the consideration received by Target's shareholders in exchange for their Target stock.) All of Target's stock ceases to trade on an established securities market upon completion of the Target Stock Acquisition.
(ii) Analysis. Target ceases to be a covered corporation after the Target Stock Acquisition. See § 58.4501-1(b)(7). Target's redemption of 60 percent of its outstanding stock is a redemption within the meaning of section 317(b) with regard to the stock of a covered corporation. See § 58.4501-2(e)(2)(i). However, because Target's redemption occurs as part of a transaction in which Target ceases to be a covered corporation, it is not a repurchase. See § 58.4501-2(e)(3)(ii).
(5) Example 5: Pro rata stock split—(i) Facts. On October 1, 2025, Corporation X distributes three shares of Corporation X stock with respect to each existing share of its outstanding stock (Corporation X Stock Split).
(ii) Analysis. The stock distributed by Corporation X to its shareholders through the Corporation X Stock Split is disregarded for purposes of the netting rule because Corporation X distributed the stock to its shareholders with respect to its outstanding stock. See § 58.4501-4(f)(1). Accordingly, the Corporation X Stock Split is not taken into account in computing Corporation X's stock repurchase excise tax base for its 2025 taxable year. See § 58.4501-2(c)(1) (regarding the computation of the stock repurchase excise tax base).
(6) Example 6: Acquisition of a target corporation in an acquisitive reorganization—(i) Facts. On October 1, 2025, Target merges into Corporation X in a transaction that qualifies as a reorganization under section 368(a)(1)(A) of the Code (Target Merger). On the date of the Target Merger, the fair market value of Target's outstanding stock is $100x. In the Target Merger, Target's shareholders exchange their Target stock for Corporation X stock and cash.
(ii) Analysis. Target's acquisition of its stock from the Target shareholders in exchange for the consideration received in the Target Merger is not a repurchase by Target. See § 58.4501-2(e)(5)(v).
(7) Example 7: E reorganization—(i) Facts. On November 1, 2025, Corporation X issues shares of new stock, with a fair market value of $100x (New Common Stock), to its shareholders in exchange for their outstanding stock in Corporation X (Old Common Stock) pursuant to a plan of reorganization (Recapitalization). The Recapitalization qualifies as an E reorganization. At the time of the Recapitalization, the fair market value of Corporation X's Old Common Stock is $100x.
(ii) Analysis. The acquisition by Corporation X of its Old Common Stock solely in exchange for New Common Stock in the Recapitalization is not a repurchase. See § 58.4501-2(e)(4)(i). The issuance of the New Common Stock by Corporation X is disregarded for purposes of the netting rule. See § 58.4501-4(f)(3)(i).
(8) Example 8: E reorganization with non-qualifying property—(i) Facts. The facts are the same as in paragraph (b)(7)(i) of this section (Example 7), except that some shareholders receive solely shares of New Common Stock in exchange for their shares of Old Common Stock, and other shareholders receive both shares of New Common Stock and Corporation X securities in exchange for their shares of Old Common Stock. The aggregate fair market value of the New Common Stock is $80x, and the aggregate fair market value of the Corporation X securities is $20x. The distribution of the Corporation X securities is not treated as a distribution with respect to Corporation X's stock under § 1.301-1(j) of this chapter and is not treated as having the effect of a distribution of a dividend under section 356(a)(2) of the Code.
(ii) Analysis regarding repurchase treatment, timing, and amount. The acquisition by Corporation X of its Old Common Stock in exchange for New Common Stock in the Recapitalization is not a repurchase. See § 58.4501-2(e)(4)(i). The acquisition by Corporation X of its Old Common Stock for Corporation X securities is a repurchase by Corporation X because the securities would not be permitted to be received by Corporation X shareholders under section 354 of the Code without the recognition of gain. See id. The repurchase occurs on November 1, 2025 (that is, the date on which ownership of the Old Common Stock transfers to Corporation X for Federal income tax purposes). See § 58.4501-2(g)(1). The amount of the repurchase by Corporation X is $20x, which equals the fair market value of the Old Common Stock exchanged for Corporation X securities on the date of the repurchase. See § 58.4501-2(h)(1).
(iii) Analysis regarding impact of issuance of New Common Stock on Corporation X's stock repurchase excise tax base. Corporation X's issuance of the New Common Stock is disregarded for purposes of the netting rule. See § 58.4501-4(f)(3) (disregarding such types of issuances). Therefore, Corporation X does not take into account any of the New Common Stock issued to its shareholders in computing its stock repurchase excise tax base for its 2025 taxable year under § 58.4501-4(b)(1).
(9) Example 9: Cash paid in lieu of fractional shares—(i) Facts. The facts are the same as in paragraph (b)(7)(i) of this section (Example 7), except that, as part of the Recapitalization, Corporation X shareholders receive cash in lieu of fractional shares of New Common Stock. The payment by Corporation X of cash in lieu of fractional shares of New Common Stock was not separately bargained-for consideration (that is, the cash paid by Corporation X in lieu of the fractional shares represented a mere rounding off of the shares issued in the Recapitalization). In addition, the payment by Corporation X of cash in lieu of fractional shares of New Common Stock was carried out solely for administrative convenience (and, therefore, solely for non-tax reasons) and was for an amount of cash that did not exceed the value of one full share of New Common Stock.
(ii) Analysis. The payment by Corporation X of cash in lieu of fractional shares of New Common Stock is treated for Federal income tax purposes as though the fractional shares were distributed by Corporation X as part of the Recapitalization and then redeemed by Corporation X for cash. This deemed redemption is not a repurchase because the payment of cash in lieu of the fractional shares satisfies the requirements of § 58.4501-2(e)(3)(iv). In addition, Corporation X's deemed issuance of the fractional shares is disregarded for purposes of the netting rule. See § 58.4501-4(f)(5).
(10) Example 10: F reorganization—(i) Facts. Corporation X is a State A corporation. To reorganize under the laws of State B, on November 15, 2025, Corporation X forms New Corporation X (a State B corporation) and merges into New Corporation X in a transaction that qualifies as an F reorganization (Corporation X Redomiciliation). On the date of the Corporation X Redomiciliation, the fair market value of Corporation X's stock is $100x. Shareholder A owns $25x of Corporation X's outstanding stock. In the Corporation X Redomiciliation, Shareholder A transfers all its Corporation X stock in exchange for $25x of cash, which is treated for Federal income tax purposes as an unrelated, separate transaction from the Corporation X Redomiciliation to which section 302(a) applies (Shareholder A Redemption). See § 1.368-2(m)(3)(iii) of this chapter. The remaining Corporation X shareholders exchange their Corporation X stock for New Corporation X stock as part of the Corporation X Redomiciliation.
(ii) Analysis regarding repurchase treatment, timing, and amount. Corporation X and New Corporation X are treated as the same corporation for purposes of the stock repurchase excise tax regulations. See § 58.4501-1(e). The Shareholder A Redemption is a repurchase by Corporation X because it is a section 317(b) redemption. See § 58.4501-2(e)(2)(i). This repurchase occurs on November 15, 2025 (that is, the date on which Shareholder A's ownership of its Corporation X stock transfers to Corporation X as part of the transaction). See § 58.4501-2(g)(1). The acquisition by Corporation X of its Corporation X stock in exchange for New Corporation X stock pursuant to the plan of reorganization is not a repurchase because that exchange is not an economically similar transaction. See § 58.4501-2(e)(4). The total amount of the repurchase by Corporation X is $25x (the fair market value of the Corporation X stock redeemed in the Shareholder A Redemption on the date of the redemption). See § 58.4501-2(h)(1). New Corporation X's transfer of $75x of its stock to Corporation X in the Corporation X Redomiciliation is disregarded for purposes of the netting rule. See § 58.4501-4(f)(3) (disregarding such types of issuances). Therefore, New Corporation X's stock repurchase excise tax base for its 2025 taxable year is $25x ($25x gross repurchase amount unreduced by the $75x of New Corporation X stock issued in the Corporation X Redomiciliation).
(11) Example 11: Section 355 split-off—(i) Facts. Corporation X owns all the stock of a pre-existing subsidiary (Controlled). On December 1, 2025, Corporation X distributes all the stock of Controlled (with a fair market value of $80x) and $20x of cash to certain of Corporation X's shareholders (Participating Shareholders) in exchange for $100x of Corporation X stock in a split-off (Corporation X Split-Off).
(ii) Analysis regarding repurchase treatment, timing, and amount. The acquisition by Corporation X of its stock in exchange for Controlled stock and cash in the Corporation X Split-Off is a repurchase by Corporation X. See § 58.4501-2(e)(2)(ii) and (e)(4)(ii). This repurchase occurs on December 1, 2025 (that is, the date on which ownership of the Corporation X stock transfers to Corporation X for Federal income tax purposes). See § 58.4501-2(g)(1). The total amount of the repurchase by Corporation X is $100x, which equals the aggregate fair market value of the Corporation X stock on the date the stock is exchanged by the Participating Shareholders for Controlled stock and cash in the Corporation X Split-Off (that is, December 1, 2025). See § 58.4501-2(h)(1).
(iii) Analysis regarding impact of Corporation X Split-Off on Corporation X's stock repurchase excise tax base. Corporation X's gross repurchase amount for its 2025 taxable year is $100x on account of the Corporation X Split-Off. See § 58.4501-2(c)(1)(i). Under the reorganization exception, Corporation X may reduce its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of any Corporation X stock repurchased from a Participating Shareholder in the Corporation X Split-Off to the extent that the repurchase is for property permitted by section 355 to be received without the recognition of gain or loss. See § 58.4501-3(c). Accordingly, Corporation X's gross repurchase amount is reduced under § 58.4501-2(c)(1)(ii) by $80x as a result of the application of the reorganization exception. Consequently, Corporation X's stock repurchase excise tax base for its 2025 taxable year is $20x ($100x−$80x).
(12) Example 12: Section 355 split-off as part of a D reorganization—(i) Facts. The facts are the same as in paragraph (b)(11)(i) of this section (Example 11), except that Controlled is a newly formed corporation, and the Corporation X Split-Off is carried out as part of a transaction qualifying as a reorganization under section 368(a)(1)(D) in which Corporation X transfers assets to Controlled.
(ii) Analysis regarding Corporation X's stock repurchase excise tax base. The analysis regarding Corporation X's stock repurchase excise tax base is the same as in paragraphs (b)(11)(ii) and (iii) of this section (Example 11).
(iii) Analysis regarding Controlled's stock repurchase excise tax base. Controlled's transfer of $80x of its stock to Corporation X in the Corporation X Split-Off is disregarded for purposes of the netting rule. See § 58.4501-4(f)(9) (disregarding such types of issuances). Controlled's transfer of its stock to Corporation X also is disregarded for purposes of the netting rule because Controlled is not a covered corporation at the time of the transfer. See § 58.4501-2(d)(1). Therefore, Controlled does not take into account any of the $80x of its stock transferred to Corporation X in computing Controlled's stock repurchase excise tax base for its 2025 taxable year under § 58.4501-4(b)(1).
(13) Example 13: Section 355 spin-off—(i) Facts. The facts are the same as in paragraph (b)(11)(i) of this section (Example 11), except that Corporation X distributes the Controlled stock and cash to the Corporation X shareholders pro rata without the shareholders exchanging any Corporation X stock (Corporation X Spin-Off).
(ii) Analysis. The Corporation X Spin-Off is not a repurchase by Corporation X. See § 58.4501-2(e)(5)(iii).
(14) Example 14: Section 355 spin-off as part of a D reorganization—(i) Facts. The facts are the same as in paragraph (b)(13)(i) of this section (Example 13), except that Controlled is a newly formed corporation, the Corporation X Spin-Off is carried out as part of a transaction qualifying as a reorganization under section 368(a)(1)(D) in which Corporation X transfers assets to Controlled, and Corporation X receives the $20x of cash from Controlled and distributes the cash to certain of Corporation X's shareholders in exchange for Corporation X stock.
(ii) Analysis regarding Corporation X's stock repurchase excise tax base. The distribution by Corporation X of the $80x of stock of Controlled in the Corporation X Spin-Off is not a repurchase by Corporation X. See § 58.4501-2(e)(5)(iii)(A). The distribution by Corporation X of the $20x of cash in exchange for Corporation X stock is a repurchase. See § 58.4501-2(e)(5)(iii)(B).
(iii) Analysis regarding Controlled's stock repurchase excise tax base. The analysis regarding Controlled's stock repurchase excise tax base is the same as in paragraph (b)(12)(iii) of this section (Example 12).
(15) Example 15: Repurchase pursuant to an accelerated share repurchase agreement—(i) Facts. On October 10, 2022, Corporation X entered into an accelerated share repurchase (ASR) agreement with an investment bank (Bank). Under the terms of the ASR agreement, Bank agrees to deliver a number of shares of Corporation X stock to Corporation X during the term of the ASR, in an amount determined by reference to the price of Corporation X stock on specified days during the term of the ASR. Pursuant to the terms of the ASR agreement, Corporation X paid Bank a prepayment amount. Bank borrowed 80 shares of Corporation X stock from a party not related to Bank or Corporation X. Pursuant to the terms of the ASR agreement, Bank delivered 80 shares of Corporation X stock to Corporation X on October 12, 2022. On final settlement of the ASR, Bank may be required to deliver additional shares of Corporation X stock to Corporation X or Corporation X may be required to make a payment to Bank. The terms of the ASR agreement and the facts and circumstances cause ownership of the 80 shares to transfer from Bank to Corporation X for Federal income tax purposes at the time of delivery (that is, October 12, 2022). The agreement settled in 2023. On February 1, 2023, Bank delivers an additional 20 shares to Corporation X in final settlement of the ASR agreement. For Federal income tax purposes, ownership of those 20 shares is treated as transferring from Bank to Corporation X at the time of delivery (that is, February 1, 2023).
(ii) Analysis. Corporation X is treated as repurchasing 80 shares of Corporation X stock on October 12, 2022 (that is, the date on which ownership of the 80 shares delivered by Bank transferred from Bank to Corporation X for Federal income tax purposes). See § 58.4501-2(g)(1). However, the repurchase by Corporation X of the 80 shares of Corporation X stock does not increase Corporation X's stock repurchase excise tax base for its 2022 taxable year because the repurchase occurred prior to January 1, 2023. See § 58.4501-2(c)(3); see also section 10201(d) of the IRA (providing that the stock repurchase excise tax applies to repurchases after December 31, 2022). The delivery by Bank to Corporation X of 20 shares of Corporation X stock on February 1, 2023, constitutes a repurchase because, for Federal income tax purposes, the terms of the ASR agreement and the facts and circumstances cause ownership of those shares to transfer from Bank to Corporation X on that date. See § 58.4501-2(g)(1). Therefore, the repurchase by Corporation X of those 20 shares of Corporation X stock increases Corporation X's gross repurchase amount for its 2023 taxable year.
(16) Example 16: Distribution in complete liquidation of a covered corporation—(i) Facts. Corporation X adopts a plan of complete liquidation that becomes effective on March 1, 2025 (Corporation X Liquidation). Corporation X has 100 shares of stock outstanding. On April 1, 2025, all shareholders of Corporation X receive a liquidating distribution by Corporation X in full payment for their Corporation X stock. On the date on which Corporation X distributes all its corporate assets to its shareholders in complete liquidation (that is, April 1, 2025), Corporation X stock is trading at $1x per share. Each distribution in complete liquidation is subject to section 331 of the Code.
(ii) Analysis. A distribution in complete liquidation of a covered corporation (that is, Corporation X) to which section 331 applies is not a repurchase by the covered corporation. See § 58.4501-2(e)(5)(i). Therefore, none of the distributions by Corporation X in complete liquidation is a repurchase by Corporation X, and Corporation X's gross repurchase amount for its 2025 taxable year is not increased because of the Corporation X Liquidation.
(17) Example 17: Complete liquidation of a covered corporation to which sections 331 and 332(a) both apply—(i) Facts. The facts are the same as in paragraph (b)(16)(i) of this section (Example 16), except that one of Corporation X's shareholders (Corporation Z) is an 80-percent distributee (as defined in section 337(c) of the Code), and the liquidating distribution by Corporation X to Corporation Z as part of the Corporation X Liquidation qualifies as a complete liquidation under section 332(a).
(ii) Analysis. The analysis is the same as in paragraph (b)(16)(ii) of this section (Example 16).
(18) Example 18: Acquisition by disregarded entity—(i) Facts. Corporation X owns all the interests in LLC, a domestic limited liability company that is disregarded as an entity separate from its owner for Federal tax purposes (disregarded entity) under § 301.7701-3 of this chapter. On May 31, 2025, LLC purchases shares of Corporation X's stock for cash from an unrelated shareholder.
(ii) Analysis. Because LLC is a disregarded entity, the May 31, 2025, acquisition of Corporation X stock is treated as an acquisition by Corporation X. Accordingly, the acquisition is a section 317(b) redemption and therefore a repurchase. See § 58.4501-2(e)(2)(i). Section 301.7701-2(c)(2)(v) of this chapter (treating disregarded entities as corporations for purposes of certain excise taxes) does not apply to treat LLC as a corporation because neither chapter 37 of the Code nor section 4501 is described in § 301.7701-2(c)(2)(v)(A) of this chapter.
(19) Example 19: Multiple repurchases and contributions of same class of stock—(i) Facts. On January 15, 2025, Corporation X repurchases 100 shares of its Class A stock that have an aggregate fair market value of $1,000x ($10x per share). On September 16, 2025, Corporation X repurchases 50 shares of its Class A stock that have an aggregate fair market value of $200x ($4x per share). Corporation X contributes to its ESOP 75 shares of its Class A stock on March 15, 2025, and 75 shares of its Class A stock on October 15, 2025.
(ii) Analysis. Corporation X's gross repurchase amount for its 2025 taxable year is increased by $1,200x ($1,000x + $200x = $1,200x) as a result of the repurchases of its Class A stock. See § 58.4501-2(c)(1)(i). Under the exception for stock contributions to an employer-sponsored retirement plan, Corporation X's stock contributions reduce Corporation X's gross repurchase amount. See §§ 58.4501-2(c)(1)(ii) and 58.4501-3(d). The amount of the reduction is determined by dividing the aggregate fair market value of shares of Class A stock repurchased by the number of shares repurchased ($1,200x/150 shares = $8 per share) and multiplying the number of shares contributed by the average price of the repurchased shares (150 shares × $8 per share = $1,200x). See § 58.4501-3(d)(3)(i). Therefore, Corporation X's stock repurchase excise tax base for its 2025 taxable year is $0 ($1,200x repurchase−$1,200x exception = $0).
(20) Example 20: Multiple repurchases and contributions of different classes of stock—(i) Facts. The facts are the same as in paragraph (b)(19)(i) of this section (Example 19), except that Corporation X has Class B stock and contributes its Class B stock rather than its Class A stock to its ESOP. On October 15, 2025, Corporation X contributes to its ESOP 75 shares of its Class B stock that have an aggregate fair market value of $1,000x. On December 16, 2025, Corporation X contributes to its ESOP 25 shares of its Class B stock that have an aggregate fair market value of $500x.
(ii) Analysis. Corporation X reduces its gross repurchase amount by an amount equal to the sum of the fair market values of the different class of stock at the time the stock is contributed to the employer-sponsored retirement plan ($1,000x + $500x = $1,500x). Corporation X's stock repurchase excise tax base for its 2025 taxable year is $0 ($1,200x repurchase−$1,500x exception). The $300x excess of the contributions qualifying for the exception under § 58.4501-3(d) over the gross repurchase amount ($1,500x exception−$1,200x gross repurchase amount) may not be carried forward or backward to preceding or succeeding taxable years of Corporation X. See § 58.4501-2(c)(2)(ii).
(21) Example 21: Treatment of contributions after the taxable year—(i) Facts. Corporation X repurchases 200 shares of its stock on December 31, 2025, for $200x ($1x per share). Corporation X has no other repurchases in 2025. On February 2, 2026, Corporation X contributes 200 shares of stock to its ESOP. Corporation X treats the contribution as if it had been received for the 2025 calendar year for plan allocation purposes. See § 58.4501-3(d)(5)(ii).
(ii) Analysis. Corporation X may use the contribution of the 200x shares of its stock on February 2, 2026, to reduce its $200x gross repurchase amount for 2025. See § 58.4501-3(d)(5)(ii).
(22) Example 22: Becoming a covered corporation—(i) Facts. As of January 1, 2025, all of Corporation X's stock is privately held (and, therefore, none of Corporation X's stock is traded on an established securities market). On February 15, 2025, Corporation X purchases 10 shares of its stock for $5x of cash ($.50x per share). On April 1, 2025, Corporation X issues 100 shares of its stock to the public (Public Shareholders), at which time Corporation X's stock begins trading on an established securities market. On November 15, 2025, when Corporation X stock is trading at $2x per share, Corporation X purchases 60 shares of its stock for $120x of cash.
(ii) Analysis regarding purchase on February 15, 2025. Corporation X becomes a covered corporation at the beginning of the day on April 1, 2025 (the initiation date). See § 58.4501-2(d)(1). Accordingly, Corporation X's purchase of 10 shares of its stock for $5x of cash on February 15, 2025, is not a repurchase. Thus, the purchase on February 15, 2025, is not included in Corporation X's gross repurchase amount for its 2025 taxable year.
(iii) Analysis regarding issuance on April 1, 2025. Corporation X is a covered corporation at the beginning of the day on April 1, 2025. See § 58.4501-2(d)(1). Accordingly, the Corporation X stock issued to the Public Shareholders on that date is stock of a covered corporation for purposes of the netting rule. See § 58.4501-4(b)(1). As a result, Corporation`s gross repurchase amount for its 2025 taxable year is reduced by $100x. See § 58.4501-2(c)(1)(iii).
(iv) Analysis regarding purchase on November 15, 2025. Corporation X is a covered corporation on November 15, 2025. Accordingly, Corporation X's purchase of 60 shares of its stock on that date is a repurchase because the transaction is a section 317(b) redemption (that is, a redemption within the meaning of section 317(b) with regard to the stock of a covered corporation). See §§ 58.4501-1(b)(31) and 58.4501-2(e)(2)(i). For purposes of computing Corporation X's gross repurchase amount, the fair market value of the 60 shares of stock repurchased on November 15, 2025, is the aggregate market price of those shares on that repurchase date, or $120x ($2x per share × 60 shares = $120x). See § 58.4501-2(g)(1). Accordingly, Corporation`s gross repurchase amount for its 2025 taxable year is increased by $120x. See § 58.4501-2(c)(1)(i).
(23) Example 23: Actual pro rata redemption in partial liquidation—(i) Facts. Corporation X is actively engaged in the conduct of Businesses A and B. Each business constitutes a qualified trade or business within the meaning of section 302(e)(3). On September 1, 2025, pursuant to a plan of partial liquidation adopted in the same taxable year, Corporation X sells Business B for $100x and distributes the proceeds to its shareholders pro rata in redemption of $100x of Corporation X stock. The transaction qualifies as a distribution in partial liquidation under section 302(b)(4) and (e).
(ii) Analysis. Corporation X's distribution in partial liquidation is a section 317(b) redemption. In addition, Corporation X's pro rata distribution in partial liquidation is not included in the exclusive list of transactions under § 58.4501-2(e)(3) that are a section 317(b) redemption but are not treated as a repurchase. Accordingly, the distribution in partial liquidation is a repurchase. See § 58.4501-2(e)(2)(i). Therefore, as a result of the distribution, Corporation X's gross repurchase amount for its 2025 taxable year is increased by $100x. See § 58.4501-2(c)(1)(i).
(24) Example 24: Constructive redemption in partial liquidation—(i) Facts. The facts are the same as in paragraph (b)(23)(i) of this section (Example 23), except that the shareholders of Corporation X surrender no stock in exchange for the proceeds from the sale of Business B. For Federal income tax purposes, a constructive redemption of stock is deemed to occur, and the transaction qualifies as a distribution in partial liquidation under section 302(b)(4) and (e).
(ii) Analysis. The analysis regarding Corporation X's gross repurchase amount is the same as in paragraph (b)(23)(ii) of this section (Example 23).
(25) Example 25: Non-pro rata redemption in partial liquidation—(i) Facts. The facts are the same as in paragraph (b)(23)(i) of this section (Example 23), except that Corporation X distributes the proceeds to Shareholder A in redemption of $100x of preferred Corporation X stock that is not described in § 58.4501-1(b)(34)(ii) or (iii).
(ii) Analysis. The analysis regarding Corporation X's gross repurchase amount is the same as in paragraph (b)(23)(ii) of this section (Example 23).
(26) Example 26: Physical settlement of call option contract—(i) Facts. On March 1, 2025, Corporation X issues an option that entitles the holder to buy 100 shares of Corporation X stock from Corporation X for $150x ($1.50x per share). On the date the option is issued, Corporation X stock is trading at $1x per share. On November 1, 2025, when Corporation X stock is trading at $2x per share, the holder pays $150x to Corporation X to exercise the option, and Corporation X issues 100 shares of Corporation X stock to the holder, at which time ownership of the shares transfers to the holder for Federal income tax purposes.
(ii) Analysis. For purposes of computing Corporation X's stock repurchase excise tax base, Corporation X is treated as issuing 100 shares of Corporation X stock on November 1, 2025. See § 58.4501-4(d)(1). The fair market value of that stock is its aggregate market price on the date of issuance by Corporation X, or $200x ($2x per share × 100 shares = $200x). See § 58.4501-4(e)(1). Accordingly, the issuance is a $200x reduction of $200x to Corporation X's gross repurchase amount in computing Corporation X's stock repurchase excise tax base for its 2025 taxable year. See § 58.4501-2(c)(1)(iii).
(27) Example 27: Net cash settlement of call option contract—(i) Facts. The facts are the same as in paragraph (b)(26)(i) of this section (Example 26), except that Corporation X net cash settles the option by paying the holder $50x.
(ii) Analysis. The net cash settlement is disregarded for purposes of the netting rule. See § 58.4501-4(f)(12) (disregarding the settlement of an option contract with respect to stock of a covered corporation using any consideration other than stock of the covered corporation). The net cash settlement also is not a repurchase. See § 58.4501-2(e)(5)(iv) (providing that net cash settlement of an option contract with respect to stock of a covered corporation generally is not a repurchase by the covered corporation).
(28) Example 28: Physical settlement of put option contract—(i) Facts. On April 1, 2025, Corporation X issues an option entitling the holder to sell 100 shares of Corporation X stock to Corporation X for $100x ($1x per share). On the date the option is issued, Corporation X stock is trading at $1.25x per share. On October 1, 2025, when Corporation X stock is trading at $0.75x per share, the holder exercises the option, and Corporation X purchases 100 shares of Corporation X stock for $100x, at which time ownership of the shares transfers to Corporation X.
(ii) Analysis. Corporation X's purchase on October 1, 2025, is a repurchase because it is a section 317(b) redemption that is not otherwise excluded. See § 58.4501-2(e)(2) and (3). For purposes of computing Corporation X's gross repurchase amount, the fair market value of the repurchased stock is its aggregate market price on the date on which ownership of the stock transfers to Corporation X for Federal income tax purposes (October 1, 2025), or $75x ($0.75x per share × 100 shares = $75x). See § 58.4501-2(g)(1) and (h)(1). Accordingly, the repurchase is an increase of $75x to Corporation X's gross repurchase amount for its 2025 taxable year. See § 58.4501-2(c)(1)(i).
(29) Example 29: Net cash settlement of put option contract—(i) Facts. The facts are the same as in paragraph (b)(28)(i) of this section (Example 28), except that Corporation X net cash settles the put option by paying the holder $25x.
(ii) Analysis. The net cash settlement is not a repurchase. See § 58.4501-2(e)(5)(vi) (providing that net cash settlement of an option contract with respect to stock of a covered corporation generally is not a repurchase by the covered corporation).
(30) Example 30: Indirect ownership—(i) Facts. Corporation X owns 60 percent of the only class of stock of Sub 1, a domestic corporation. Sub 1 owns 60 percent of the only class of stock of Sub 2, which also is a domestic corporation. On October 15, 2025, Sub 2 purchases stock of Corporation X with a market price of $100,000.
(ii) Analysis. Corporation X must determine at the time its stock is repurchased by Sub 2 (that is, on October 15, 2025) whether Sub 2 is a specified affiliate of Corporation X. See § 58.4501-2(f)(2)(i). Under § 58.4501-2(f)(2)(ii), Corporation X indirectly owns 36 percent (60% × 60% = 36%) of the stock of Sub 2. Sub 2 is not a specified affiliate of Corporation X, because Corporation X does not own, directly or indirectly, more than 50 percent of the stock of Sub 2. See § 58.4501-1(b)(32). Accordingly, Sub 2's purchase of Corporation X stock on October 15, 2025, is not a repurchase under § 58.4501-2(f)(1).
(31) Example 31: Restricted stock provided to a service provider—(i) Facts. Individual M provides services to Corporation X. In 2025, as compensation for Individual M's services, Corporation X transfers to Individual M 100 shares of Corporation X restricted stock with an aggregate fair market value of $500x ($5x per share). The shares vest in 2028. Individual M does not make an election under section 83(b) of the Code. In 2028, Corporation X withholds from Individual M's other wages amounts that are required to pay the income tax and employment tax withholding obligations arising from the stock transfer. The shares have a fair market value of $7x per share when they vest.
(ii) Analysis. Corporation X is treated as issuing 100 shares of stock to Individual M when they become substantially vested in 2028. See § 58.4501-4(d)(2)(i). The fair market value of the shares issued is $700x (100 shares × $7x per share = $700x). Accordingly, the issuance is a reduction of $700x in computing Corporation X's stock repurchase excise tax base for its 2028 taxable year.
(32) Example 32: Restricted stock provided to a service provider with section 83(b) election—(i) Facts. The facts are the same as in paragraph (b)(31)(i) of this section (Example 31), except that Individual M makes a valid election under section 83(b) to include the fair market value of the shares of restricted stock in gross income when the shares are transferred.
(ii) Analysis. Corporation X is treated as issuing 100 shares of stock to Individual M when the shares are transferred in 2025. See § 58.4501-4(d)(2)(iii). The fair market value of the shares issued is $500x (100 shares × $5x per share = $500x). Accordingly, the issuance is a reduction of $500x in computing Corporation X's stock repurchase excise tax base for its 2025 taxable year. Corporation X is not treated as issuing stock to Individual M when the shares vest in 2028.
(33) Example 33: Forfeiture of restricted stock provided to a service provider with section 83(b) election—(i) Facts. The facts are the same as in paragraph (b)(32)(i) of this section (Example 32), except that Individual M forfeits the 100 shares of restricted stock in 2027 because of a failure to meet the vesting conditions for the stock. At the time of the forfeiture, the fair market value of the 100 shares of stock is $600x (100 shares × $6x per share = $600x).
(ii) Analysis. The analysis regarding the timing and amount of Corporation X's issuance of stock is the same as in paragraph (b)(32)(ii) of this section (Example 32). See § 58.4501-4(d)(2)(iii). However, because Individual M made a valid election under section 83(b) with regard to the stock and the forfeiture resulted from Individual M failing to meet the vesting conditions for the stock, Individual M's forfeiture of the 100 shares of stock to Corporation X is a repurchase by Corporation X. See § 58.4501-2(e)(4)(iii). The stock is treated as repurchased in 2027. See § 58.4501-2(g)(1). The amount of the repurchase by Corporation X equals the fair market value of the stock (that is, $600x) on the date of the repurchase. See § 58.4501-2(h)(1).
(34) Example 34: Vested stock provided to a service provider with share withholding—(i) Facts. Individual N is an employee of Corporation X. In 2025, as compensation for Individual N's services, Corporation X grants Individual N 100 restricted stock units (RSUs). Pursuant to the RSUs, if Individual N remains employed by Corporation X through December 31, 2027, Corporation X will transfer 100 shares of Corporation X stock to Individual N in January 2028. Individual N remains employed by Corporation X through December 31, 2027. In January 2028, when the shares have a fair market value of $5x per share, Corporation X initiates the transfer of 60 shares of Corporation X stock to Individual N and withholds 40 shares to satisfy Corporation X's income tax and employment tax withholding obligations arising from Individual N vesting in the shares.
(ii) Analysis. Corporation X is treated as issuing 60 shares of stock to Individual N when the shares are transferred in 2028. See § 58.4501-4(d)(2)(i). The 40 shares of Corporation X stock withheld to satisfy Corporation X's withholding obligations are disregarded for purposes of the netting rule. See § 58.4501-4(f)(11)(i). The fair market value of the shares issued is $300x (60 shares × $5x per share = $300x). Accordingly, the issuance is a reduction of $300x in computing Corporation X's stock repurchase excise tax base for its 2028 taxable year.
(35) Example 35: Stock option net exercise—(i) Facts. Individual O is an employee of Corporation X. In 2025, in connection with the performance of services, Corporation X transfers to Individual O options to purchase 100 shares of Corporation X stock with an exercise price of $4x per share ($400x exercise price in total). The options are described in § 1.83-7 of this chapter and do not have a readily ascertainable fair market value. Individual O exercises the options to purchase 100 shares in 2026, when the fair market value is $5x per share. Corporation X withholds 80 shares to pay the $400x exercise price (80 shares × $5x per share = $400x).
(ii) Analysis. Corporation X is treated as issuing 20 shares of stock to Individual O when Individual O exercises the options in 2026. See § 58.4501-4(d)(2)(ii). The 80 shares of Corporation X stock withheld to pay the exercise price are disregarded for purposes of the netting rule. See § 58.4501-4(f)(11). The fair market value of the shares issued is $100x (20 shares × $5x per share = $100x). Accordingly, the issuance is a reduction of $100x in computing Corporation X's stock repurchase excise tax base for its 2026 taxable year.
(36) Example 36: Net share settlement not in connection with performance of services—(i) Facts. Corporation X issues a call option to Individual P that entitles Individual P to buy 100 shares of Corporation X stock for $100x ($1x per share) from Corporation X for a limited time. The terms of the option require or permit net share settlement. On the date the option is issued, Corporation X stock is trading at $1x per share. On the date the option is exercised, Corporation X stock is trading at $1.25x per share. To settle the option, Individual P makes no payment to Corporation X, and Corporation X issues 20 shares of Corporation X stock (worth $25x).
(ii) Analysis. Corporation X is treated as issuing 20 shares with a fair market value of $25x. See § 58.4501-4(f)(11).
(37) Example 37: Broker-assisted net exercise—(i) Facts. The facts are the same as in paragraph (b)(35)(i) of this section (Example 35), except that, instead of Corporation X withholding shares to pay the exercise price, a third-party broker pays an amount equal to the exercise price (that is, $400x) to Corporation X. Corporation X transfers 100 shares of Corporation X stock to the third-party broker, which deposits the 100 shares into Individual O's account. The third-party broker then immediately sells 80 shares to recover the $400x exercise price paid to Corporation X (80 shares × $5x per share = $400x).
(ii) Analysis. Corporation X is treated as issuing 100 shares of stock to Individual O when Individual O exercises the options in 2026. See § 58.4501-4(c)(2) and (d)(1)(i). The fair market value of the shares issued is $500x (100 shares × $5x per share = $500x). Accordingly, the issuance is a reduction of $500x in computing Corporation X's stock repurchase excise tax base for its 2026 taxable year.
(38) Example 38: Stock provided by a specified affiliate to an employee—(i) Facts. Individual Q is an employee of Corporation Y, which is a specified affiliate of Corporation X. In 2025, Corporation X transfers 100 shares of its stock to Individual Q, when the stock is valued at $9x per share, in connection with Individual Q's performance of services as an employee of Corporation Y.
(ii) Analysis. Under § 1.83-6(d) of this chapter, Corporation X is treated as contributing the stock to the capital of Corporation Y, which is treated as transferring the shares to Individual Q as compensation for services. Corporation Y is treated as providing 100 shares to Individual Q. See § 58.4501-4(b)(1)(ii) and (f)(2)(iv). The fair market value of the shares provided is $900x (100 shares × $9x per share = $900x). Accordingly, the provision is a reduction of $900x in computing Corporation X's stock repurchase excise tax base for its 2025 taxable year.
(39) Example 39: Stock provided by a specified affiliate to a non-employee—(i) Facts. The facts are the same as in paragraph (b)(38)(i) of this section (Example 38), except that Individual Q provides services as a non-employee service provider of Corporation Y.
(ii) Analysis. The analysis is the same as in paragraph (b)(38)(ii) of this section (Example 38).
(40) Example 40: Corporation treated as a domestic corporation under section 7874(b)—(i) Facts. Corporation FB is a corporation the stock of which is traded on an established securities market (within the meaning of section 7704(b)(1) of the Code) and that is created or organized in a foreign jurisdiction. Corporation FB is treated as a domestic corporation under section 7874(b) of the Code.
(ii) Analysis. Corporation FB is treated for purposes of this title as a domestic corporation under section 7874(b). Corporation FB is a covered corporation because it is treated for purposes of this title as a domestic corporation and its stock is traded on an established securities market. See § 58.4501-1(b)(7).
[T.D. 10037, 90 FR 53159, Nov. 24, 2025; 90 FR 59380, Dec. 19, 2025; 91 FR 6135, Feb. 11, 2026]
§ 58.4501-6 Applicability dates.
(a) In general. Except as provided in paragraph (b) of this section, §§ 58.4501-1 through 58.4501-5 apply to—
(1) Repurchases of stock of a covered corporation occurring after December 31, 2022; and
(2) Issuances and provisions of stock of a covered corporation occurring during taxable years ending after December 31, 2022.
(b) Exceptions—(1) Applicability date for certain rules. Sections 58.4501-2(d), (e)(4)(iii), (f)(2), (h)(2)(v), and (h)(3)(ii), 58.4501-3(g)(3) through (5), 58.4501-4(e)(2)(v), (e)(3)(ii), (f)(2)(ii), (f)(8), (f)(9), and (f)(13) apply to—
(i) Repurchases of stock of a covered corporation occurring after April 12, 2024; and
(ii) Issuances and provisions of stock of a covered corporation occurring after April 12, 2024.
(2) Early application. Provided a covered corporation consistently applies all the rules set forth in paragraph (b)(1) of this section, the covered corporation may choose to apply all the rules set forth in paragraph (b)(1) of this section to—
(i) Repurchases of stock of the covered corporation occurring on or before April 12, 2024, and after December 31, 2022; and
(ii) Issuances and provisions of stock of the covered corporation occurring on or before April 12, 2024, and during taxable years ending after December 31, 2022.
(c) Special rules for acquisitions or repurchases of stock of certain foreign corporations. See § 58.4501-7(p) for applicability dates for the provisions of § 58.4501-7 and the provisions of § 58.4501-1 as applicable to transactions subject to § 58.4501-7.
§ 58.4501-7 Special rules for acquisitions or repurchases of stock of certain foreign corporations.
(a) Scope. This section provides rules regarding the application of section 4501(d) of the Code. Paragraph (b) of this section provides definitions applicable for purposes of this section. Paragraph (c) of this section provides rules for computing a section 4501(d) covered corporation's section 4501(d) excise tax liability. Paragraph (d) of this section provides certain coordination rules related to section 4501(d)(2). Paragraph (e) of this section provides certain rules for determining the status of a corporation as an applicable foreign corporation or a covered surrogate foreign corporation. Paragraph (f) of this section provides certain rules for determining the status of a corporation or partnership as an applicable specified affiliate of an applicable foreign corporation or a specified affiliate of a covered surrogate foreign corporation. Paragraph (g) of this section provides rules for determining whether a foreign partnership is an applicable specified affiliate. Paragraph (h) of this section defines the term CSFC repurchase. Paragraph (i) of this section is reserved. Paragraph (j) of this section provides rules for determining the date of a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase. Paragraph (k) of this section provides rules for determining the fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is repurchased or acquired. Paragraph (l) of this section provides rules regarding the application of certain section 4501(d) exceptions. Paragraph (m) of this section provides rules regarding the section 4501(d) netting rule. Paragraph (n) of this section illustrates the application of the rules of this section through examples involving section 4501(d)(1). Paragraph (o) of this section illustrates the application of the rules of this section through examples involving section 4501(d)(2). Paragraph (p) of this section provides applicability dates for the rules of this section.
(b) Definitions—(1) Application of definitions in § 58.4501-1(b). Any term used in this section but not defined in paragraph (b)(2) of this section has the meaning provided in § 58.4501-1(b), with the following modifications:
(i) For all definitions provided in § 58.4501-1(b) other than those described in paragraph (b)(1)(ii) of this section, any reference in those definitions to a covered corporation is treated as a reference to either a section 4501(d) covered corporation, an applicable foreign corporation, or a covered surrogate foreign corporation, as appropriate based on the context.
(ii) For the definitions of employee and employer-sponsored retirement plan provided in § 58.4501-1(b)(14) and (15), any reference to a covered corporation or its specified affiliates is treated solely as a reference to a section 4501(d) covered corporation.
(2) Section 4501(d) definitions. The definitions in this paragraph (b)(2) apply solely for purposes of this section.
(i) Applicable foreign corporation. The term applicable foreign corporation means any foreign corporation the stock of which is traded on an established securities market.
(ii) Applicable specified affiliate. The term applicable specified affiliate means a specified affiliate of an applicable foreign corporation, other than a foreign corporation or a foreign partnership (unless the partnership has a domestic entity as a direct or indirect partner, as determined under paragraph (g) of this section).
(iii) CSFC repurchase. The term CSFC repurchase has the meaning provided in paragraph (h) of this section.
(iv) Covered surrogate foreign corporation. The term covered surrogate foreign corporation means any surrogate foreign corporation (as determined under section 7874(a)(2)(B) of the Code by substituting September 20, 2021 for March 4, 2003 each place it appears) the stock of which is traded on an established securities market, including any successor to the surrogate foreign corporation (as determined under § 1.7874-12(a)(10) of this chapter), but only with respect to taxable years that include any portion of the applicable period with respect to such corporation under section 7874(d)(1).
(v) Direct partner. The term direct partner has the meaning given the term in paragraph (g)(2)(i) of this section.
(vi) Domestic entity. The term domestic entity means a domestic corporation, a domestic partnership, or a trust within the meaning of section 7701(a)(30)(E) of the Code.
(vii) Expatriated entity. The term expatriated entity has the meaning given the term in section 7874(a)(2)(A) and § 1.7874-12(a)(8) of this chapter, including any successor (as determined under § 1.7874-12(a)(6) of this chapter).
(viii) Indirect partner. The term indirect partner has the meaning given the term in paragraph (g)(2)(ii) of this section.
(ix) Section 4501(d) covered corporation. The term section 4501(d) covered corporation means either—
(A) An applicable specified affiliate of an applicable foreign corporation that is treated as a covered corporation under section 4501(d)(1)(A) by reason of a section 4501(d)(1) repurchase; or
(B) Any expatriated entity with respect to a covered surrogate foreign corporation that is treated as a covered corporation under section 4501(d)(2)(A) by reason of a section 4501(d)(2) repurchase.
(x) Section 4501(d) covered holder. The term section 4501(d) covered holder has the meaning provided in paragraph (m)(7)(v)(B)(3) of this section.
(xi) Section 4501(d) covered non-stock instrument. The term section 4501(d) covered non-stock instrument has the meaning provided in paragraph (m)(7)(v)(B)(2) of this section.
(xii) Section 4501(d) de minimis exception. The term section 4501(d) de minimis exception has the meaning provided in paragraph (c)(2)(i) of this section.
(xiii) Section 4501(d) economically similar transaction. The term section 4501(d) economically similar transaction has the meaning provided in paragraph (h)(4) of this section.
(xiv) Section 4501(d) exception. The term section 4501(d) exception has the meaning provided in paragraph (l)(1) of this section.
(xv) Section 4501(d) excise tax. The term section 4501(d) excise tax has the meaning provided in paragraph (c)(1) of this section.
(xvi) Section 4501(d) excise tax base. The term section 4501(d) excise tax base has the meaning provided in paragraph (c)(3)(i) of this section.
(xvii) Section 4501(d) gross repurchase amount. The term section 4501(d) gross repurchase amount has the meaning provided in paragraph (c)(3)(i)(A) of this section.
(xviii) Section 4501(d) netting rule. The term section 4501(d) netting rule has the meaning provided in paragraph (m)(1) of this section.
(xix) Section 4501(d) non-stock instrument. The term section 4501(d) non-stock instrument has the meaning provided in paragraph (m)(7)(v)(B)(1) of this section.
(xx) Section 4501(d) reorganization exception. The term section 4501(d) reorganization exception has the meaning provided in paragraph (l)(2) of this section.
(xxi) Section 4501(d)(1) repurchase. The term section 4501(d)(1) repurchase means an acquisition of stock of an applicable foreign corporation by an applicable specified affiliate of the applicable foreign corporation from a person other than the applicable foreign corporation or a specified affiliate of the applicable foreign corporation. A section 4501(d)(1) repurchase includes a clawback or forfeiture of stock of an applicable foreign corporation pursuant to a legal or contractual obligation on the date of forfeiture or clawback (as appropriate), but only if the stock was treated in the current or a prior year as issued or provided by the section 4501(d) covered corporation to its employees in accordance with the section 4501(d) netting rule.
(xxii) Section 4501(d)(2) repurchase. The term section 4501(d)(2) repurchase means a CSFC repurchase or an acquisition of stock of a covered surrogate foreign corporation by a specified affiliate of the covered surrogate foreign corporation.
(c) Computation of section 4501(d) excise tax liability for a section 4501(d) covered corporation—(1) Imposition of tax. Except as provided in paragraph (c)(2) of this section (regarding the section 4501(d) de minimis exception), the amount of excise tax imposed pursuant to section 4501(a) on a section 4501(d) covered corporation (section 4501(d) excise tax) for a taxable year equals the product obtained by multiplying—
(i) The applicable percentage; by
(ii) The section 4501(d) excise tax base of the section 4501(d) covered corporation for the taxable year determined in accordance with paragraph (c)(3)(i) of this section.
(2) Section 4501(d) de minimis exception—(i) In general. A section 4501(d) covered corporation is not subject to the section 4501(d) excise tax with regard to a taxable year of the section 4501(d) covered corporation if, during that taxable year, the aggregate fair market value of all section 4501(d)(1) repurchases with respect to all applicable specified affiliates of the applicable foreign corporation or all section 4501(d)(2) repurchases by the covered surrogate foreign corporation and all specified affiliates of the covered surrogate foreign corporation, as applicable, does not exceed $1,000,000 (section 4501(d) de minimis exception).
(ii) Determination. A determination of whether the section 4501(d) de minimis exception applies with regard to a taxable year of a section 4501(d) covered corporation is made before applying—
(A) Any section 4501(d) exception under paragraph (l) of this section; and
(B) Any adjustments pursuant to the section 4501(d) netting rule under paragraph (m) of this section.
(3) Section 4501(d) excise tax base—(i) In general. With regard to a section 4501(d) covered corporation, the term section 4501(d) excise tax base means the dollar amount (not less than zero) that is obtained by—
(A) Determining the aggregate fair market value of, as applicable, all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases during the section 4501(d) covered corporation's taxable year (section 4501(d) gross repurchase amount);
(B) Reducing the section 4501(d) gross repurchase amount by the fair market value of stock repurchased or acquired in all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases, as applicable, during the section 4501(d) covered corporation's taxable year to the extent any section 4501(d) exceptions apply in accordance with paragraph (l) of this section; and then
(C) Further reducing the section 4501(d) gross repurchase amount by the aggregate fair market value of, as applicable, stock of the applicable foreign corporation or stock of the covered surrogate foreign corporation to the extent the section 4501(d) netting rule applies in accordance with paragraph (m) of this section.
(ii) Taxable year determination—(A) In general. The determinations under paragraph (c)(3)(i) of this section are made separately for each section 4501(d) covered corporation and for each taxable year of such section 4501(d) covered corporation.
(B) No carrybacks or carryforwards. Reductions under paragraphs (c)(3)(i)(B) and (C) of this section in excess of the section 4501(d) gross repurchase amount with regard to a section 4501(d) covered corporation may not be carried forward or backward to preceding or succeeding taxable years of the section 4501(d) covered corporation.
(4) Section 4501(d)(1) repurchases or section 4501(d)(2) repurchases before January 1, 2023. Section 4501(d)(1) repurchases and section 4501(d)(2) repurchases before January 1, 2023, are neither included in the section 4501(d) excise tax base of a section 4501(d) covered corporation nor taken into account in determining the applicability of the section 4501(d) de minimis exception.
(d) Section 4501(d)(2) coordination rules—(1) Coordination rule for section 4501(d)(1) repurchases and section 4501(d)(2) repurchases. To the extent any CSFC repurchase or acquisition of stock of a covered surrogate foreign corporation by a specified affiliate of the covered surrogate foreign corporation would be both a section 4501(d)(1) repurchase and a section 4501(d)(2) repurchase absent this paragraph (d)(1), the CSFC repurchase or acquisition will only be a section 4501(d)(2) repurchase.
(2) Coordination rule for multiple section 4501(d) covered corporations—(i) In general. Except as provided in paragraph (d)(2)(ii) of this section, each section 4501(d) covered corporation with respect to a covered surrogate foreign corporation is liable for any section 4501(d) excise tax with respect to section 4501(d)(2) repurchases that occur during a taxable year of the section 4501(d) covered corporation.
(ii) Full payment and reporting by a section 4501(d) covered corporation. If there are multiple section 4501(d) covered corporations with respect to a covered surrogate foreign corporation, then provided that one of those section 4501(d) covered corporations pays the amount of section 4501(d) excise tax determined under paragraph (c)(1) of this section with respect to all section 4501(d)(2) repurchases that occur during the paying section 4501(d) covered corporation's taxable year and fulfills the filing obligations for the taxable year with respect to such section 4501(d)(2) repurchases, no other section 4501(d) covered corporation with respect to the covered surrogate foreign corporation is liable for section 4501(d) excise tax related to such section 4501(d)(2) repurchases.
(e) Status as applicable foreign corporation or covered surrogate foreign corporation—(1) Initiation date. A corporation becomes an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, at the beginning of the corporation's initiation date (that is, the date on which stock of the corporation begins to be traded on an established securities market).
(2) Cessation date. A corporation ceases to be an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, at the end of the corporation's cessation date (that is, the date on which all stock of the corporation ceases to be traded on an established securities market).
(3) Rules regarding F reorganizations—(i) Inbound F reorganization. In the case of a foreign corporation that transfers its assets or that is treated as transferring its assets to a domestic corporation in an F reorganization (as described in § 1.367(b)-2(f) of this chapter), the corporation is not treated as a domestic corporation until the day after the reorganization.
(ii) Outbound F reorganization. In the case of a domestic corporation that transfers its assets or that is treated as transferring its assets to a foreign corporation in an F reorganization (as described in § 1.367(a)-1(e) of this chapter), the corporation is not treated as a foreign corporation until the day after the reorganization.
(iii) Treatment of F reorganizations. For purposes of the stock repurchase excise tax regulations, the transferor corporation and the resulting corporation (each as defined in § 1.368 2(m)(1) of this chapter) in an F reorganization are treated as the same corporation.
(f) Status as an applicable specified affiliate or a specified affiliate of a covered surrogate foreign corporation—(1) Timing of determination. The determination of whether a corporation or partnership is an applicable specified affiliate of an applicable foreign corporation, or a specified affiliate of a covered surrogate foreign corporation, as applicable, is made at the time the stock of the applicable foreign corporation or covered surrogate foreign corporation is acquired or provided by the applicable specified affiliate or a specified affiliate of a covered surrogate foreign corporation, respectively, whenever such determination is relevant for purposes of this section.
(2) Determination of indirect ownership. Except as provided in paragraph (g)(2)(ii)(B) of this section, a corporation or partnership is treated as indirectly owning stock in a corporation or holding capital or profits interests in a partnership equal to the corporation's or partnership's proportionate percentage of stock owned or capital or profits interests held through other entities.
(g) Foreign partnerships that are applicable specified affiliates—(1) In general. A foreign partnership is an applicable specified affiliate of an applicable foreign corporation, if—
(i) More than 50 percent of the capital interests or profits interests of the foreign partnership are held, directly or indirectly, by the applicable foreign corporation; and
(ii) Under the rules described in paragraphs (g)(2) through (5) of this section, at least one domestic entity is a direct or indirect partner with respect to the foreign partnership.
(2) Direct or indirect partner. Except as provided in paragraphs (g)(4) and (5) of this section—
(i) A domestic entity is a direct partner with respect to a foreign partnership if it directly owns an interest in the foreign partnership; and
(ii) A domestic entity is an indirect partner with respect to a foreign partnership if the domestic entity owns an interest in the foreign partnership indirectly through—
(A) One or more other foreign partnerships;
(B) One or more foreign corporations controlled by one or more domestic entities within the meaning of paragraph (g)(3) of this section; or
(C) An ownership chain with one or more entities described in paragraphs (g)(2)(ii)(A) and (B) of this section.
(3) Control of a foreign corporation. For purposes of paragraph (g)(2)(ii)(B) of this section, a foreign corporation is controlled by one or more domestic entities, if more than 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote or the total value of the stock of such corporation is owned, directly or indirectly, in aggregate, by one or more domestic entities.
(4) Indirect interests held through applicable foreign corporations. Solely for purposes of paragraph (g)(2)(ii) of this section, if an applicable foreign corporation owns, directly or indirectly, stock of a foreign corporation or an interest in a foreign partnership, a domestic entity is not treated as indirectly owning stock of the foreign corporation or an interest in the foreign partnership solely by reason of owning, directly or indirectly, stock of the applicable foreign corporation.
(5) De minimis domestic entity (direct or indirect) partner. A foreign partnership that has one or more domestic entities as direct or indirect partners is not considered an applicable specified affiliate if the domestic entities hold, directly or indirectly, in aggregate, less than 10 percent in each of the capital interests and profits interests in the foreign partnership.
(h) CSFC repurchase—(1) Overview. This paragraph (h) provides rules for determining whether a transaction is a CSFC repurchase for purposes of this section. Paragraph (h)(2) of this section provides a general rule regarding the scope of such term. Paragraph (h)(3) of this section provides an exclusive list of transactions that are section 317(b) redemptions but are not CSFC repurchases. Paragraph (h)(4) of this section provides an exclusive list of transactions that are section 4501(d) economically similar transactions. Paragraph (h)(5) of this section provides a non-exclusive list of transactions that are not CSFC repurchases.
(2) Scope of CSFC repurchases. For purposes of this section, a CSFC repurchase means solely—
(i) A section 317(b) redemption with respect to stock of a covered surrogate foreign corporation, except as provided in paragraph (h)(3) of this section; or
(ii) A section 4501(d) economically similar transaction described in paragraph (h)(4) of this section.
(3) Certain section 317(b) redemptions that are not CSFC repurchases. This paragraph (h)(3) provides an exclusive list of section 317(b) redemptions that are not CSFC repurchases for purposes of the section 4501(d) excise tax.
(i) Section 304(a)(1) transactions. The deemed distribution by an acquiring corporation (within the meaning of section 304(a)(1) of the Code) that is a covered surrogate foreign corporation in redemption of stock of the acquiring corporation (resulting from the application of section 304(a)(1) to an acquisition of stock by such acquiring corporation), regardless of whether section 302(a) or (d) of the Code applies to the acquiring corporation's deemed distribution in redemption of its stock.
(ii) Leveraged buyouts and take-private transactions. A redemption by a covered surrogate foreign corporation that occurs as part of a transaction in which the covered surrogate foreign corporation ceases to be a covered surrogate foreign corporation.
(iii) Stock issued prior to August 16, 2022. A redemption by a covered surrogate foreign corporation of stock of the covered corporation issued prior to August 16, 2022, if, at the time such stock was issued, the stock was subject to—
(A) Mandatory redemption by the covered surrogate foreign corporation; or
(B) A unilateral put option by the holder of such stock.
(iv) Payment by a covered surrogate foreign corporation of cash in lieu of fractional shares. A payment by a covered surrogate foreign corporation of cash in lieu of a fractional share of the stock of the covered surrogate foreign corporation, if—
(A) The payment is carried out as part of a transaction that qualifies as a reorganization under section 368(a) of the Code or a distribution to which section 355 of the Code applies, or pursuant to the settlement of an option or a similar financial instrument (for example, a convertible debt instrument or convertible preferred share);
(B) The cash received by the shareholder entitled to the fractional share is not separately bargained-for consideration (that is, the cash paid by the covered surrogate foreign corporation in lieu of the fractional share represents a mere rounding off of the shares issued in the exchange or settlement);
(C) The payment is carried out solely for administrative convenience (and, therefore, solely for non-tax reasons); and
(D) The amount of cash paid to the shareholder in lieu of a fractional share does not exceed the fair market value of one full share of the class of stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, with respect to which the payment of cash in lieu of a fractional share is made.
(4) Section 4501(d) economically similar transactions. This paragraph (h)(4) provides an exclusive list of transactions that are economically similar to section 317(b) redemptions solely for purposes of the section 4501(d) excise tax (each, a section 4501(d) economically similar transaction) and, therefore, are taken into account as CSFC repurchases for purposes of this section.
(i) E reorganizations—(A) In general. Except as provided in paragraph (h)(4)(i)(B) of this section, in the case of an E reorganization in which the recapitalizing corporation is a covered surrogate foreign corporation, solely the recapitalizing corporation's acquisition of its stock pursuant to the plan of reorganization in exchange for property that is not permitted to be received by the recapitalizing corporation's shareholders under section 354 of the Code without the recognition of gain.
(B) Exception. Paragraph (h)(4)(i)(A) of this section does not apply to the extent that—
(1) The distribution of such property is treated as a distribution with respect to the recapitalizing corporation's stock under § 1.301-1(j) of this chapter; or
(2) The exchange is with respect to preferred stock with dividends in arrears and is treated under § 1.305-7(c)(2) or 1.368-2(e)(5) of this chapter as a deemed distribution to which sections 301 and 305(b)(4) of the Code apply.
(ii) Split-offs. In the case of a split-off by a distributing corporation that is a covered surrogate foreign corporation, the acquisition by the distributing corporation of its stock in exchange for property.
(iii) Certain forfeitures and clawbacks of stock—(A) In general. In the case of a forfeiture or clawback of stock of a covered surrogate foreign corporation pursuant to a legal or contractual obligation, the forfeiture or clawback is a section 4501(d)(2) repurchase on the date of forfeiture or clawback (as appropriate) if the stock was treated as issued or provided under paragraph (m)(1) of this section and the forfeiture or clawback of the stock (as appropriate) is described in paragraph (h)(4)(iii)(B) or (C) of this section.
(B) Stock for which a section 83(b) election was made. The stock was subject to a substantial risk of forfeiture within the meaning of section 83(a) of the Code on the date the stock was issued or provided, the service provider made a valid election under section 83(b) with regard to the stock, and the forfeiture resulted from the service provider failing to meet the vesting condition.
(C) Clawbacks. On the date the stock was issued or provided, the stock was subject to a clawback agreement, and a clawback of the stock resulted from the occurrence of an event specified in the clawback agreement.
(5) Transactions that are not CSFC repurchases. This paragraph (h)(5) provides a non-exclusive list of transactions each of which is not a CSFC repurchase for purposes of this section.
(i) Complete liquidations. A distribution by a covered surrogate foreign corporation—
(A) In complete liquidation of the covered surrogate foreign corporation to which section 331 or 332(a) (or both) applies;
(B) Pursuant to a resolution or plan of dissolution of the covered surrogate foreign corporation that is reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Pursuant to a deemed dissolution of the covered surrogate foreign corporation (for instance, pursuant to a deemed liquidation under § 301.7701-3 of this chapter).
(ii) Distributions during taxable year of complete liquidation or dissolution. A distribution by a covered surrogate foreign corporation during a taxable year of the covered surrogate foreign corporation, if the covered surrogate foreign corporation—
(A) Completely liquidates during the taxable year (that is, has a final distribution during the taxable year in a complete liquidation to which section 331 or 332(a) (or both) applies);
(B) Dissolves during the taxable year pursuant to a resolution or plan of dissolution as reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Is deemed to dissolve during the taxable year (for instance, pursuant to a deemed liquidation under § 301.7701-3 of this chapter).
(iii) Divisive transactions under section 355 other than split-offs—(A) In general. Subject to paragraph (h)(5)(iii)(B) of this section, a distribution by a distributing corporation that is a covered surrogate foreign corporation of stock of a controlled corporation qualifying under section 355 that is not a split-off.
(B) Exception regarding non-qualifying property in spin-offs. A distribution by a distributing corporation that is a covered surrogate foreign corporation of other property or money in exchange for stock of the distributing corporation is a repurchase by the distributing corporation if it occurs in pursuance of a transaction qualifying under section 355 in which the distribution by the distributing corporation of stock of the controlled corporation is with respect to stock of the distributing corporation.
(iv) Non-redemptive distributions subject to section 301(c)(2) or (3). A distribution to which section 301 applies by a covered surrogate foreign corporation to a distributee, if the distribution—
(A) Is subject to section 301(c)(2) or (3); and
(B) The distributee does not exchange stock of the covered surrogate foreign corporation (and is not treated as exchanging stock of the covered surrogate foreign corporation for Federal income tax purposes).
(v) Acquisitive reorganizations. In the case of an acquisitive reorganization in which the target corporation is a covered surrogate foreign corporation, the acquisition by the target corporation of its stock pursuant to the plan of reorganization in exchange for property that is received by the target corporation's shareholders under section 354 or 356 of the Code.
(vi) Net cash settlement of an option contract—(A) In general. Subject to paragraph (h)(5)(vi)(B) of this section, the net cash settlement of an option contract or other derivative financial instrument with respect to stock of a covered surrogate foreign corporation.
(B) Exception regarding net cash settlement of an option contract or other derivative financial instrument treated as stock. The net cash settlement of an instrument in the legal form of an option contract or other derivative financial instrument that is treated as stock of a covered surrogate foreign corporation for Federal tax purposes at the time of issuance is a repurchase.
(i) [Reserved]
(j) Date of section 4501(d)(1) repurchase or section 4501(d)(2) repurchase—(1) General rule. In general, stock of an applicable foreign corporation or a covered surrogate foreign corporation is treated as acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, on the date on which ownership of the stock transfers to the specified affiliate of the applicable foreign corporation, the specified affiliate of the covered surrogate foreign corporation, or the covered surrogate foreign corporation, as applicable, for Federal income tax purposes.
(2) Regular-way sale. A regular-way sale of stock of an applicable foreign corporation or a covered surrogate foreign corporation (that is, a transaction in which a trade order is placed on the trade date, and settlement of the transaction, including payment and delivery of the stock, occurs a standardized period of time, as set by a regulator, after the trade date) is treated as acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, on the trade date.
(k) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is repurchased or acquired—(1) In general. The fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase is the market price of the stock on the date of the section 4501(d)(1) repurchase or the section 4501(d)(2) repurchase (as determined under paragraph (j) of this section). That is, if the price at which the repurchased or acquired stock is purchased differs from the market price of the stock on the date the stock is repurchased or acquired, the fair market value of the stock is the market price on the date the stock is repurchased or acquired.
(2) Stock traded on an established securities market—(i) In general. If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is acquired in a section 4501(d)(1) repurchase a or section 4501(d)(2) repurchase with respect to a section 4501(d) covered corporation is traded on an established securities market, the section 4501(d) covered corporation must determine the market price of the stock by applying one of the methods provided in paragraph (k)(2)(ii) of this section. For purposes of this paragraph (k)(2), stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is treated as traded on an established securities market if any stock of the same class and issue of stock is so traded, regardless of whether the shares repurchased or acquired are so traded.
(ii) Acceptable methods. The following are acceptable methods for determining the market price of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, traded on an established securities market:
(A) The daily volume-weighted average price as determined on the date the stock is acquired in a section 4501(d)(1) repurchase or section 4501(d)(2) repurchase.
(B) The closing price on the date the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(C) The average of the high and low prices on the date the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(D) The trading price at the time the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(iii) Date of section 4501(d)(1) repurchase or section 4501(d)(2) repurchase not a trading day. For purposes of each method provided in paragraph (k)(2)(ii) of this section, if the date stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase is not a trading day, the date on which the market price is determined is the immediately preceding trading day.
(iv) Consistency requirement. The market price of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is traded on an established securities market must be determined by consistently applying one (but not more than one) of the methods provided in paragraph (k)(2)(ii) of this section to all section 4501(d)(1) repurchases with respect to an applicable foreign corporation or all section 4501(d)(2) repurchases with respect to a covered surrogate foreign corporation, as applicable, in the same taxable year of the applicable foreign corporation or covered surrogate foreign corporation, as applicable (which, if the applicable foreign corporation or covered surrogate foreign corporation, as applicable, does not have a taxable year for Federal tax purposes, is the calendar year).
(v) Stock traded on multiple exchanges—(A) In general. A section 4501(d) covered corporation must determine the market price of the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, by reference to trading on the established securities market in the country in which the applicable foreign corporation or covered surrogate foreign corporation, as applicable, is organized, including a regional established securities market that trades in that country.
(B) Stock traded on multiple exchanges in country where corporation is organized. If the stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is traded on multiple established securities markets in the country in which the applicable foreign corporation or covered surrogate foreign corporation, as applicable, is organized, a section 4501(d) covered corporation must determine the market price of the stock by reference to trading on the established securities market in that country with the highest trading volume in the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, in the section 4501(d) covered corporation's prior taxable year.
(C) Other cases in which stock is traded on multiple exchanges. If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is traded on multiple established securities markets and neither paragraph (k)(2)(v)(A) nor (B) of this section applies, a section 4501(d) covered corporation must determine the market price of the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, in a manner that is reasonable and consistent under the facts and circumstances.
(3) Stock not traded on an established securities market—(i) General rule. If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is not traded on an established securities market, the market price of the stock is determined as of the date the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase under the principles of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(ii) Consistency requirement. The valuation method for determining the market price of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is not traded on an established securities market must be used for all section 4501(d)(1) repurchases with respect to the same class of stock of an applicable foreign corporation or all section 4501(d)(2) repurchases with respect to the same class of stock of a covered surrogate foreign corporation, as applicable, in the same taxable year of the applicable foreign corporation or covered surrogate foreign corporation, as applicable (which, if the applicable foreign corporation or covered surrogate foreign corporation, as applicable, does not have a taxable year for Federal tax purposes, is the calendar year), unless the application of that method to a particular section 4501(d)(1) repurchase or a particular section 4501(d)(2) repurchase would be unreasonable under the facts and circumstances as of the valuation date within the meaning of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(4) Market price of stock denominated in non-U.S. currency. The market price of any stock of an applicable foreign corporation or a covered surrogate foreign corporation that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in § 1.988-1(d)(1) of this chapter) on the date the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(l) Section 4501(d) exceptions—(1) In general—(i) Overview. This paragraph (l) provides rules regarding the application of each exception set forth in section 4501(e) (other than the section 4501(d) de minimis exception) and an additional exception applicable to certain investment companies (each, a section 4501(d) exception) to a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(ii) Reduction of section 4501(d) excise tax base. For purposes of determining a section 4501(d) covered corporation's section 4501(d) stock repurchase excise tax base under paragraph (c)(3) of this section, the section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount by an amount equal to the aggregate fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that qualifies for an exception described in this paragraph (l). See paragraph (c)(3)(i)(B) of this section.
(iii) Coordination of exceptions. If a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase qualifies for more than one exception described in paragraphs (l)(2) through (7) of this section, the section 4501(d) covered corporation may reduce its gross repurchase amount under solely a single exception, as determined by the section 4501(d) covered corporation.
(2) Section 4501(d) reorganization exception. A section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount under paragraph (c)(3)(i)(B) of this section by an amount equal to the aggregate fair market value of a covered surrogate foreign corporation's stock repurchased from a shareholder in a CSFC repurchase described in paragraph (h)(4)(i) or (ii) of this section to the extent that the repurchase is for property permitted by section 355 to be received without the recognition of gain or loss on that CSFC repurchase (section 4501(d) reorganization exception).
(3) Stock contributions to an employer-sponsored retirement plan—(i) Reductions to section 4501(d) excise tax base—(A) General rule. A section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount under paragraph (c)(3)(i)(B) of this section if the stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, that is repurchased or acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, or an amount of stock equal to the fair market value of the stock repurchased or acquired, is contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation.
(B) Special rule for leveraged ESOPs. If a section 4501(d) covered corporation maintains an ESOP with an exempt loan (as described in section 4975(d)(3) of the Code), allocations of qualifying employer securities that are stock of the applicable foreign corporation or covered surrogate foreign corporation from the ESOP suspense account to ESOP participants' accounts that are attributable to employer contributions (and not to dividends) are treated as contributions of stock under this paragraph (l)(3) as of the date stock attributable to repayment of the exempt loan is released from the suspense account and allocated to ESOP participants' accounts.
(ii) Classes of stock contributed to an employer-sponsored retirement plan. This paragraph (l)(3) applies to contributions of any class of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, to an employer-sponsored retirement plan of the section 4501(d) covered corporation, regardless of the class of stock that was repurchased or acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase by the section 4501(d) covered corporation.
(iii) Determining amount of reduction to section 4501(d) excise tax base. The amount of the reduction under paragraph (l)(3)(i) of this section for a section 4501(d) covered corporation is determined as provided in paragraph (l)(3)(iii)(A) or (B) of this section.
(A) Same class of stock repurchased and contributed. If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is repurchased or acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, and stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, that is of the same class is contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation, the amount of the reduction under paragraph (l)(3)(i) of this section is equal to the lesser of—
(1) The aggregate fair market value of the stock of the same class that was repurchased or acquired (as determined under paragraph (k) of this section) during the section 4501(d) covered corporation's taxable year; or
(2) The amount obtained by—
(i) Determining the aggregate fair market value of all stock of that class repurchased or acquired (as determined under paragraph (k) of this section) in all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases, as applicable, during the section 4501(d) covered corporation's taxable year, reduced by the fair market value of shares of that class of stock that is a reduction to the section 4501(d) excise tax base for the taxable year under a section 4501(d) exception other than this paragraph (l)(3);
(ii) Dividing the amount determined under paragraph (l)(3)(iii)(A)(2)(i) of this section by the number of shares of that class repurchased or acquired in all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases, as applicable, during the section 4501(d) covered corporation's taxable year, reduced by the number of shares of that class of stock the fair market value of which is a reduction to the section 4501(d) excise tax base for the taxable year under a section 4501(d) exception other than this paragraph (l)(3); and
(iii) Multiplying the amount determined under paragraph (l)(3)(iii)(A)(2)(ii) of this section by the number of shares of that class contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation for the taxable year.
(B) Different class of stock repurchased and contributed—(1) In general. Subject to paragraph (l)(3)(iii)(B)(2) of this section, if stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, of a different class of stock than is repurchased or acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, with respect to a section 4501(d) covered corporation is contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation, then the amount of the reduction under paragraph (l)(3)(i) of this section is equal to the fair market value of the contributed stock at the time the stock is contributed to the employer-sponsored retirement plan.
(2) Maximum reduction permitted. The amount of the reduction under paragraph (l)(3)(iii)(B)(1) of this section may not exceed the section 4501(d) excise tax base for the taxable year (determined without regard to any reduction under paragraph (l)(3)(i) of this section).
(iv) Timing of contributions—(A) In general. The reduction under paragraph (l)(3)(i) of this section (that is, the reduction in the section 4501(d) excise tax base), for a taxable year applies to contributions of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, to an employer-sponsored retirement plan during the section 4501(d) covered corporation's taxable year.
(B) Treatment of contributions after close of taxable year. For purposes of paragraph (l)(3)(iv)(A) of this section, a section 4501(d) covered corporation may treat stock contributions to an employer-sponsored retirement plan made after the close of the section 4501(d) covered corporation's taxable year as having been contributed during that taxable year if the following two requirements are satisfied:
(1) The stock must be contributed to the employer-sponsored retirement plan by the filing deadline for the form on which the section 4501(d) excise tax must be reported (applicable form) for that taxable year of the section 4501(d) covered corporation.
(2) The stock must be treated by the employer-sponsored retirement plan in the same manner that the plan would treat a contribution received on the last day of that taxable year of the section 4501(d) covered corporation.
(C) No duplicate reductions. Stock contributions that are treated under paragraph (l)(3)(iv)(B) of this section as having been contributed in the taxable year to which the applicable form applies may not be treated as having been contributed for any other taxable year for purposes of the section 4501(d) excise tax.
(v) Contributions before January 1, 2023. A section 4501(d) covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, may include for that taxable year the fair market value of all contributions of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, to an employer-sponsored retirement plan during the entirety of that taxable year for purposes of applying this paragraph (l)(3).
(4) Repurchases or acquisitions by a dealer in securities in the ordinary course of business—(i) In general. Subject to paragraph (l)(4)(ii) of this section, a section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount under paragraph (c)(3)(i)(B) of this section by an amount equal to the aggregate fair market value of stock acquired in a section 4501(d)(1) repurchase or in a section 4501(d)(2) repurchase if the repurchasing or acquiring entity is a dealer in securities (within the meaning of section 475(c)(1) of the Code) to the extent the stock is repurchased or acquired in the ordinary course of the dealer's business of dealing in securities.
(ii) Applicability. The reduction described in paragraph (l)(4)(i) of this section applies solely to the extent that—
(A) The dealer accounts for the stock as securities held primarily for sale to customers in the dealer's ordinary course of business;
(B) The dealer disposes of the stock within a period of time that is consistent with the holding of the stock for sale to customers in the dealer's ordinary course of business, taking into account the terms of the stock and the conditions and practices prevailing in the markets for similar stock during the period in which the stock is held; and
(C) The dealer (if it is a covered surrogate foreign corporation) does not sell or otherwise transfer the stock to a specified affiliate of the covered surrogate foreign corporation or the dealer (if it is a specified affiliate of an applicable foreign corporation or of a covered surrogate foreign corporation, as applicable) does not sell or otherwise transfer the stock to the applicable foreign corporation, covered surrogate foreign corporation, or to another specified affiliate of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, in each case other than in a sale or transfer to a dealer that also satisfies the requirements of this paragraph (l)(4)(ii).
(5) Repurchases by a RIC or REIT. Section 4501(e)(5) does not apply for purposes of section 4501(d).
(6) CSFC repurchase treated as a dividend—(i) In general. A section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount under paragraph (c)(3)(i)(B) of this section by an amount equal to the aggregate fair market value of stock of a covered surrogate foreign corporation repurchased by the covered surrogate foreign corporation in a CSFC repurchase to the extent the CSFC repurchase is treated as a distribution of a dividend under section 301(c)(1) or 356(a)(2).
(ii) Rebuttable presumption of no dividend equivalence—(A) Presumption. A CSFC repurchase to which section 302 or 356(a) applies is presumed to be subject to section 302(a) or 356(a)(1), respectively (and, therefore, is presumed ineligible for the exception in paragraph (l)(6)(i) of this section).
(B) Rebuttal of presumption. A section 4501(d) covered corporation may rebut the presumption described in paragraph (l)(6)(ii)(A) of this section with regard to a specific shareholder of the covered surrogate foreign corporation solely by establishing with sufficient evidence that the covered surrogate foreign corporation and the shareholder treat the CSFC repurchase as a dividend for Federal income tax purposes.
(iii) Sufficient evidence requirement—(A) In general. To provide sufficient evidence under paragraph (l)(6)(ii)(B) of this section to establish that the covered surrogate foreign corporation and the shareholder treat the CSFC repurchase as a dividend for Federal income tax purposes, the section 4501(d) covered corporation must—
(1) Establish, based on information known to the section 4501(d) covered corporation (for example, through legal documentation of share ownership, publicly available information, the pro rata nature of the repurchase, or the shareholder certification safe harbor described in paragraph (l)(6)(iii)(B) of this section), that—
(i) The CSFC repurchase either constitutes a redemption that is treated as a distribution to which section 301 applies by reason of section 302(d) or has the effect of the distribution of a dividend under section 356(a)(2); and
(ii) The section 4501(d) covered corporation has no knowledge of facts that would indicate that the treatment described in paragraph (l)(6)(iii)(A)(1)(i) of this section is incorrect;
(2) Treat the CSFC repurchase consistent with the treatment described in paragraph (l)(6)(iii)(A)(1)(i) of this section, including by withholding the applicable amounts, if required; and
(3) Demonstrate sufficient earnings and profits to treat as a dividend either the redemption under section 302 or the receipt of money or other property under section 356.
(B) Shareholder certification safe harbor. To provide sufficient evidence under paragraph (l)(6)(iii)(A) of this section to establish that the shareholder treats the repurchase as a dividend for Federal income tax purposes, the section 4501(d) covered corporation—
(1) May obtain certification from the shareholder, in accordance with § 58.4501-3(g)(3)(ii), that the repurchase constitutes a redemption treated as a distribution to which section 301 applies by reason of section 302(d), or that the repurchase has the effect of the distribution of a dividend under section 356(a)(2), including evidence that applicable withholding occurred if required; and
(2) Must have no knowledge of facts that would indicate that the shareholder certification is incorrect.
(iv) Documentation of sufficient evidence—(A) Retention and availability of evidence. A section 4501(d) covered corporation must retain the evidence described in paragraph (l)(6)(iii) of this section and make that evidence available for inspection to the IRS if any of the evidence becomes material in the administration of any internal revenue law.
(B) Retention of supporting records. The section 4501(d) covered corporation must retain records of all information necessary to document and substantiate all content described in paragraph (l)(6)(iii) of this section.
(7) Repurchases by a non-RIC '40 Act fund. The exception for repurchases by a non-RIC '40 Act fund under § 58.4501-3(h) does not apply for purposes of section 4501(d).
(m) Application of section 4501(d) netting rule—(1) In general. This paragraph (m) provides the section 4501(d) netting rule, under which the section 4501(d) excise tax base with respect to a section 4501(d) covered corporation for a taxable year is reduced only by stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, issued or provided by the section 4501(d) covered corporation to its employees during its taxable year. Any reference in this paragraph (m) to issuing or providing stock to an employee refers solely to stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, that is issued or provided by a section 4501(d) covered corporation to an employee in connection with the employee's performance of services in the employee's capacity as an employee of the section 4501(d) covered corporation. The fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is described in this paragraph (m) is a reduction for purposes of computing the section 4501(d) covered corporation's section 4501(d) excise tax base. See paragraph (c)(3)(i)(C) of this section.
(2) Stock issued or provided outside period of applicable foreign corporation or covered surrogate foreign corporation status. Any stock issued or provided prior to the initiation date or after the cessation date of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, is not taken into account under paragraph (m)(1) of this section. See paragraph (e)(1) of this section (determination of initiation date and cessation date).
(3) Issuances or provisions before January 1, 2023. Except as provided in paragraph (m)(2) of this section, a section 4501(d) covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, must include the fair market value of all issuances or provisions of stock during the entirety of that taxable year for purposes of applying paragraph (m)(1) of this section for that taxable year.
(4) Stock issued or provided in connection with the performance of services—(i) In general. For purposes of this paragraph (m), stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is transferred by the section 4501(d) covered corporation in connection with the performance of services only if the transfer is described in section 83, including pursuant to the exercise of a nonqualified stock option described in § 1.83-7 of this chapter, or is pursuant to the exercise of a stock option described in section 421 of the Code.
(ii) Sale of shares to cover exercise price or withholding—(A) Payment or advance by third party equal to exercise price. If a third party pays the exercise price of an option to acquire stock of a covered corporation on behalf of an employee or advances to an employee an amount equal to the exercise price of a stock option that the employee uses to exercise the option, then any stock transferred by the section 4501(d) covered corporation to the third party in connection with exercising the option (as well as any stock transferred by the covered corporation or specified affiliate to the employee) is treated as issued or provided in connection with the performance of the services by the employee.
(B) Advance by third party equal to withholding obligation. If a third party advances an amount equal to the withholding obligation of an employee, then any stock transferred by the section 4501(d) covered corporation to the third party (as well as any stock transferred by the covered corporation or specified affiliate to the employee) in connection with this arrangement is treated as issued or provided in connection with the performance of services by the employee.
(5) Date of issuance or provision for section 4501(d) netting rule—(i) In general. Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is issued or provided to an employee of a section 4501(d) covered corporation as of the date the employee is treated as the beneficial owner of the stock for Federal income tax purposes. In general, an employee is treated as the beneficial owner of the stock when the stock is both transferred by the section 4501(d) covered corporation and substantially vested within the meaning of § 1.83-3(b) of this chapter. Thus, stock transferred pursuant to a vested stock award or a restricted stock unit is issued or provided when the section 4501(d) covered corporation initiates payment of the stock. Stock transferred that is not substantially vested within the meaning of § 1.83-3(b) of this chapter is not issued or provided until it vests, except as provided in paragraph (m)(5)(iii) of this section.
(ii) Stock options and stock appreciation rights. Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, transferred by a section 4501(d) covered corporation pursuant to an option described in § 1.83-7 of this chapter or section 421 or a stock appreciation right is issued or provided by the section 4501(d) covered corporation as of the date the option or stock appreciation right is exercised.
(iii) Stock on which a section 83(b) election is made. Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, transferred by the section 4501(d) covered corporation when it is not substantially vested within the meaning of § 1.83-3(b) of this chapter, but as to which a valid election under section 83(b) is made, is treated as issued or provided by the section 4501(d) covered corporation as of the transfer date.
(6) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is issued or provided to employees—(i) In general. For purposes of paragraph (m)(1) of this section, the fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is issued or provided is determined under section 83 as of the date the stock is issued or provided to an employee by the section 4501(d) covered corporation. The fair market value of the stock is determined under the rules provided in section 83 regardless of whether an amount is includible in the employee's income under section 83 or otherwise. For example, the fair market value of stock issued or provided by a section 4501(d) covered corporation to its employee pursuant to a stock option described in section 421 and stock issued or provided by a section 4501(d) covered corporation to an employee who is a nonresident alien for services performed outside of the United States is determined using the rules provided in section 83.
(ii) Market price of stock denominated in non-U.S. currency. The market price of any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in § 1.988-1(d)(1) of this chapter) on the date the stock is issued or provided by the section 4501(d) covered corporation to its employee.
(7) Issuances that are disregarded for purposes of applying the section 4501(d) netting rule—(i) In general. This paragraph (m)(7) lists the sole circumstances in which an issuance or provision of stock by the section 4501(d) covered corporation to its employee is disregarded for purposes of this paragraph (m). The transfers of stock described in § 58.4501-4(f)(1) through (9) are not issuances or provisions of stock by a section 4501(d) covered corporation to its employees and therefore are not relevant to the section 4501(d) netting rule.
(ii) Stock contributions to an employer-sponsored retirement plan. Any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation, any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, treated as contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation under paragraph (l)(3) of this section, and any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, sold to a leveraged or non-leveraged ESOP, is disregarded for purposes of this paragraph (m).
(iii) Net exercises and share withholding. Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, withheld by a section 4501(d) covered corporation to satisfy the exercise price of a stock option issued to an employee, or to pay any withholding obligation, is disregarded for purposes of this paragraph (m). For example, stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, withheld by a section 4501(d) covered corporation to pay the exercise price of a stock option, to satisfy an employer's income tax withholding obligation under section 3402 of the Code, to satisfy an employer's withholding obligation under section 3102 of the Code, or to satisfy an employer's withholding obligation for State, local, or foreign taxes, is disregarded for purposes of this paragraph (m).
(iv) Settlement other than in stock. Settlement of an option contract with respect to stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, using any consideration other than stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, (including cash) is disregarded for purposes of this paragraph (m).
(v) Instrument not in the legal form of stock—(A) Issuance or provision of section 4501(d) covered non-stock instrument generally disregarded. Except as provided in paragraph (m)(7)(v)(C) or (D) of this section, the issuance or provision by a section 4501(d) covered corporation of a section 4501(d) covered non-stock instrument (as defined in paragraph (m)(7)(v)(B)(2) of this section, including an issuance or provision before the initiation date or after the cessation date, is disregarded for purposes of the section 4501(d) netting rule.
(B) Definitions. The following definitions apply for purposes of this paragraph (m)(7)(v).
(1) Section 4501(d) non-stock instrument. A section 4501(d) non-stock instrument is an instrument of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is not in the legal form of stock but that is treated as stock for Federal tax purposes. For the avoidance of doubt, in the case of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is an eligible entity with the meaning of § 301.7701-3(a) of this chapter, a section 4501(d) non-stock instrument does not include an instrument that is in the legal form of membership, partnership, or other ownership interests of the eligible entity.
(2) Section 4501(d) covered non-stock instrument. A section 4501(d) covered non-stock instrument is a section 4501(d) non-stock instrument issued or provided by a section 4501(d) covered corporation to a section 4501(d) covered holder.
(3) Section 4501(d) covered holder. A section 4501(d) covered holder is any person that owns (or under the attribution rules of section 318 of the Code is considered to own) at least 10 percent of the stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, either by vote or value, but only if the section 4501(d) covered corporation has knowledge of facts that would indicate such ownership, including through legal documentation of share ownership, publicly available information, or any other means at the time of the issuance or provision of the section 4501(d) non-stock instrument by the section 4501(d) covered corporation.
(C) Certain instruments treated as issued when repurchased—(1) In general. Subject to the identification requirement in paragraph (m)(7)(v)(C)(2) of this section, if a section 4501(d) covered non-stock instrument is repurchased by a section 4501(d) covered corporation, the issuance or provision of the instrument is regarded for purposes of the section 4501(d) netting rule at the time of such repurchase based on the fair market value of the instrument when the instrument was issued or provided. Such fair market value is determined under paragraph (m)(6) of this section. For purposes of the section 4501(d) excise tax, the delivery of stock pursuant to the terms of a section 4501(d) covered non-stock instrument is treated as a repurchase of the section 4501(d) covered non-stock instrument in exchange for an issuance or provision of the stock that is delivered.
(2) Identification of an instrument not in the legal form of stock. The issuance or provision of a section 4501(d) covered non-stock instrument is regarded under paragraph (m)(7)(v)(C)(1) of this section only if the section 4501(d) covered corporation identifies the section 4501(d)(1) repurchase or the section 4501(d)(2) repurchase, as applicable, of the section 4501(d) covered non-stock instrument on the return on which the section 4501(d) excise tax must be reported for the section 4501(d) covered corporation's taxable year in which the section 4501(d)(1) repurchase or the section 4501(d)(2) repurchase, as applicable, occurs.
(D) Issuances pursuant to a public offering. Paragraph (m)(7)(v)(A) of this section does not apply to any issuance or provision of a section 4501(d) covered non-stock instrument the offer and sale of which was registered with the SEC.
(n) Section 4501(d)(1) examples. The following examples illustrate the application of the rules in this section relating to section 4501(d)(1). For purposes of the following examples, unless otherwise stated: Corporation FZ is an applicable foreign corporation; each entity has a calendar taxable year, has no direct or indirect owner that is a domestic entity, and is not related to any other entity; each corporation's only outstanding stock for Federal tax purposes is a single class of common stock; the functional currency (within the meaning of section 985 of the Code) of any entity is the U.S. dollar; any acquisition of the stock of an applicable foreign corporation is from a person who is not the applicable foreign corporation or a specified affiliate of the applicable foreign corporation; no stock is transferred to any employee; for examples that expressly provide that stock is transferred to any employee, such transfer is made in connection with the employee's performance of services in its capacity as an employee of the transferor, and the employee is treated as the beneficial owner of the stock for Federal income tax purposes on the date of the transfer; and the section 4501(d) exceptions are inapplicable.
(1) Example 1: Section 4501(d) netting rule with respect to a single applicable specified affiliate—(i) Facts. Corporation FZ owns all the outstanding stock of Corporation US1, a domestic corporation. Each of Employee M and Employee P is an employee of Corporation US1. On February 1, 2025, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2025, Corporation US1 transfers to Employee M 50 shares of stock of Corporation FZ when the fair market value of each share is $5x. On November 1, 2025, Corporation US1 transfers to Employee P 30 shares of stock of Corporation US1 when the fair market value of each share is $9x.
(ii) Analysis. Corporation US1 is an applicable specified affiliate. See paragraph (b)(2)(ii) of this section. Corporation US1's purchase of 100 shares of stock of Corporation FZ on February 1, 2025, is a section 4501(d)(1) repurchase. See paragraph (b)(2)(xxi) of this section. Corporation US1 is a section 4501(d) covered corporation with respect to the section 4501(d)(1) repurchase. See paragraph (b)(2)(ix)(A) of this section. For purposes of computing Corporation US1's section 4501(d) excise tax base for its 2025 taxable year, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(1) repurchase is $800x. See paragraph (k)(1) of this section. Accordingly, the section 4501(d)(1) repurchase increases Corporation US1's section 4501(d) excise tax base for the 2025 taxable year by $800x. 50 shares of Corporation FZ stock are treated as issued or provided to Employee M on May 15, 2025. See paragraph (m)(5) of this section. Therefore, Corporation US1's section 4501(d) excise tax base for its 2025 taxable year is reduced by $250x (50 shares × $5x per share = $250x). See paragraph (c)(3)(i)(C) of this section. Corporation US1's section 4501(d) excise tax base for its 2025 taxable year is not reduced by the transfer of stock of Corporation US1 to Employee P because the section 4501(d) excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See paragraph (m) of this section. Accordingly, Corporation US1's section 4501(d) excise tax base with respect to these transactions for its 2025 taxable year is $550x ($800x repurchase − $250x issuance = $550x).
(2) Example 2: Section 4501(d) netting rule with respect to multiple applicable specified affiliates—(i) Facts. Corporation FZ owns all the outstanding stock of both Corporation US1, a domestic corporation, and Corporation US2, a domestic corporation. Employee T is an employee of Corporation US2. On February 1, 2025, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2025, Corporation US2 transfers to Employee T 50 shares of stock of Corporation FZ when the fair market value of each share is $5x.
(ii) Analysis. Corporation US1 is an applicable specified affiliate. See paragraph (b)(2)(ii) of this section. Corporation US1's purchase of 100 shares of stock of Corporation FZ on February 1, 2025, is a section 4501(d)(1) repurchase. See paragraph (b)(2)(xxi) of this section. Corporation US1 is a section 4501(d) covered corporation with respect to the section 4501(d)(1) repurchase. See paragraph (b)(2)(ix)(A) of this section. For purposes of computing Corporation US1's section 4501(d) excise tax base for its 2025 taxable year, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(1) repurchase is $800x. See paragraph (k)(1) of this section. Accordingly, the section 4501(d)(1) repurchase increases Corporation US1's section 4501(d) excise tax base for the 2025 taxable year by $800x. Corporation US1's section 4501(d) excise tax base for its 2025 taxable year is not reduced by the transfer of stock of Corporation FZ to Employee T, an employee of Corporation US2, because the section 4501(d) excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See paragraph (m) of this section. Because there is no section 4501(d) repurchase by Corporation US2, the section 4501(d) netting rule does not apply to Corporation US2's transfer of 50 shares of stock of Corporation FZ to Employee T.
(3) Example 3: Foreign partnership that is an applicable specified affiliate—(i) Facts. Partnership FP is a foreign partnership in which Corporation FZ, Corporation FB, a foreign corporation, and Corporation US1, a domestic corporation, are partners. Corporation FZ owns 70 percent of the capital interests and profits interests of Partnership FP; Corporation FB owns 20 percent of the capital interests and profits interests of Partnership FP; and Corporation US1 owns 10 percent of the capital interests and profits interests of Partnership FP. On March 1, 2024, Partnership FP purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x.
(ii) Analysis. Corporation US1 is a domestic entity. See paragraph (b)(2)(vi) of this section. Corporation US1 is a direct partner with respect to Partnership FP for purposes of section 4501(d)(1) because Corporation US1 directly owns an interest in Partnership FP and is not a de minimis domestic entity partner with respect to Partnership FP. See paragraphs (g)(2)(i) and (g)(5) of this section. Accordingly, Partnership FP is an applicable specified affiliate of Corporation FZ because Corporation FZ owns more than 50 percent of the capital interests or profits interests of Partnership FP, and Corporation US1, a domestic entity, is a direct partner of Partnership FP. See paragraph (g)(1) of this section. Consequently, Partnership FP's purchase of 100 shares of stock of Corporation FZ is a section 4501(d)(1) repurchase. See paragraph (b)(2)(xxi) of this section. Partnership FP is a section 4501(d) covered corporation with respect to the section 4501(d)(1) repurchase. See paragraph (b)(2)(ix)(A) of this section. For purposes of computing Partnership FP's section 4501(d) excise tax base, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(1) repurchase is $800x. See paragraph (k)(1) of this section. Accordingly, the section 4501(d)(1) repurchase increases Partnership FP's section 4501(d) excise tax base for the 2024 taxable year by $800x. See paragraph (c)(3)(i) of this section.
(4) Example 4: Foreign partnership that is not an applicable specified affiliate—(i) Facts. The facts are the same as in paragraph (n)(3)(i) of this section (Example 3), except that Corporation FZ owns 76 percent of the capital interests and profits interests of Partnership FP; Corporation FB owns 20 percent of the capital interests and profits interests of Partnership FP; and Corporation US1 owns 4 percent of the capital interests and profits interests of Partnership FP.
(ii) Analysis. Corporation US1 is not a direct or indirect partner with respect to Partnership FP for purposes of section 4501(d)(1) because Corporation US1 qualifies as a de minimis domestic entity partner. See paragraph (g)(5) of this section. Consequently, Partnership FP is not an applicable specified affiliate of Corporation FZ because Partnership FP has no direct or indirect domestic entity partner. See paragraph (g)(1) of this section. Accordingly, Partnership FP's purchase of 100 shares of stock of Corporation FZ is not a section 4501(d)(1) repurchase. See paragraph (b)(2)(xxi) of this section.
(5) Example 5: Foreign partnership that is directly owned by foreign corporations and is an applicable specified affiliate—(i) Facts. Corporation FZ owns all the outstanding stock of Corporation US1, a domestic corporation. Corporation US1 owns all the outstanding stock of Corporation FB, a foreign corporation. Partnership FP is a foreign partnership in which Corporation FB and Corporation FE, a foreign corporation, are partners. Corporation FB owns 80 percent of the capital interests and profits interests of Partnership FP, and Corporation FE owns 20 percent of the capital interests and profits interests of Partnership FP.
(ii) Analysis. Corporation US1 is a domestic entity. See paragraph (b)(2)(vi) of this section. Corporation US1 owns an interest in Partnership FP indirectly through Corporation FB, a foreign corporation that Corporation US1 controls within the meaning of paragraph (g)(3) of this section. Corporation US1 does not qualify as a de minimis domestic entity partner with respect to Partnership FP. See paragraph (g)(5) of this section. Thus, Corporation US1 is an indirect partner with respect to Partnership FP for purposes of section 4501(d)(1). See paragraph (g)(2)(ii)(B) of this section. Accordingly, Partnership FP is an applicable specified affiliate of Corporation FZ because Corporation FZ indirectly owns more than 50 percent of the capital interests or profits interests of Partnership FP and Corporation US1, a domestic entity, is an indirect partner of Partnership FP. See paragraph (g)(1) of this section.
(o) Section 4501(d)(2) examples. The following examples illustrate the application of the rules in this section relating to section 4501(d)(2). For purposes of the following examples, unless otherwise stated: Corporation FZ is a covered surrogate foreign corporation; each domestic entity is an expatriated entity within the meaning of section 7874(a)(2)(A) with respect to Corporation FZ and is not a member of a consolidated group; there are no expatriated entities with respect to Corporation FZ other than as described in the facts; a reference to ownership refers to direct ownership; any repurchase or acquisition of stock is during a taxable year that includes at least a portion of the applicable period with respect to Corporation FZ under section 7874(d)(1); each entity has a calendar taxable year; each corporation's only outstanding stock is a single class of common stock; the functional currency (within the meaning of section 985) of any entity is the U.S. dollar; no stock is transferred to any employee; for examples that expressly provide that stock is transferred to any employee, such transfer is made in connection with the employee's performance of services in its capacity as an employee of the transferor, and the employee is treated as the beneficial owner of the stock for Federal income tax purposes on the date of the transfer; and the section 4501(d) exceptions are inapplicable.
(1) Example 1: Section 4501(d) netting rule with respect to an expatriated entity—(i) Facts. Corporation FZ owns all the outstanding stock of Corporation US1, a domestic corporation. Employee M is an employee of Corporation FZ, and Employee P is an employee of Corporation US1. On February 1, 2024, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2024, Corporation FZ transfers to Employee M 50 shares of stock of Corporation FZ when the fair market value of each share is $5x. On November 1, 2024, Corporation US1 transfers to Employee P 30 shares of stock of Corporation US1 when the fair market value of each share is $9x. On December 15, 2024, Corporation FZ purchases 90 shares of its stock when the market price of each share is $12x.
(ii) Analysis. Each of Corporation US1's purchase of 100 shares of stock of Corporation FZ and Corporation FZ's purchase of 90 shares of its stock is a section 4501(d)(2) repurchase. See paragraph (b)(2)(xxii) of this section. Corporation US1 is a section 4501(d) covered corporation with respect to the section 4501(d)(2) repurchases. See paragraph (b)(2)(ix)(B) of this section. For purposes of computing Corporation US1's section 4501(d) excise tax base, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on February 1, 2024, is $800x, and the fair market value of the 90 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on December 15, 2024, is $1,080x. See paragraph (k)(1) of this section. Thus, the section 4501(d)(2) repurchases increase Corporation US1's section 4501(d) excise tax base for the 2024 taxable year by $1,880x ($800x + $1,080x). See paragraph (c)(3)(i)(A) of this section. Corporation US1's section 4501(d) excise tax base for its 2024 taxable year is not reduced by the fair market value of the stock of Corporation FZ transferred to Employee M or the fair market value of the stock of Corporation US1 transferred to Employee P because the section 4501(d) excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See paragraph (m)(1) of this section. Accordingly, Corporation US1's section 4501(d) excise tax base with respect to these transactions for its 2024 taxable year is $1,880x.
(2) Example 2: Section 4501(d)(2) repurchase from the covered surrogate foreign corporation or another specified affiliate of the covered surrogate foreign corporation—(i) Facts. Corporation FZ owns all the outstanding stock of each of Corporation US1, a domestic corporation, Corporation FB, a foreign corporation, and Corporation FE, a foreign corporation. On February 1, 2024, Corporation US1 purchases 100 shares of stock of Corporation FZ from Corporation FB when the market price of each share is $8x. On December 15, 2024, Corporation FZ contributes 90 shares of its stock to Corporation FE when the fair market value of each share is $12x.
(ii) Analysis. Each of Corporation US1's purchase of 100 shares of stock of Corporation FZ and Corporation FZ's transfer of 90 shares of its stock is a section 4501(d)(2) repurchase. See paragraph (b)(2)(xxii) of this section. Corporation US1 is a section 4501(d) covered corporation with respect to the section 4501(d)(2) repurchases. See paragraph (b)(2)(ix)(B) of this section. For purposes of computing Corporation US1's section 4501(d) excise tax base, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on February 1, 2024, is $800x, and the fair market value of the 90 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on December 15, 2024, is $1,080x. See paragraph (k)(1) of this section. Accordingly, Corporation US1's section 4501(d) excise tax base with respect to these transactions for its 2024 taxable year is $1,880x. See paragraph (c)(3)(i) of this section.
(3) Example 3: Liability with respect to multiple expatriated entities—(i) Facts. Corporation FZ owns all the outstanding stock of each of Corporation US1, a domestic corporation, and Corporation US2, a domestic corporation. Employee M is an employee of Corporation US1, and Employee P is an employee of Corporation US2. On February 1, 2024, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2024, Corporation US2 purchases 40 shares of stock of Corporation FZ when the market price of each share is $9x. On October 15, 2024, Corporation FZ repurchases 50 shares of its stock when the market price of each share is $7x. On November 1, 2024, Corporation US1 transfers to Employee M 30 shares of stock of Corporation FZ when the fair market value of each share is $9x. On November 20, 2024, Corporation US2 transfers to Employee P 30 shares of stock of Corporation FZ when the fair market value of each share is $8x. Corporation US1 pays the entire amount of section 4501(d) excise tax that it owes with respect to all section 4501(d)(2) repurchases relating to Corporation FZ and its specified affiliates that occur during Corporation US1's 2024 taxable year and fulfills its filing obligations for its 2024 taxable year with respect to such section 4501(d)(2) repurchases.
(ii) Analysis. Each of Corporation US1's purchase of 100 shares of stock of Corporation FZ, Corporation US2's purchase of 40 shares of stock of Corporation FZ, and Corporation FZ's repurchase of 50 shares of its stock is a section 4501(d)(2) repurchase. See paragraphs (b)(2)(xxii) and (d)(2)(i) of this section. Each of Corporation US1 and Corporation US2 is a section 4501(d) covered corporation with respect to the section 4501(d)(2) repurchases. See paragraph (b)(2)(ix)(B) of this section. For purposes of computing the section 4501(d) excise tax base for each of Corporation US1 and Corporation US2, the fair market value of the 100 shares subject to the section 4501(d)(2) repurchase on February 1, 2024, is $800x; the fair market value of the 40 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on May 15, 2024, is $360x; and the fair market value of the 50 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on October 15, 2024, is $350x. See paragraph (k)(1) of this section. Thus, the section 4501(d)(2) repurchases increase each of Corporation US1's and Corporation US2's section 4501(d) excise tax base for the 2024 taxable year by $1,510x ($800x + $360x + $350x). See paragraph (c)(3)(i)(A) of this section. 30 shares of Corporation FZ stock are treated as issued or provided to Employee M on November 1, 2024. See paragraph (m)(5) of this section. Therefore, Corporation US1's section 4501(d) excise tax base is reduced for its 2024 taxable year by the fair market value of the 30 shares of stock of Corporation FZ transferred on November 1, 2024, or $270x ($9x per share × 30 shares = $270x). See paragraph (m)(7) of this section. Corporation US1's section 4501(d) excise tax base for its 2024 taxable year is not reduced by the fair market value of the stock of Corporation FZ that Corporation US2 transferred to Employee P because the section 4501(d) excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See paragraph (m)(1) of this section. Accordingly, Corporation US1's section 4501(d) excise tax base with respect to these transactions for its 2024 taxable year is $1,240x ($1,510x−$270x). See paragraph (c)(3)(i) of this section. Because Corporation US1 pays the entire amount of section 4501(d) excise tax that it owes with respect to all section 4501(d)(2) repurchases that occur during Corporation US1's 2024 taxable year relating to Corporation FZ and its specified affiliates and fulfills its filing obligations for its 2024 taxable year with respect to such section 4501(d)(2) repurchases, Corporation US2 is not liable for section 4501(d) excise tax with respect to such section 4501(d)(2) repurchases. See paragraph (d)(2)(ii) of this section.
(p) Applicability dates—(1) In general. Except as provided in paragraphs (p)(2) and (3) of this section, the provisions of this section apply to transactions that occur after April 12, 2024.
(2) Transition rule for foreign partnership de minimis rule. A section 4501(d) covered corporation may choose to apply paragraph (g)(5) of this section by replacing the phrase “10 percent” with “five percent” for transactions that occur after April 12, 2024, but before November 24, 2025.
(3) Early application. A section 4501(d) covered corporation may choose to apply all the rules of this section to transactions occurring after December 31, 2022, provided that the section 4501(d) covered corporation and all other section 4501(d) covered corporations with respect to the same applicable foreign corporation or covered surrogate foreign corporation, as applicable, consistently apply all the rules of this section with respect to such transactions.
Subpart B Procedure and Administration
§ 58.6001-1 Notice or regulations requiring records, statements, and special returns.
(a) In general. Any covered corporation (as defined in section 4501(b) of the Internal Revenue Code (Code)), or any person treated as a covered corporation (as described in section 4501(d)(1)(A) or (d)(2)(A)), that makes a repurchase (as defined in section 4501(c)(1)), or that is treated as making a repurchase under section 4501(c)(2)(A), (d)(1)(B), or (d)(2)(B), must keep such complete and detailed records as are sufficient to establish accurately the amount of repurchases, adjustments, or exceptions required to be shown by the covered corporation or person treated as a covered corporation in any stock repurchase excise tax return (as defined in § 58.6011-1(b)).
(b) Notice by IRS requiring returns, statements, or the keeping of records. The Internal Revenue Service (IRS) may require any covered corporation or person treated as a covered corporation, by notice served upon such corporation or person, to make such returns, render such statements, or keep such specific records as will enable the IRS to determine whether or not such corporation or person is liable for tax under chapter 37 of the Code.
(c) Retention of records. The records required by this section must be kept at all times available for inspection by the IRS and must be retained for so long as the contents thereof may become material in the administration of any internal revenue law.
(d) Applicability date. This section applies to repurchases, adjustments, or exceptions required to be shown in any stock repurchase excise tax return required to be filed after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6011-1 General requirement of return, statement, or list.
(a) In general. Any covered corporation (as defined in section 4501(b) of the Internal Revenue Code (Code)), or any person treated as a covered corporation (as described in section 4501(d)(1)(A) or (d)(2)(A)), other than a regulated investment company (as defined in section 851 of the Code), a real estate investment trust (as defined in section 856(a) of the Code), or a non-RIC '40 Act fund (as described in § 58.4501-3(h)), that makes a repurchase (as defined in section 4501(c)(1)), or that is treated as making a repurchase under section 4501(c)(2)(A), (d)(1)(B), or (d)(2)(B), after December 31, 2022, must file a stock repurchase excise tax return with respect to any taxable year in which the covered corporation or person treated as a covered corporation makes a repurchase or is treated as making a repurchase under section 4501(c)(2)(A), (d)(1)(B), or (d)(2)(B).
(b) Stock Repurchase Excise Tax Return. For purposes of this part, the term stock repurchase excise tax return means the Form 720, Quarterly Federal Excise Tax Return, due for the first full calendar quarter after the end of the covered corporation's taxable year, with an attached Form 7208, Excise Tax on Repurchase of Corporate Stock, or any other forms, schedules, or statements prescribed by the Commissioner for the purpose of making a return to report the tax under chapter 37 of the Code.
(c) [Reserved]
(d) Applicability date. This section applies to stock repurchase excise tax returns required to be filed after June 28, 2024, and during taxable years ending after June 28, 2024.
[T.D. 10002, 89 FR 55049, July 3, 2024, as amended by T.D. 10037, 90 FR 53190, Nov. 24, 2025]
§ 58.6060-1 Reporting requirements for tax return preparers.
(a) In general. A person that engages or employs one or more signing tax return preparers (as defined in § 301.7701-15(b)(1) of this chapter) to prepare a stock repurchase excise tax return (as defined in § 58.6011-1(b)) or claim for refund of tax under chapter 37 of the Internal Revenue Code, other than for the person, at any time during a return period, must satisfy the recordkeeping and inspection requirements in the manner stated in § 1.6060-1 of this chapter.
(b) Applicability date. This section applies to stock repurchase excise tax returns and claims for refund required to be filed after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6061-1 Signing of returns and other documents.
(a) In general. Any stock repurchase excise tax return (as defined in § 58.6011-1(b)), statement, or other document required to be made with respect to the tax imposed by chapter 37 of the Internal Revenue Code must be signed by the person required to file the return, statement, or other document, or by the persons required or duly authorized to sign in accordance with the regulations, forms, or instructions prescribed with respect to such return, statement, or document. An individual's signature on such a return, statement, or other document is prima facie evidence that the individual is authorized to sign the return, statement, or other document.
(b) Applicability date. This section applies to stock repurchase excise tax returns, statements, or other documents that are required to be made with respect to the tax imposed by chapter 37 and required to be filed after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6065-1 Verification of returns.
(a) In general. If either a stock repurchase excise tax return (as defined in § 58.6011-1(b)), statement, or other document made with respect to any tax imposed by chapter 37 of the Internal Revenue Code, or the related form and instructions, requires that such return, statement, or other document contain or be verified by a written declaration that it is made under the penalties of perjury, then it must be so verified by the person or persons required to sign such return, statement, or other document. In addition, any other statement or document submitted under any provision of chapter 37, subtitle F, or regulations under this part with respect to any tax imposed by chapter 37 may be required to contain or be verified by a written declaration that it is made under the penalties of perjury.
(b) Applicability date. This section applies to stock repurchase excise tax returns, statements, or other documents that are required to be made with respect to the tax imposed by chapter 37 and required to be filed after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6071-1 Time for filing returns.
(a) In general. Except as provided in paragraph (c) of this section, a stock repurchase excise tax return required by § 58.6011-1(a) must be filed by the due date of the Form 720, Quarterly Federal Excise Tax Return, that is for the first full calendar quarter after the end of the taxable year of the covered corporation (as defined in section 4501(b) of the Internal Revenue Code (Code)), or person treated as a covered corporation (as described in section 4501(d)(1)(A) or (d)(2)(A)).
(b) Example. Corporation X is a covered corporation with a taxable year that ends on December 31. During its 2024 taxable year, Corporation X makes a repurchase within the meaning of section 4501(c)(1). Because Corporation X's taxable year ends in the fourth quarter of the calendar year, Corporation X must file a stock repurchase excise tax return reporting liability for the tax imposed by chapter 37 of the Code by the due date for a first-quarter Form 720 (that is, April 30, 2025).
(c) Taxable years ending on or before June 28, 2024. With respect to a covered corporation, or person treated as a covered corporation, with a taxable year ending after December 31, 2022, and on or before June 28, 2024, the stock repurchase excise tax return required by § 58.6011-1(a) for such taxable year must be filed by the due date of the Form 720 for the first full calendar quarter after June 28, 2024. If a covered corporation, or person treated as a covered corporation, has more than one taxable year ending after December 31, 2022, and on or before June 28, 2024, the covered corporation, or person treated as a covered corporation, should file a single Form 720 with two separate Forms 7208, Excise Tax on Repurchase of Corporate Stock (one for each taxable year) attached.
(d) Example. Corporation Y is a covered corporation with a taxable year ending December 31, 2023. During its 2023 taxable year, Corporation Y makes a repurchase within the meaning of section 4501(c)(1). Corporation Y is required to file the stock repurchase excise tax return for its 2023 taxable year by the due date of the Form 720 for the first full calendar quarter after June 28, 2024. The due date for the Form 720 for the first full calendar quarter after June 28, 2024 (that is, the third quarter Form 720), is October 31, 2024.
(e) Applicability date. This section applies to stock repurchase excise tax returns required to be filed after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6091-1 Place for filing tax returns under chapter 37 of the Internal Revenue Code.
(a) In general. Except as provided in paragraphs (b) and (c) of this section, stock repurchase excise tax returns required by § 58.6011-1(a) must be filed in accordance with the instructions applicable to such returns.
(b) Hand-carried returns. Notwithstanding paragraph (a) of this section, stock repurchase excise tax returns that are filed by hand carrying must be filed with any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service (IRS) office that serves the principal place of business, principal office, or agency of the taxpayer.
(c) Exceptional cases. Notwithstanding paragraph (a) of this section, the Commissioner may permit the filing of any stock repurchase excise tax return in any local IRS office.
(d) Applicability date. This section applies to stock repurchase excise tax returns required to be filed after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6107-1 Tax return preparer must furnish copy of return or claim for refund to taxpayer and must retain a copy or record.
(a) In general. A person who is a signing tax return preparer (as defined in § 301.7701-15(b)(1) of this chapter) of any stock repurchase excise tax return required by § 58.6011-1(a) or claim for refund of tax under chapter 37 of the Internal Revenue Code must furnish a completed copy of the stock repurchase excise tax return or claim for refund to the taxpayer and retain a completed copy or record in the manner stated in § 1.6107-1 of this chapter.
(b) Applicability date. This section applies to stock repurchase excise tax returns and claims for refund required to be filed after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund.
(a) In general. Each stock repurchase excise tax return required by § 58.6011-1(a) or claim for refund of tax under chapter 37 of the Internal Revenue Code prepared by one or more signing tax return preparers (as defined in § 301.7701-15(b)(1) of this chapter) must include the identifying number of the preparer required by § 1.6695-1(b) of this chapter to sign the stock repurchase excise tax return or claim for refund in the manner stated in § 1.6109-2 of this chapter.
(b) Applicability date. This section applies to stock repurchase excise tax returns and claims for refund required to be filed after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6151-1 Time and place for paying of tax shown on returns.
(a) In general. The tax shown on any stock repurchase excise tax return required by § 58.6011-1(a) must, without assessment or notice and demand, be paid to the Internal Revenue Service at the time and place for filing such stock repurchase excise tax return. For provisions relating to the time and place for filing the stock repurchase excise tax return required under § 58.6011-1(a), see §§ 58.6071-1 and 58.6091-1.
(b) Applicability date. This section applies to payments of stock repurchase excise tax required to be paid after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6694-1 Section 6694 penalties.
(a) Penalties applicable to tax return preparer. For general definitions regarding penalties under section 6694 of the Internal Revenue Code (Code) applicable to preparers of tax returns or claims for refund of tax under chapter 37 of the Code, see § 1.6694-1 of this chapter.
(b) Penalties for understatement due to an unreasonable position. A person who is a tax return preparer of any return or claim for refund of tax under chapter 37 may be subject to penalties under section 6694(a) in the manner stated in § 1.6694-2 of this chapter.
(c) Penalties for understatement due to willful, reckless, or intentional conduct. A person who is a tax return preparer of any return or claim for refund of tax under chapter 37 may be subject to penalties under section 6694(b) in the manner stated in § 1.6694-3 of this chapter.
(d) Extension of period of collection when tax return preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters. The rules under § 1.6694-4 of this chapter, relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund of tax pays 15 percent of a penalty for understatement of taxpayer's liability and to procedural matters regarding the investigation, assessment, and collection of the penalties under sections 6694(a) and (b), apply to a tax return preparer who prepared a return or claim for refund for tax under chapter 37.
(e) Applicability date. This section applies to returns and claims for refund filed, and advice provided, after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6695-1 Other assessable penalties with respect to the preparation of tax returns or claims for refund for other persons.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under chapter 37 of the Internal Revenue Code (Code) may be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b), failure to furnish an identifying number under section 6695(c), failure to retain a copy or list under section 6695(d), failure to file a correct information return under section 6695(e), and endorsement or negotiation of a check under section 6695(f), in the manner stated in § 1.6695-1 of this chapter.
(b) Applicability date. This section applies to returns and claims for refund filed after June 28, 2024, and during taxable years ending after June 28, 2024.
§ 58.6696-1 Claims for credit or refund by tax return preparers.
(a) In general. The rules under § 1.6696-1 of this chapter apply to claims for credit or refund by a tax return preparer who prepared a return or claim for credit or refund for tax under chapter 37 of the Internal Revenue Code.
(b) Applicability date. This section applies to returns and claims for credit or refund filed, and advice provided, after June 28, 2024, and during taxable years ending after June 28, 2024.
PART 141 TEMPORARY EXCISE TAX REGULATIONS UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
§ 141.4975-13 Definition of “amount involved” and “correction”.
Until superseded by permanent regulations under sections 4975(f) (4) and (5), § 53.4941(e)-1 of this chapter (Foundation Excise Tax Regulations) will be controlling to the extent such regulations describe terms appearing both in section 4941(e) and section 4975(f). Because of the need for immediate guidance with respect to the provisions contained in this Treasury decision, it is found impracticable to issue it with notice and public procedure thereon under subsection (b) of section 553 of title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.
(Sec. 7805 of the Internal Revenue Code of 1954 (68A Stat. 917; 26 U.S.C. 7805))
[T.D. 7425, 41 FR 32890, Aug. 6, 1976, as amended by T.D. 8084, 51 FR 16305, May 2, 1986]
PART 143 TEMPORARY EXCISE TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1969
Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805.
§ 143.1 [Reserved]
§ 143.2 Taxes on self-dealing; scholarship and fellowship grants by private foundations.
(a) In general. Section 4941(d)(1)(D) of the Internal Revenue Code of 1954 as added by section 101(b) of the Tax Reform Act of 1969 (83 Stat. 500) provides that the term “self-dealing” includes any direct or indirect payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person. Section 4941(d)(1)(E) provides that the term “self-dealing” includes any direct or indirect transfer to, or use by, or for the benefit of, a disqualified person of the income or assets of a private foundation.
(b) Scholarship and fellowship grants. A scholarship or fellowship grant to a person other than a Government official paid or incurred by a private foundation in accordance with a program which is consistent with the allowance of a deduction under section 170 for contributions made to such private foundation shall not constitute an act of self-dealing. For example, a scholarship or fellowship grant made by a private foundation in accordance with a program to award scholarship or fellowship grants to the children of employees of the donor shall not constitute an act of self-dealing if the private foundation has, after disclosure of the method of carrying out such program, received a ruling or determination letter stating that it is exempt from taxation under section 501(c)(3) and that contributions to the private foundation are deductible by the donor under section 170.
[T.D. 7030, 35 FR 4293, Mar. 10, 1970]
§§ 143.3-143.4 [Reserved]
§ 143.5 Taxes on self-dealing; indirect transactions by a private foundation.
(a) In general. Section 4941(d)(1)(D) of the Internal Revenue Code of 1954 as added by section 101(b) of the Tax Reform Act of 1969 (83 Stat. 500) provides that the term “self-dealing” includes any direct or indirect payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person. Section 4941(d)(1)(E) provides that the term “self-dealing” includes any direct or indirect transfer to, or use by, or for the benefit of, a disqualified person of the income or assets of a private foundation. Section 4941(d)(1)(F) provides that the term “self-dealing” includes any direct or indirect agreement by a private foundation to make any payment of money or other property to a government official other than an agreement to employ such individual for any period after the termination of his government service if such individual is terminating his government service within a 90-day period.
(b) Indirect transactions by a private foundation. A transaction engaged in directly with a Government official by an organization described in section 509(a) (1), (2), or (3) which is the recipient of a grant from a private foundation shall not constitute an indirect act of self-dealing between such private foundation and Government official if the private foundation does not earmark the use of the grant for any named Government official and does not control or retain any veto power over the selection of the Government official by the grantee organization. For purposes of the preceding sentence, a grant by a private foundation shall not constitute an indirect act of self-dealing even though such foundation had reason to believe that certain Government officials would derive benefits from such grant so long as the grantee, in fact, exercises control over the selecting process and actually makes the selection completely independent of the private foundation.
(c) Example. The provisions of subsection (b) of this section may be illustrated by the following example.
Example.A private foundation made a grant to an organization described in section 509(a) (1), (2), or (3) to conduct a judicial seminar. The grantee conducting the seminar made payments to certain Government officials. By the nature of the seminar the grantor foundation had reason to believe that Government officials would be compensated for participation in such seminar. The grantee, however, had complete independent control over the selection of such participants. Since the grantee has not acted as a conduit for the private foundation and has, in fact, exercised independent control over the use of the grant, such grant by the private foundation shall not constitute an act of self-dealing with respect to the Government officials.
[T.D. 7036, 35 FR 6322, Apr. 18, 1970]
§ 143.6 Election to shorten the period during which certain excess business holdings of private foundations are treated as permitted holdings.
(a) In general. Under section 4943(c)(4)(B)(ii), where the combined holdings on May 26, 1969, of a private foundation and all disqualified persons in any one business enterprise exceed 75 percent of the voting stock or more than a 75 percent interest in the value of all outstanding shares of all classes of stock in such enterprise, and the foundation's holdings on such date do not exceed 95 percent of the voting stock in such enterprise, then such combined holdings must be reduced to 50 percent of the voting stock of such enterprise by the end of a 15-year period beginning on May 26, 1969. However, under section 4943(c)(4)(E), the 15-year period during which such combined holdings in the enterprise must be reduced to 50 percent is to be shortened to a 10-year period, referred to in section 4943(c)(4)(B)(iii), if, at any time before January 1, 1971, one or more individuals:
(1) Who are substantial contributors (as described in section 507(d)(2)) or members of the family within the meaning of section 4946(d) of one or more substantial contributors to such private foundation, and
(2) Who on May 26, 1969, held in aggregate more than 15 percent of the voting stock of the enterprise, make an election in the manner described in paragraph (b). If an individual who owns 15 percent or less of the voting stock of the enterprise wishes to make an election under this paragraph, he and one or more other individuals who together own more than 15 percent of the voting stock of the enterprise may join in making an election by together filing the statement referred to in paragraph (b) of this section.
(b) Manner of making election. The election referred to in paragraph (a) of this section is made by filing two copies of a written statement with the Office of the Assistant Commissioner (Technical), Internal Revenue Service, Washington, DC 20224.
(c) Additional copies. The individual filing the written statement referred to in paragraph (b) of this section shall submit a copy of the statement to the private foundation with respect to which the election is being made and to the management of such business enterprise.
(d) Content of statement. The statement shall indicate that an election is being made under section 4943(c) (4)(E) of the Code, and shall be signed by each of the individuals making the election, and, in addition shall contain the following information:
(1) The name, address, and taxpayer identification number of each of the individuals making the election;
(2) The name and address of the foundation with respect to which such election is being made;
(3) The name and address of the business enterprise with respect to which the election is being made;
(4) The aggregate number of shares of voting stock in the business enterprise that were held on May 26, 1969, by each individual making the election, and, in addition, the percentage that such voting stock is of the total number of shares of voting stock issued and outstanding on such date;
(5) The aggregate number of shares of voting stock in the business enterprise held by the private foundation on May 26, 1969, and, in addition, the percentage that such voting stock is of the total number of shares of voting stock issued and outstanding on such date; and
(6) The total number of shares of voting stock in the business enterprise or the best available estimate thereof, that were issued and outstanding on May 26, 1969.
(e) Time for making election. The statement referred to in paragraph (b) of this section shall be filed before January 1, 1971.
[T.D. 7038, 35 FR 6962, May 1, 1970]
PART 145 TEMPORARY EXCISE TAX REGULATIONS UNDER THE HIGHWAY REVENUE ACT OF 1982 (PUB. L. 97-424)
Authority: 26 U.S.C. 7805. Sections 145.4051-1 and 145.4052-1 also issued under 26 U.S.C. 4051 and 4052.
Source: T.D. 7882, 48 FR 14362, Apr. 4, 1983, unless otherwise noted.
§ 145.4051-1 Imposition of tax on heavy trucks and trailers sold at retail.
(a) Imposition of tax—(1) In general. Section 4051(a)(1) imposes a tax on the first retail sale (as defined in § 145.4052-1(a)) of the following articles (including in each case parts or accessories therefor sold on or in connection therewith or with the sale thereof):
(i) Automobile truck chassis and bodies;
(ii) Truck trailer and semitrailer chassis and bodies; and
(iii) Tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.
A sale of an automobile truck, truck trailer or semitrailer, shall be considered to be a sale of a chassis and of a body enumerated in this paragraph (a)(1).
(2) Special rule applicable to chassis and bodies. A chassis or body enumerated in paragraph (a)(1) of this section is taxable under section 4051(a)(1) only if such chassis or body is sold for use as a component part of a highway vehicle (as defined in paragraph (d) of § 48.4061(a)-1 (Regulations on Manufacturers and Retailers Excise Taxes)), which is an automobile truck, truck trailer or semitrailer, or a tractor of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. Furthermore, a chassis or body which is not enumerated in paragraph (a)(1) of this section is not taxable under section 4051(a)(1) even though such chassis or body is used as a component part of a highway vehicle (e.g., a chassis or body of a passenger automobile). See paragraphs (e)(1) and (e)(2) of this section for the definitions of a tractor and truck. See paragraphs (e) (1) through (5) of § 145.4052-1 for other provisions applicable to this section. See paragraph (f) of this section, relating to tax-free sales of non-highway vehicles.
(3) Parts or accessories sold on or in connection with chassis, bodies, etc. The tax applies in respect of parts or accessories sold on or in connection with or with the sale of the vehicles specified in section 4051(a)(1). Thus, for example, if at the time the article is sold by the retailer, the part or accessory has been ordered from the retailer, the part or accessory will be considered as sold in connection with and with the sale of the vehicle. The tax applies in such a case whether or not the parts or accessories are billed separately by the retailer. If a taxable chassis, body, or tractor is sold by the retailer, without parts or accessories which are considered equipment essential for the operation or appearance of the taxable article, the sale of such parts or accessories by the retailer to the purchaser of the taxable article will be considered, in the absence of evidence to the contrary, to have been made in connection with the sale of the taxable article even though they are shipped separately, at the same time or on a different date. For example, if a retailer sells to any person a chassis and the bumpers for such chassis, or sells a taxable tractor and the fifth wheel and attachments, the tax applies to such parts or accessories regardless of the method of billing or the time at which the shipments were made. Parts and accessories that are spares or replacements are not subject to tax.
(4) Exclusions. No tax is imposed by section 4051(a)(1) on the sale of automobile truck chassis and bodies, suitable for use with a vehicle which has a gross vehicle weight of 33,000 pounds or less, or truck trailer and semitrailer chassis and bodies, suitable for use with a trailer or semitrailer which has a gross vehicle weight of 26,000 pounds or less. For purposes of this paragraph (a)(4) the term suitable for use means practical and commercial fitness for such use. A chassis or body possesses practical fitness for use with a vehicle if it performs its intended function up to a generally acceptable standard of efficiency with the vehicle, and a chassis or body possesses commercial fitness for use with a vehicle if it is generally available for use with the vehicle at a price that is reasonably competitive with other articles that may be used for the same purpose. Thus, a truck chassis which is suitable for use with a vehicle having a gross vehicle weight of 33,000 pounds or less, is not subject to the tax imposed by section 4051(a)(1) regardless of the body actually mounted thereon. A truck trailer or semitrailer chassis suitable for use with a vehicle having a gross vehicle weight of 26,000 pounds or less, is not subject to tax regardless of the body actually mounted thereon. Where an exempt body is mounted on a taxable chassis, or a taxable body is mounted on an exempt chassis, the taxable chassis or body, as the case may be, nevertheless remains subject to such tax, if the resulting vehicle is a highway vehicle as defined in § 48.4061(a)-1.
(b) Rate of tax. With respect to the articles enumerated in paragraph (a)(1) of this section, the rate of tax imposed by section 4051(a)(1) is 12 percent of the price for which the article is sold on or after April 1, 1983. See paragraph (d) of this section relating to vehicles on which a 10 percent tax was imposed under section 4061(a)(1).
(c) Separate purchase of truck or trailer and parts and accessories therefor—(1) In general. If the owner, lessee, or operator of any vehicle, which contains an article taxable under paragraph (a)(1) of this section, installs (or causes to be installed) any part or accessory on such vehicle, and such installation is not later than 6 months after the date such vehicle (as it contains such article) was first placed in service, section 4051(b)(1) imposes a tax on such installation equal to 12 percent of the price of such part or accessory and its installation. For purposes of the tax imposed by section 4051(b)(1) and this paragraph (c)(1) the term “parts and accessories” does not include those parts and accessories which were previously exempt from tax under sections 4061(b) (1) and (2) as in effect prior to January 7, 1983. Thus, for example, articles of general use are exempt from tax. See § 48.4061(b)-2 (b). See paragraphs (d) (1) through (4) of § 145.4052-1 for determination of price.
(2) Placed in service. For purposes of paragraph (c)(1) of this section, a vehicle shall be considered placed in service on the date on which the owner of the vehicle took actual possession of the vehicle. This date can be established by the delivery ticket signed by the owner or other comparable document indicating delivery to and acceptance by the owner.
(3) Exceptions. The tax imposed by section 4051(b)(1) and paragraph (c)(1) of this section shall not apply if:
(i) The part or accessory installed is a replacement part or accessory, or
(ii) The aggregate price of the parts and accessories (and their installation) described in paragraph (c)(1) of this section with respect to any vehicle does not exceed $200.
For purposes of paragraph (c)(3)(i) of this section, a part is a replacement part, regardless of when it is ordered, if its use with a vehicle is as a replacement for a part on such vehicle. For purposes of paragraph (c)(3)(ii) of this section, the term aggregate price of parts and accessories (and their installation) refers to all purchases and installation charges, not including replacement parts and accessories, made with respect to a vehicle within the 6 month period provided for in paragraph (c)(1) of this section. If the aggregate price of parts and accessories (and their installation) during the 6 month period exceeds $200, the tax imposed under section 4051(b)(1) and paragraph (c)(1) of this section shall apply to the cost of all parts and accessories (and their installation) during such period. For example, a vehicle is purchased and placed in service on July 1, 1983. On August 1, 1983, the owner purchases and has installed parts and accessories at a cost of $150. On September 1, 1983, the owner purchases and has installed parts and accessories at a cost of $300. On September 1, 1983 a tax of $54 will be imposed (12 percent × $450). Any costs of additional parts and accessories installed with respect to the vehicle before January 1, 1984 (and the cost of installation) will also be subject to the 12 percent tax.
(d) Transitional rule. In the case of an article taxable under paragraph (a)(1) of this section, on which a tax was imposed under section 4061(a)(1), the rate of tax set forth in paragraph (b) shall be applied by substituting “2 percent” for “12 percent.” For example, if a manufacturer sells a tractor to a dealer on February 1, 1983, for $20,000 (which includes the Federal excise tax), for which a 10 percent tax was paid, and the dealer sells the tractor on April 10, 1983 for $25,000, a tax of 2 percent will be imposed on the $25,000 sales price. See paragraphs (d) (1) through (4) of § 145.4052-1 relating to determination of price.
(e) Definitions. For purposes of this section:
(1) Tractor. (i) The term “tractor” means a highway vehicle primarily designed to tow a vehicle, such as a trailer or semitrailer, but does not carry cargo on the same chassis as the engine. A vehicle equipped with air brakes and/or towing package will be presumed to be primarily designed as a tractor.
(ii) An incomplete chassis cab shall be treated as a tractor if it is equipped with one or more of the following:
(A) A device for supplying pressure from the chassis cab to the brake system (air or hydraulic) of the towed vehicle;
(B) A mechanism for protecting the chassis cab brake system from the effects of a loss of pressure in the brake system of the towed vehicle;
(C) A control linking the brake system of the chassis to the brake system of the towed vehicle;
(D) A control in the cab for operating the towed vehicle's brakes independently of the chassis cab's brakes; or
(E) Any other equipment designed to make it suitable for use as a tractor.
An incomplete chassis cab which is not equipped with any of the devices set forth in paragraphs (e)(1)(ii) (A) through (E) of this section shall be treated as a truck if the purchaser certifies in writing that the vehicle will not be equipped for use as a tractor.
(2) Truck. The term “truck” refers to a highway vehicle that is primarily designed to transport its load on the same chassis as the engine even if it is also equipped to tow a vehicle, such as a trailer or semitrailer.
(3) Gross vehicle weight. (i) For purposes of this section the term “gross vehicle weight” means the maximum total weight of a loaded vehicle. Except as otherwise provided in paragraphs (e)(3) (ii) through (v) of this section, such maximum total weight shall be the gross vehicle weight rating of the article as specified by the manufacturer or established by the seller of the completed article, unless the Commissioner finds that such rating is unreasonable in light of the facts and circumstances in a particular case.
(ii) A seller must specify or establish a weight rating for each chassis, body, or vehicle sold on or after April 1, 1983 if such article requires no additional manufacture other than (A) the addition of readily attachable articles, such as tire or rim assemblies or minor accessories, (B) the performance of minor finishing operations, such as painting, or (C) in the case of a chassis, the addition of a body. If an article is specially equipped to the purchaser's specifications, such specifications may be used to establish the gross vehicle weight of the article.
(iii) A seller shall maintain a record of the gross vehicle weight rating of each truck, trailer and semitrailer sold and excluded from the tax imposed by section 4051(a)(1) by reason of sections 4051(a) (2), (3) and paragraphs (e)(3) (i) through (v) of this section. For this purpose, a record of the serial number of each such article shall be treated as a record of the gross vehicle weight rating of the article if such rating is indicated by the serial number.
(iv) If (A) the seller's rating indicated in a label or identifying device affixed to an article, (B) the rating set forth in the sales invoice or warranty agreement, and (C) the advertised rating for that article (or two or more identical articles) are inconsistent, the highest of such ratings will be considered to be the seller's gross vehicle weight rating specified or established for purposes of the tax imposed by section 4051(a)(1).
(v) The seller's gross vehicle weight rating must take into account, among other things, the strength of the chassis frame and the axle capacity and placement. The Commissioner may exclude from the gross vehicle weight rating any readily attachable parts to the extent the Commissioner finds that the use of such parts in computing the gross vehicle weight rating is unreasonable.
(f) Tax-free sales. With respect to tax-free sales of a chassis or body for use as a component of a vehicle other than a highway vehicle, similar provisions to paragraphs (e)(2) (ii), (iii), and (iv) of § 48.4061(a)-1 shall apply.
(g) Effective date. The provisions of this section shall be effective for articles sold on or after April 1, 1983.
[T.D. 7882, 48 FR 14362, Apr. 4, 1983, as amended by T.D. 8879, 65 FR 17164, Mar. 31, 2000]
§ 145.4052-1 Special rules and definitions.
(a) First retail sale—(1) General rule. For purposes of section 4051(a)(1) and § 145.4051-1, the term “first retail sale” means a taxable sale described in paragraph (a)(2) of this section.
(2) Taxable sale. The sale of an article is a taxable sale unless—
(i) The sale is a tax-free sale under section 4221,
(ii) [Reserved]. For sales after June 30, 1998, see § 48.4052-1 of this chapter.
(iii) There has been a prior taxable sale of the article. Notwithstanding the preceding clause, the sale of a chassis or body of a trailer or semitrailer (“trailer or semitrailer”) less than six months after a taxable sale of the article shall be treated as a taxable sale.
(3) Computation of tax—(i) In general. If the sale of an article is a taxable sale under paragraph (a)(2) of this section, the tax shall be computed on the price as determined under paragraph (d) of this section.
(ii) Exception. If the taxable sale of an article is a taxable use of such article under paragraph (c) of this section, the tax shall be computed on the price as determined under paragraph (c) of this section.
(4) Special rule for tax-paid trailer and semitrailer. In the case of a taxable sale of a trailer or semitrailer less than six months after a taxable sale of the article, the seller in the subsequent sale (“the subsequent seller”) may claim a credit equal to the amount of tax previously paid by another person (“the previous taxpayer”) under section 4051(a)(1) with respect to the prior taxable sale of the article. The credit for such tax will be allowed to the subsequent seller only if the form on which the credit is claimed is accompanied by a statement, signed by the subsequent seller, indicating the amount of the credit being claimed under this paragraph (a)(4) and stating that—
(i) The subsequent seller has not been repaid any portion of such tax by the previous taxpayer,
(ii) The subsequent seller has not provided the previous taxpayer with written consent to allow the previous taxpayer to claim a credit or refund of such tax under section 6416 (a), and
(iii) The subsequent seller has records (e.g., invoices) substantiating the amount of tax paid by the previous taxpayer with respect to the prior taxable sale of such article.
In no case shall the amount of the credit allowable under this paragraph (a)(4) with respect to an article exceed the tax liability of the subsequent seller with respect to the sale of such article.
(5) No installment payments of tax. If a lease or an installment sale (or another form of sale under which the sales price is paid in installments) is, or is deemed to be, a taxable sale under this section, then the liability for the entire tax arises at the time of the lease or installment sale. No portion of the tax is deferred by reason of the fact that the sales price is paid in installments.
(6) Certificate. A certificate signed by the purchaser, or an officer or employee authorized by the purchaser to sign the certificate, may be accepted by a seller in support of a nontaxable sale to the purchaser. If it is impracticable to furnish a separate certificate for each sale because of the frequency of sales to such purchaser, a certificate covering all orders between given dates (such period not to exceed 12 calendar quarters) will be acceptable. The purchaser may revoke the certificate by sending a written revocation to the seller. The certificate and proper records of invoices, orders, etc., relating to sales made pursuant to such certificate, must be retained by the seller as provided in section 6001 and the regulations thereunder. The certificate shall be substantially in the following form:
Exemption Certificate
I hereby certify that I am ____________ (Title) of ____________, (Name of purchaser) that I am authorized to execute this certificate, and that:
(Check appropriate line)
______ the article or articles specified in the accompanying order, or on the reverse side hereof, (or) ______ all orders placed by the purchaser for the period commencing ______________ (Date) (period not to exceed 12 calendar quarters), are purchased either for resale or for lease on a long-term basis.
I have filed Form 637 and have received registration number ________.
I understand that the fraudulent use of this certificate to secure exemption will subject me and all parties making such fraudulent use to a fine of not more than $10,000, or to imprisonment for not more than 5 years, or both, together with costs of prosecution. (Signature) (Address)
(b) Tax treatment of leases—(1) Long-term lease. For purposes of this section and § 145.4051-1, the leasing of an article on a long-term basis (as defined in paragraph (d)(6) of this section) will be deemed to be a sale of the article and will be deemed to be a taxable sale unless one of the exceptions contained in paragraph (a)(2) of this section applies. Thus, if a dealer purchases an article tax-free under an exception contained in paragraph (a)(2) of this section and then leases the article on a long-term basis, the leasing of the article will be treated as a taxable sale.
(2) Short-term lease. For purposes of this section and § 145.4051-1, the leasing of an article on a short-term basis (as defined in paragraph (d)(6) of this section) will be deemed to be a taxable use of such article under paragraph (c) of this section and will be deemed to be a taxable sale unless one of the exceptions contained in paragraph (a)(2) of this section applies.
(3) Computation of tax—(i) Long-term lease by manufacturer, producer, or importer. When a manufacturer, producer, or importer is the lessor of an article on a long-term basis (as defined in paragraph (d)(6) of this section) and such lease is deemed to be a taxable sale under paragraph (b)(1) of this section, the tax shall be computed on a presumptive retail sales price as determined under paragraph (d)(4)(i) of this section. The manufacturer, producer, or importer shall be liable for the tax as if the article were sold at retail by such manufacturer, importer, or retailer.
(ii) Long-term lease by persons other than manufacturer, producer, or importer. When a person other than a manufacturer, producer, or importer is the lessor of an article on a long-term basis (as defined in paragraph (d)(6) of this section) and such lease is deemed to be a taxable sale under paragraph (b)(1) of this section, the tax shall be computed on a presumptive retail sales price as determined under paragraph (d)(5) (i) of this section. Such person shall be liable for the tax as if the article were sold at retail by such person.
(c) Use treated as sale—(1) In general. For purposes of this section and § 145.4051-1, the use of an article will be deemed to be a sale of the article. Furthermore, if a person purchases a vehicle for which no tax was imposed under section 4051(a)(1) and thereafter converts such vehicle into an article which would have been taxable under section 4051(a)(1) and uses it, such person shall be liable for the tax as if such article were sold at retail by such person. For example, a truck having a gross vehicle weight rating of 24,000 pounds is sold at retail. The purchaser adds a lift axle, thereby increasing the gross vehicle weight rating to 34,000 pounds. If the purchaser thereafter uses the vehicle the purchaser shall be liable for the tax as if such article were sold at retail.
(2) Exemption for use in further manufacture. The tax on the use of an article to which paragraph (c)(1) of this section applies shall not apply to use of the article by such person as material in the manufacture or production of, or as a component part of, another article to be manufactured or produced by the same user.
(3) Time of application of tax. In the case of taxable use of an article by the seller, the tax attaches at the time such use begins. It tax applies by reason of the sale of an article on or in connection with, or with the sale of another article, the tax attaches at the time of the sale of such other article.
(4) Events subsequent to taxable use of article. Liability for tax incurred on the use of an article is not extinguished or reduced because of any subsequent sale or lease of the article even if such sale or lease would have been exempt if the article had been sold or leased prior to use. If a seller of an article incurs liability for tax on his or her use of an article, and thereafter sells or leases the article in a transaction which otherwise would be subject to tax, liability for tax is not incurred on such sale or lease.
(5) Computation of tax. (i) Except as provided in paragraphs (c)(5)(ii) and (c)(5)(iii) of this section.
(ii) If the seller of an article regularly sells such articles at retail in arm's length transactions, tax liability on its use of any such article shall be computed on its lowest established retail price for such articles in effect at the time of the taxable use. In establishing such price, there shall be included and excluded, as applicable, the charges and readjustments specified in sections 4216(a), 4216(f), and 6416(b)(1) as in effect at the time the tax liability on the use of the article is incurred. If the seller of an article does not regularly sell such articles at retail in arm's length transactions, a constructive price on which the tax shall be computed will be determined by the Commissioner. This price will be established after considering the selling practices and price structures of sellers of similar articles.
(iii) In the case of any short-term lease (as defined in paragraph (d)(6) of this section) by any person other than a manufacturer, producer, or importer (or related person as defined in paragraph (d)(2)(ii) of this section) of an article that is deemed to be a taxable use of such article under paragraph (b)(2) of this section, the tax imposed by section 4051(a)(1) shall be computed on a price equal to the sum of—
(A) The price (as determined under paragraph (d) of this section) at which such article was sold to the lessor plus the cost of any parts and accessories installed by the lessor (or an agent of the lessor) on such article before the first use or lease by the lessor, plus
(B) The product of the sum described in paragraph (c)(5)(iii)(A) of this section and the presumed markup percentage (as defined in paragraph (d)(7) of this section).
(d) Determination of price—(1) In general. The price for which an article is sold includes the total consideration paid for the article whether that consideration is paid in money, services, or other forms. In addition, there shall be included any charge incident to placing the article in condition ready for use. Similar rules to section 4216(a) and the regulations thereunder, relating to charges to be included in the price and excluded from the price, shall apply. For example, charges for transportation, delivery, insurance, and installation (other than installation charges to which section 4051(b) applies), and other expenses actually incurred in connection with the delivery of an article to a purchaser pursuant to a bona fide sale shall be excluded from the price in computing the tax.
(2) Presumptive retail sales price where tax paid by manufacturer, producer, or importer—(i) In general. In the case of a taxable sale (other than a taxable sale described in paragraph (b)(1) of this section) where a manufacturer, producer, importer, or related person is liable for the tax imposed by section 4051, such tax shall be computed on a price equal to the sum of—
(A) The price that would (but for this paragraph (d)(2)) be determined under this paragraph (d), and
(B) The product of the price determined under paragraph (d)(2)(i)(A) of this section and the presumed markup percentage (as defined in paragraph (d)(7) of this section).
(ii) Related person defined—(A) In general. Except as provided in paragraph (d)(2)(ii)(B) of this section, the term “related person” means any person that is a member of the same controlled group (within the meaning of section 5061(e)(3)) as the manufacturer, producer, or importer.
(B) Exception for permanent retail establishment. A person shall not be treated as a related person with respect to the sale of any article if—
(1) Such person sells the article through a permanent retail establishment in the normal course of business of being a retailer, and
(2) Such person has records (e.g., invoices) that substantiate that the article was sold for a price that included a markup equal to or greater than the presumed markup percentage (as defined in paragraph (d)(7) of this section).
(3) Retail sales price where tax paid by person other than a manufacturer, producer, importer, or related person—(i) In general. In the case of a taxable sale (other than a taxable sale defined in paragraph (b)(1) of this section) where a person other than a manufacturer, producer, importer, or related person is liable for the tax imposed by section 4051, such tax shall be computed on a price determined under paragraph (d)(1) of this section.
(ii) Exception. When a person other than a manufacturer, producer, importer, or related person is liable for the tax imposed by section 4051, such tax shall be computed on a price determined under paragraph (d)(2)(i) of this section if—
(A) Such person does not perform any significant activities relating to the processing of the sale of an article,
(B) The principal purpose for processing the sale through such person is to avoid or evade the presumed markup under paragraph (d)(2)(i)(B) of this section, and
(C) Such person does not have records (e.g., invoices) substantiating that the article was sold for a price that included a markup equal to or greater than the presumed markup percentage as defined in paragraph (d)(7) of this section.
(4) Presumptive retail sales price in the case of a lease by a manufacturer, producer, or importer. In the case of any long-term lease (as defined in paragraph (d)(6) of this section) by a manufacturer, producer, importer, or a related person (as defined in paragraph (d)(2)(ii) of this section) of an article that is deemed to be a taxable sale of such article under paragraph (b)(1) of this section, the tax imposed by section 4051(a)(1) shall be computed on a price equal to the sum of—
(i) A constructive sales price established by the Commissioner based on the price at which such article would be sold by a manufacturer, producer, or importer in a sale other than a taxable sale (e.g., a sale to which the exceptions contained in paragraph (a)(2)(ii) of this section applies) on the date the lease is made, and
(ii) The product of the constructive sales price referred to in paragraph (d)(4)(i) of this section and the presumed markup percentage as defined in paragraph (d)(7) of this section.
(5) Presumptive retail sales price in the case of a long-term lease by any other person. In the case of any long-term lease (as defined in paragraph (d)(6) of this section) of an article in which any person other than a manufacturer, producer, or importer (or related person as defined in paragraph (d)(2)(ii) of this section) is the lessor and the long-term lease is deemed to be a taxable sale of such article under paragraph (b)(1) of this section, the tax imposed by section 4051(a)(1) shall be computed on a price equal to the sum of—
(i) The price (as determined under this paragraph (d)) at which such article was sold to the lessor plus the cost of any parts and accessories installed by the lessor (or an agent of the lessor) on such article before the first use by the lessee or leased in connection with such long-term lease, and
(ii) The product of the sum described in paragraph (d)(5)(i) of this section and the presumed markup percentage as defined in paragraph (d)(7) of this section.
(6) Long-term and short-term lease defined. For purposes of this section, the term “long-term lease” means any lease with a term of one year or more. The term “short-term lease” means any lease with a term of less than one year. In determining a lease term, options to renew shall be taken into account. In addition, two or more successive leases that are part of the same transaction (or a series of related transactions) with respect to the same or substantially similar article, shall be treated as one lease.
(7) Presumed markup percentage—(i) In general. Except as provided in paragraph (d)(7)(ii) of this section, for purposes of this section the term “presumed markup percentage” shall be four percent.
(ii) Exceptions. For purposes of this section the “presumed markup percentage” for trailers, semitrailers, and remanufactured automobile truck chassis and bodies and tractors shall be zero percent. For purposes of this section an article is a remanufactured article if—
(A) The refurbishing, renovation, or repair of the article causes it to be subject to the tax imposed by section 4051, and
(B) Before remanufacture, such article was previously subject to the tax imposed by section 4051 (or section 4061 prior to its repeal).
(8) Items excluded from price. There shall be excluded from the price:
(i) The amount of tax imposed under sections 4051(a)(1) and (b)(1);
(ii) If stated as a separate charge, the amount of any retail sales tax imposed by any state or political subdivision thereof or the District of Columbia, whether the liability for such tax is imposed on the vendor or vendee; and
(iii) The fair market value (including any tax imposed by section 4071) at retail of any tires (not including any metal rim or rim base). For purposes of this paragraph (d)(8)(iii), fair market value at retail shall be determined by the lowest established price for which the vehicle retailer would sell such tires at retail in the ordinary course of trade. The lowest established price is the lowest price for which the vehicle retailer sells, or offers to sell, a single tire to an independent purchaser who would not ordinarily be expected to buy more than one. If the vehicle retailer has no lowest established price the Commissioner will accept any price provided, under the facts and circumstances, such price is not unreasonable. For vehicles sold on or after April 1, 1983, and before October 13, 1985, a price will not be considered unreasonable if it is no more than an amount equal to 50 percent of the manufacturer's suggested retail price.
(9) Trade-ins. If, in connection with the sale of an article subject to the tax imposed under section 4051(a)(1) or (b)(1) on the price for which sold, a vendor receives from its vendee another article in exchange, the tax on the vendor's sale shall be computed on the basis of the full price of the article sold, unreduced by any amount allowed for the article received from the vendee. For example, where a vehicle costing $20,000 is purchased for $16,000 cash plus a used vehicle valued at $4,000, tax is $2,400 (12 percent × $20,000).
(10) Sales not at arm's length. For purposes of § 145.4051-1 and this section, a sale is considered to be made under circumstances otherwise than at “arm's length” if:
(i) One of the parties is controlled (in law or in fact) by the other, or there is common control, whether or not such control is actually exercised to influence the sale price, or
(ii) The sale is made pursuant to special arrangements between a seller and a purchaser.
In the case of an article sold otherwise than at arm's length, and sold at less than the fair market price, the tax imposed under section 4051(a)(1) or (b)(1) shall be computed on the price for which similar articles are sold at retail in the ordinary course of trade, as determined by the Commissioner. Once such a price has been determined, no further adjustment of such price shall be made.
(e) Examples. The provisions of this section may be illustrated by the following examples:
Example 1.M manufactures trucks that are taxable under section 4051. On July 11, 1988, D, a corporation that is a dealer, purchases one truck from M for $50,000. M does not own any stock in D. Prior to this transaction, D gave M a certificate that meets the specifications detailed in paragraph (a)(6) of this section. The certificate states that the truck will be resold or leased on a long-term basis. M's sale to D is not a taxable sale of the truck (within the meaning of paragraph (a)(2) of this section). On July 20, 1988, D resells the truck to a purchaser, P, for $52,000. The additional $2,000 includes the dealer's mark-up, costs of transporting the truck from M to D, and overhead. No parts or accessories were added to the truck. P did not give D a certificate and did not have an agreement with D under which all vehicles purchased were to be resold. The sale of the truck by D to P is a taxable sale within the meaning of paragraph (a)(3) of this section. Therefore, D has a tax liability of $6,240 (12% × $52,000).
Example 2.Assume the same facts as in example (1) except that M owns 80 percent of D's stock. D and M are members of the same controlled group (within the meaning of section 5061(e)(3)). Therefore, D is a related person under paragraph (d)(2)(ii)(A) of this section. On July 20, 1988, D sells the truck to P for $51,000. D does not have records substantiating that the truck was sold for a price that included a markup equal to or greater than the presumed markup percentage. The tax on the sale of the truck to P is determined under paragraph (d)(2)(i) of this section. Therefore, D has a tax liability of $6,240 [(12% × ($50,000 + ($50,000 × 4%))].
Example 3.Assume the same facts as in example (1) except that D does not perform any significant activities relating to the sale. Assume further that the principal purpose for processing the sale through D is to avoid the presumed markup and that D did not sell the truck for a price that included a markup equal to or greater than the presumed markup percentage. D, however, is designated the seller of the truck on the invoice. Pursuant to paragraph (d)(3)(ii) of this section, the price of the truck shall be computed on a price determined under paragraph (d)(2)(i). Therefore, D, the taxpayer, has a tax liability of $6,240 [12% × ($50,000 + ($50,000 × 4%))].
Example 4.Assume the same facts as in example (1) except that on July 20, 1988, D leases the truck for a two-year period (i.e., on a long-term basis) to L, a lessee. D's leasing of the truck to L is treated as a taxable sale under paragraph (b)(1) of this section and the tax is computed on the price as determined under paragraph (d)(5)(i) of this section. D has a tax liability of $6,240 [12% × ($50,000 + ($50,000 × 4%))].
Example 5.Assume the same facts as in example (1) except that on July 20, 1988. D leases the truck to L for a six-month period (i.e., a short-term lease). The lease is treated as a use under paragraph (b)(2) of this section. The tax is computed on the price as determined under paragraph (c)(5) of this section. D has a tax liability of $6,240 [12% × ($50,000 + ($50,000 × 4%))].
Example 6.Assume the same facts as in example (1) except that D does not give M a certificate. The sale by M to D is a taxable sale of the truck under paragraph (a)(2) of this section. M's tax liability is $6,240 [12% × ($50,000 + ($50,000 × 4%))]. On July 20, 1988, D leases the truck to L, a lessee. The lease has a two-year term. Since the lease to L occurred after a taxable sale of the truck, paragraph (b)(1) of this section does not apply, and the lease is not treated as a taxable sale under this section.
Example 7.M manufactures trucks that are taxable under section 4051. On July 11, 1988, M leases a truck to a lessee, L. The lease has a two-year term. The lease is treated as a taxable sale under paragraph (b)(1) of this section and the tax is computed on the price as determined under paragraph (d)(4)(i) of this section. The constructive sales price established by the Commissioner, pursuant to paragraph (d)(4)(i) of this section, is $50,000. M has a tax liability of $6,240 [12% × ($50,000 + ($50,000 × 4%))].
Example 8.Assume the same facts as in example (7) except that the lease has a six-month term. The lease is treated as a taxable use under paragraph (b)(2) of this section and the tax is computed under paragraph (c)(5) of this section. The constructive sales price established by the Commissioner, pursuant to paragraph (c)(5)(i) of this section, is $52,000. M has a tax liability of $6,240 (12% × $52,000).
Example 9.M manufactures truck trailers and semitrailers that are taxable under section 4051. On July 5, 1988, D, a dealer, purchases a trailer from M for $10,000. Prior to this transaction, D did not give M a certificate and D did not have an agreement with M to resell all articles purchased. The sale by M to D is a taxable sale of the trailer under paragraph (a)(2) of this section. M has a tax liability of $1,200 (12% × $10,000 + ($10,000 × 0%)).
Example 10.Assume the same facts as in example (9) except that on July 12, 1988, D resells the trailer to P, a purchaser, for $10,500 (the additional $500 includes the dealer's markup, costs of transporting the trailer from M to D, and overhead). P did not give D a certificate and P did not have an agreement with D that stipulates that all articles purchased were to be leased on a long-term basis or resold. The sale of the trailer by D to P is a taxable sale within the meaning of paragraph (a)(3) of this section. Therefore, D has a tax liability of $1,260(12% × $10,500). D, however, may file for a credit of $1,200 under section 6402 provided that the requirements of paragraph (a)(4) of this section are met.
(f) Other rules made applicable. For purposes of § 145.4051-1 and this section, rules similar to the following provisions shall apply:
(1) Section 48.0-2, relating to general definitions and attachment of tax;
(2) Paragraphs (a) (2) and (3) of § 48.4061 (a)-1;
(3) The exemptions provided by sections 4063 (a) and (d) and the regulations thereunder;
(4) Section 4216(f) and the regulations thereunder, relating to the incorporation of used components; and
(5) Section 4221 and the regulations thereunder, relating to certain tax-free sales.
(g) Effective date—(1) In general. Except as provided below, the provisions of this section shall be effective for articles sold or leased on or after April 1, 1983.
(2) Certain sales made prior to November 12, 1985. If a sale to a lessor before November 12, 1985, was not taxable under § 145.4052-1 of the temporary regulations contained in 26 CFR part 145 revised as of April 1, 1983, (the “prior regulations”) and it was so treated by the parties, a subsequent sale or lease that was or would have been treated as the first retail sale of the article under the prior regulations will be treated as a taxable sale for purposes of this section. The tax on such subsequent sale will be based on a price determined under paragraph (d) of this section. For example, if an article was sold to a purchaser who intended to lease such article long-term, the sale would not have been taxable under the prior regulations even though the seller did not receive a certificate of the purchaser's intent to lease the vehicle. If such a sale was treated as nontaxable by the parties, and the purchaser leases it long-term on or after October 1, 1987, the lease will be treated as a taxable sale of the article. The tax is to be computed under paragraph (b)(3)(ii) of this section and the price will be computed under paragraph (d)(5).
(3) Certain sales made after November 11, 1985, and before October 1, 1987—(i) Sales not treated as taxable by purchaser and seller. If a sale to a purchaser after November 11, 1985, and before October 1, 1987, was not treated as taxable by the parties, a subsequent sale or lease that was or would have been treated as the first retail sale of the article under the temporary regulations published in the September 13, 1985, issue of the Federal Register (50 FR 37350) (“the interim regulations”) will be treated as a taxable sale for purposes of this section. The tax on a sale or lease after September 30, 1987, will be based on a price determined under paragraph (d) of this section. For example, if a vehicle was sold on January 3, 1987, to a purchaser who intended to resell the article and who was not in the business of leasing to any extent, the sale would not have been taxable under the interim regulations even though the seller did not receive a certificate indicating the purchaser's intent to resell the article. If such a sale was not treated as a taxable sale by the parties, and the purchaser resells the article, the resale will be treated as a taxable sale of the article under paragraph (a)(2) of this section.
(ii) Sales treated as first retail sale by purchaser and seller. If the sale of an article after November 11, 1985, and before October 1, 1987, was treated as a taxable sale by the parties and tax was paid with respect to the article under the interim regulations, the subsequent sale of the article by the purchaser will not be treated as a taxable sale under paragraph (a)(2) of this section.
[T.D. 7882, 48 FR 14362, Apr. 4, 1983, as amended by T.D. 8050, 50 FR 37351, Sept. 13, 1985; T.D. 8200, 53 FR 16869, May 12, 1988; T.D. 8774, 63 FR 35804, July 1, 1998; T.D. 8879, 65 FR 17164, Mar. 31, 2000]
§ 145.4061-1 Application to manufacturers tax.
The provisions of § 145.4051-1(e) (1) and (2), relating to the definition of tractors and trucks, shall apply to section 4061(a)(1) for sales made on or after January 7, 1983. However, an incomplete chassis cab will be treated as a truck chassis for sales made on or after January 7, 1983, and before April 1, 1983. For purposes of section 4061, gross vehicle weight shall be determined under § 48.4061(a)-1(f)(3) (i) through (iv) for sales made on or after January 7, 1983, and before April 1, 1983.
151-155 PARTS 151-155 [RESERVED]
PART 156 EXCISE TAX ON GREENMAIL
Authority: 26 U.S.C. 6001, 6011, 6061, 6071, 6091, 6161, and 7805. Section 156.6060-1 also issued under 26 U.S.C. 6060(a); Section 156.6081-1 also issued under 26 U.S.C. 6081(a); Section 156.6109-1 also issued under 26 U.S.C. 6109(a); Section 156.6109-2 also issued under 26 U.S.C. 6109(a); Section 156.6695-1 also issued under 26 U.S.C. 6695(b).
Source: T.D. 8379, 56 FR 65685, Dec. 18, 1991, unless otherwise noted.
Subpart A Tax on Greenmail
§ 156.5881-1 Imposition of excise tax on greenmail.
(a) In general. Section 5881 of the Code imposes a tax equal to 50 percent of the gain or other income realized by any person on the receipt of greenmail, whether or not the gain or other income is recognized.
(b) Transactions occurring on or after March 31, 1988. For transactions occurring on or after March 31, 1988, greenmail is defined as any consideration transferred by a corporation (or any person acting in concert with the corporation) to directly or indirectly acquire stock of the corporation from any shareholder if:
(1) The transferring shareholder has held the stock (as determined under section 1223) for less than two years before entering into the agreement to transfer the stock,
(2) The shareholder, any person acting in concert with the shareholder, or any person related to the shareholder or to a person acting in concert with the shareholder made or threatened to make a public tender offer for stock of the corporation at some time during the two-year period ending on the date of the acquisition of the stock by the corporation, and
(3) The acquisition is pursuant to an offer that was not made on the same terms to all shareholders.
(c) Transactions occurring before March 31, 1988. For transactions occurring before March 31, 1988, greenmail has the same meaning as in paragraph (b) of this section, except that it does not include any consideration transferred by any person acting in concert with the corporation described in that paragraph.
(d) Effective date. Generally, section 5881 of the Code applies to consideration received after December 22, 1987, in taxable years ending after that date. However, section 5881 does not apply to any acquisition of stock pursuant to a written binding contract in effect on December 15, 1987, and at all times thereafter before the acquisition.
Subpart B Procedure and Administration
§ 156.6001-1 Notice or regulations requiring records, statements, and special returns.
(a) In general. Any person subject to tax under chapter 54 (Greenmail) of the Code shall keep such complete and detailed records as are sufficient to enable the district director to determine accurately the amount of liability under chapter 54.
(b) Notice by district director requiring returns, statements, or the keeping of records. The district director may require any person, by notice served upon him, to make such returns, render such statements, or keep such specific records as will enable the district director to determine whether or not the person is liable for tax under chapter 54 of the Code.
(c) Retention of records. The records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law.
[T.D. 8379, 56 FR 65685, Dec. 18, 1991; 57 FR 5931, Feb. 18, 1992]
§ 156.6011-1 General requirement of return, statement, or list.
Every person liable for tax under section 5881 of the Code shall file a return with respect to the tax on the form prescribed by the Internal Revenue Service (Form 8725). Each such person shall include therein the information required by the form and the instructions issued with respect thereto.
§ 156.6060-1 Reporting requirements for tax return preparers.
(a) In general. A person that employs one or more tax return preparers to prepare a return or claim for refund under section 5881 of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in § 1.6060-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 156.6061-1 Signing of returns and other documents.
Any return, statement, or other document required to be made with respect to a tax imposed by chapter 54 (Greenmail) of the Code or the regulations thereunder shall be signed by the person required to file the return, statement, or other document, or by the persons required or duly authorized to sign in accordance with the regulations, forms, or instructions prescribed with respect to such return, statement, or document. An individual's signature on such a return, statement, or other document shall be prima facie evidence that the individual is authorized to sign the return, statement, or other document.
§ 156.6065-1 Verification of returns.
If a return, statement, or other document made under the provisions of chapter 54 (Greenmail) or of subtitle F of the Code, or the regulations thereunder with respect to any tax imposed by chapter 54, or the form and instructions issued with respect to such return, statement, or other document, requires that it shall contain or be verified by a written declaration that it is made under the penalties of perjury, it must be so verified by the person or persons required to sign such return, statement, or other document. In addition, any other statement or document submitted under any provision of chapter 54 or of subtitle F of the Code, or the regulations thereunder with respect to any tax imposed by chapter 54 may be required to contain or be verified by written declaration that is made under the penalties of perjury.
§ 156.6071-1 Time for filing returns relating to greenmail.
(a) In general. Returns required by § 156.6011-1 (relating to liability for tax on greenmail under section 5881) shall be filed on or before the ninetieth day following receipt of any portion of the greenmail. Greenmail is considered to be received when gain or other income is realized, as determined according to the taxpayer's method of accounting, without regard to any provision of the Code providing for deferral of recognition.
(b) Returns relating to greenmail received before the date these regulations become final. Returns required by § 156.6011-1 that relate to greenmail received on or before December 18, 1991, shall be filed on or before March 18, 1992.
§ 156.6081-1 Automatic extension of time for filing a return due under chapter 54.
(a) In general. A taxpayer required to file a return on Form 8725, “Excise Tax on Greenmail,” will be allowed an automatic 6-month extension of time to file the return after the date prescribed for filing the return if the taxpayer files an application under this section in accordance with paragraph (b) of this section.
(b) Requirements. To satisfy this paragraph (b), a taxpayer must—
(1) Submit a complete application on Form 7004, “Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns,” or in any other manner prescribed by the Commissioner;
(2) File the application on or before the date prescribed for filing the return with the Internal Revenue Service office designated in the application's instructions; and
(3) Remit the amount of the properly estimated unpaid tax liability on or before the date prescribed for payment.
(c) No extension of time for the payment of tax. An automatic extension of time for filing a return granted under paragraph (a) of this section will not extend the time for payment of any tax due on such return.
(d) Termination of automatic extension. The Commissioner may terminate an automatic extension at any time by mailing to the taxpayer a notice of termination at least 10 days prior to the termination date designated in such notice. The Commissioner must mail the notice of termination to the address shown on the Form 7004 or to the taxpayer's last known address. For further guidance regarding the definition of last known address, see § 301.6212-2 of this chapter.
(e) Penalties. See section 6651 for failure to file or failure to pay the amount shown as tax on the return.
(f) Effective/applicable dates. This section is applicable for applications for an automatic extension of time to file a return due under chapter 54, filed after July 1, 2008.
[T.D. 9407, 73 FR 37370, July 1, 2008]
§ 156.6091-1 Place for filing chapter 54 (Greenmail) tax returns.
Except as provided in § 156.6091-2 (relating to exceptional cases):
(a) Individuals, estates, and trusts. In general, tax returns under chapter 54 of the Code of individuals, estates, and trusts shall be filed with any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves the legal residence or the principal place of business of the person required to make the return.
(b) Corporations. In general, tax returns under chapter 54 of the Code of corporations shall be filed with any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves the principal place of business or the principal office or agency of the corporation.
(c) Partnerships. In general, tax returns under chapter 54 of the Code of partnerships shall be filed with any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves the principal place of business or the principal office or agency of the partnership.
(d) Returns of taxpayers outside the United States. The return of a person (other than a partnership or a corporation) outside the United States having no legal residence or principal place of business or agency in the United States, or the return of a partnership or a corporation having no principal place of business or principal office or agency in the United States, shall be filed with the Internal Revenue Service, Philadelphia, PA 19255, or as otherwise directed in the applicable forms and instructions.
(e) Returns filed with service centers or by hand carrying. Notwithstanding paragraph (a), (b), (c), or (d) of this section, unless a return is filed by hand carrying, whenever instructions applicable to tax returns under chapter 54 of the Code provide that the returns be filed with a service center, the returns must be so filed in accordance with the instructions. Returns that are filed by hand carrying shall be filed with any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office in accordance with paragraphs (a), (b), (c), or (d) of this section.
[T.D. 8379, 56 FR 65685, Dec. 18, 1991; 57 FR 5931, Feb. 18, 1992, as amended by T.D. 9156, 69 FR 55746, Sept. 16, 2004]
§ 156.6091-2 Exceptional cases.
Notwithstanding the provisions of § 156.6091-1, the Commissioner may permit the filing of any tax return under chapter 54 (Greenmail) of the Code in any local Internal Revenue Service office.
[T.D. 8379, 56 FR 65685, Dec. 18, 1991, as amended by T.D. 9156, 69 FR 55747, Sept. 16, 2004]
§ 156.6107-1 Tax return preparer must furnish copy of return and claim for refund to taxpayer and must retain a copy or record.
(a) In general. A person who is a signing tax return preparer of any return or claim for refund of tax under section 5881 of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer and retain a completed copy or record in the manner stated in § 1.6107-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 156.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund.
(a) In general. Each tax return or claim for refund for tax under section 5881 of the Internal Revenue Code prepared by one or more signing tax return preparers must include the identifying number of the preparer required by § 1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in § 1.6109-2 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 156.6151-1 Time and place for paying of tax shown on returns.
The tax under chapter 54 (Greenmail) of the Code shown on any return shall, without notice of assessment and demand, be paid to the internal revenue officer with whom the return is filed at the time and place for filing such return (determined without regard to any extension of time for filing the return). For provisions relating to the time and place for filing such return, see §§ 156.6071-1 and 156.6091-1. For provisions relating to the extension of time for paying the tax, see § 156.6161-1.
§ 156.6161-1 Extension of time for paying tax or deficiency.
(a) In general—(1) Tax shown or required to be shown on return. A reasonable extension of the time for payment of the amount of any tax imposed by chapter 54 (Greenmail) of the Code and shown or required to be shown on any return may be granted by the appropriate district director at the request of the taxpayer. The period of such extension shall not exceed 6 months from the date for payment of such tax.
(2) Deficiency. The time for payment of any amount determined as a deficiency in respect of tax imposed by chapter 54 of the Code may, at the request of the taxpayer, be extended by the internal revenue officer to whom the tax is required to be paid. The extension may be for a period not to exceed 18 months from the date fixed for payment of the deficiency, as shown on the notice and demand. In exceptional cases, a further extension for a period not in excess of 12 months may be granted. No extension of time for payment of a deficiency shall be granted if the deficiency is due to negligence, to intentional disregard of rules and regulations, or to fraud with intent to evade tax.
(3) Extension of time for filing distinguished. The granting of an extension of time for filing a return does not operate to extend the time for the payment of the tax or any part thereof unless so specified in the extension.
(b) Certain rules relating to extensions of time for paying income tax to apply. The provisions of § 1.6161-1 (b), (c), and (d) of this chapter (relating to a requirement for undue hardship, to the application for extension, and to payment pursuant to an extension) shall apply to extensions of time for payment of the tax imposed by chapter 54 of the Code.
§ 156.6165-1 Bonds where time to pay tax or deficiency has been extended.
If an extension of time for payment is granted under section 6161 of the Code, the district director or the director of the service center may, if he deems it necessary, require a bond for the payment of the amount in respect to which the extension is granted in accordance with the terms of the extension. However, the bond shall not exceed double the amount with respect to which the extension is granted. For provisions relating to form of bonds, see the regulations under section 7101 of the Code contained in part 301 of title 26 (Regulations on Procedure and Administration).
§ 156.6694-1 Section 6694 penalties applicable to tax return preparer.
(a) In general. For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund for tax under section 5881 of the Internal Revenue Code, see § 1.6694-1 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 156.6694-2 Penalties for understatement due to an unreasonable position.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under section 5881 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in § 1.6694-2 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 156.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under section 5881 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in § 1.6694-3 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 156.6694-4 Extension of period of collection when tax return preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters.
(a) In general. For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for tax under section 5881 of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under § 1.6694-4 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78461, Dec. 22, 2008]
§ 156.6695-1 Other assessable penalties with respect to the preparation of tax returns or claims for refund for other persons.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under section 5881 of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in § 1.6695-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
§ 156.6696-1 Claims for credit or refund by tax return preparers.
(a) In general. For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax under section 5881 of the Internal Revenue Code, the rules under § 1.6696-1 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
§ 156.7701-1 Tax return preparer.
(a) In general. For the definition of a tax return preparer, see § 301.7701-15 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
PART 157 EXCISE TAX ON STRUCTURED SETTLEMENT FACTORING TRANSACTIONS
Authority: 26 U.S.C. 7805. Section 157.6001-1 also issued under 26 U.S.C. 6001; Section 157.6011-1 also issued under 26 U.S.C. 6011; Section 157.6061-1 also issued under 26 U.S.C. 6061; Section 157.6071-1 also issued under 26 U.S.C. 6071; Section 157.6081-1 also issued under 26 U.S.C. 6081(a); Section 157.6091-1 also issued under 26 U.S.C. 6091; Section 157.6060-1 also issued under 26 U.S.C. 6060(a); Section 157.6109-1 also issued under 26 U.S.C. 6109(a); Section 157.6109-2 also issued under 26 U.S.C. 6109(a); Section 157.6161-1 also issued under 26 U.S.C. 6161; Section 157.6695-1 also issued under 26 U.S.C. 6695(b).
Source: T.D. 9134, 69 FR 41193, July 8, 2004, unless otherwise noted.
Subpart A Tax on Structured Settlement Factoring Transactions
§ 157.5891-1 Imposition of excise tax on structured settlement factoring transactions.
(a) In general. Section 5891 imposes on any person who acquires, directly or indirectly, structured settlement payment rights in a structured settlement factoring transaction a tax equal to 40 percent of the factoring discount with respect to such factoring transaction.
(b) Exceptions for certain approved transactions—(1) In general. The excise tax shall not apply to a structured settlement factoring transaction if the transfer of structured settlement payment rights is approved in advance in a qualified order.
(2) Qualified order dispositive. A qualified order shall be treated as dispositive for purposes of this exception.
(c) Definitions—(1) Applicable state statute means—
(i) A statute that is enacted by the state in which the payee of the structured settlement is domiciled and provides for the entry of an order, judgment, or decree described in paragraph (c)(4)(i) of this section; or
(ii) If there is no such statute, a statute that—
(A) Is enacted by the state in which either the party to the structured settlement (including an assignee under a qualified assignment under section 130) or the person issuing the funding asset for the structured settlement is domiciled or has its principal place of business; and
(B) Provides for the entry of such an order, judgment, or decree.
(2) Applicable state court means, with respect to any applicable state statute, a court of the state that enacted such statute. If the payee of the structured settlement is not domiciled in the state that enacted the statute, the term also includes a court of the state in which the payee is domiciled.
(3) Factoring discount means an amount equal to the excess of—
(i) The aggregate undiscounted amount of structured settlement payments being acquired in the structured settlement factoring transaction; over
(ii) The total amount actually paid by the acquirer to the person from whom such structured settlement payments are acquired.
(4) Qualified order means a final order, judgment, or decree that—
(i) Finds that the transfer of structured settlement payment rights does not contravene any Federal or state statute, or the order of any court or responsible administrative authority, and is in the best interest of the payee, taking into account the welfare and support of the payee's dependents; and
(ii) Is issued under the authority of an applicable state statute by an applicable state court, or is issued by the responsible administrative authority (if any) which has exclusive jurisdiction over the underlying action or proceeding which was resolved by means of the structured settlement.
(5) Responsible administrative authority means the administrative authority that had jurisdiction over the underlying action or proceeding that was resolved by means of the structured settlement.
(6) State includes the Commonwealth of Puerto Rico and any possession of the United States.
(7) Structured settlement means an arrangement—
(i) That is established by—
(A) Suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104(a)(2); or
(B) Agreement for the periodic payment of compensation under any workers' compensation law excludable from the gross income of the recipient under section 104(a)(1); and
(ii) Under which the periodic payments are—
(A) Of the character described in section 130(c)(2)(A) and (B); and
(B) Payable by a person who is a party to the suit or agreement or to the workers' compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.
(8) Structured settlement factoring transaction means a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale, assignment, pledge, or other form of encumbrance or alienation for consideration other than—
(i) The creation or perfection of a security interest in structured settlement payment rights under a blanket security agreement entered into with an insured depository institution in the absence of any action to redirect the structured settlement payments to such institution (or agent or successor thereof) or otherwise to enforce such blanket security interest as against the structured settlement payment rights; or
(ii) A subsequent transfer of structured settlement payment rights acquired in a structured settlement factoring transaction.
(9) Structured settlement payment rights means rights to receive payments under a structured settlement.
(d) Coordination with other provisions of the Internal Revenue Code—(1) In general. If the applicable requirements of sections 72, 104(a)(1), 104(a)(2), 130, and 461(h) were satisfied at the time the structured settlement involving structured settlement payment rights was entered into, the subsequent occurrence of a structured settlement factoring transaction shall not affect the application of the provisions of such sections to the parties to the structured settlement (including an assignee under a qualified assignment under section 130) in any taxable year.
(2) No withholding of tax. The provisions of section 3405 regarding withholding of tax shall not apply to the person making the payments in the event of a structured settlement factoring transaction.
(e) Effective dates. This section applies to structured settlement factoring transactions entered into on or after July 8, 2004. For structured settlement factoring transactions entered into before July 8, 2004, see § 157.5891-1T of this chapter (2003-1 C.B. 564. See § 601.601(d)(2) of this chapter.), as it appeared in the April 1, 2003, edition of 26 CFR part 157.
Subpart B Procedure and Administration
§ 157.6001-1 Records, statements, and special returns.
(a) In general. Any person subject to tax under chapter 55 (Structured Settlement Factoring Transactions) of the Internal Revenue Code must keep such complete and detailed records as are sufficient to enable the Internal Revenue Service (IRS) to determine accurately the amount of liability under chapter 55.
(b) Notice by the IRS requiring returns, statements, or the keeping of records. The IRS may require any person, by notice served upon him, to make such returns, render such statements, or keep such specific records as will enable the IRS to determine whether or not the person is liable for tax under chapter 55.
(c) Retention of records. The records required by this section must be kept at all times available for inspection by the IRS, and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law.
§ 157.6011-1 General requirement of return, statement, or list.
Every person liable for tax under section 5891 must file a return with respect to the tax in accordance with the forms and instructions provided by the Internal Revenue Service.
§ 157.6060-1 Reporting requirements for tax return preparers.
(a) In general. A person that employs one or more tax return preparers to prepare a return or claim for refund for tax under section 5891 of the Internal Revenue Code, other than for the person, at any time during a return period, shall satisfy the record keeping and inspection requirements in the manner stated in § 1.6060-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
§ 157.6061-1 Signing of returns and other documents.
Any return, statement, or other document required to be made with respect to a tax imposed by chapter 55 (Structured Settlement Factoring Transactions) of the Internal Revenue Code or the regulations under chapter 55 must be signed by the person required to file the return, statement, or other document, or by the persons required or duly authorized to sign in accordance with the regulations, forms, or instructions prescribed with respect to such return, statement, or document. An individual's signature on such return, statement, or other document shall be prima facie evidence that the individual is authorized to sign the return, statement, or other document.
§ 157.6065-1 Verification of returns.
If a return, statement, or other document made under the provisions of chapter 55 (Structured Settlement Factoring Transactions) or of subtitle F of the Internal Revenue Code, or the regulations under those provisions with respect to any tax imposed by chapter 55, or the form and instructions issued with respect to such return, statement, or other document, requires that it shall contain or be verified by a written declaration that it is made under the penalties of perjury, it must be so verified by the person or persons required to sign such return, statement, or other document. In addition, any other statement or document submitted under any provision of chapter 55 or subtitle F, or the regulations under those provisions, with respect to any tax imposed by chapter 55 may be required to contain or be verified by written declaration that it is made under the penalties of perjury.
§ 157.6071-1 Time for filing returns.
(a) In general. Except as provided in paragraph (b) of this section, returns required by § 157.6011-1 (relating to returns of tax with respect to structured settlement factoring transactions) must be filed on or before the ninetieth day following the receipt of structured settlement payment rights in a structured settlement factoring transaction.
(b) Returns relating to structured settlement payment rights received before February 19, 2003. Returns required by § 157.6011-1 that relate to structured settlement payment rights received on or before February 19, 2003, must be filed on or before May 20, 2003.
§ 157.6081-1 Automatic extension of time for filing a return due under chapter 55.
(a) In general. A taxpayer required to file a return on Form 8876, “Excise Tax on Structured Settlement Factoring Transactions”, will be allowed an automatic 6-month extension of time to file the return after the date prescribed for filing the return if the taxpayer files an application under this section in accordance with paragraph (b) of this section.
(b) Requirements. To satisfy this paragraph (b), the taxpayer must—
(1) Submit a complete application on Form 7004, “Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns,” or in any other manner prescribed by the Commissioner;
(2) File the application on or before the date prescribed for filing the return with the Internal Revenue Service office designated in the application's instructions; and
(3) Remit the amount of the properly estimated unpaid tax liability on or before the date prescribed for payment.
(c) No extension of time for the payment of tax. An automatic extension of time for filing a return granted under paragraph (a) of this section will not extend the time for payment of any tax due on such return.
(d) Termination of automatic extension. The Commissioner may terminate an automatic extension at any time by mailing to the taxpayer a notice of termination at least 10 days prior to the termination date designated in such notice. The Commissioner must mail the notice of termination to the address shown on the Form 7004 or to the taxpayer's last known address. For further guidance regarding the definition of last known address, see § 301.6212-2 of this chapter.
(e) Penalties. See section 6651 for failure to file or failure to pay the amount shown as tax on the return.
(f) Effective/applicability dates. This section is applicable for applications for an automatic extension of time to file a return due under chapter 55, filed after July 1, 2008.
[T.D. 9407, 73 FR 37370, July 1, 2008]
§ 157.6091-1 Place for filing returns.
The return required by § 157.6011-1 (relating to returns of tax with respect to structured settlement factoring transactions) must be filed at the place specified in the forms and instructions provided by the Internal Revenue Service.
§ 157.6107-1 Tax return preparer must furnish copy of return or claim for refund to taxpayer and must retain a copy or record.
(a) In general. A person who is a signing tax return preparer of any return or claim for refund of tax under section 5891 of the Internal Revenue Code shall furnish a completed copy of the return or claim for refund to the taxpayer and retain a completed copy or record in the manner stated in § 1.6107-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
§ 157.6109-1 Tax return preparers furnishing identifying numbers for returns or claims for refund.
(a) In general. Each tax return or claim for refund for tax under section 5891 of the Internal Revenue Code prepared by one or more signing tax return preparers must include the identifying number of the preparer required by § 1.6695-1(b) of this chapter to sign the return or claim for refund in the manner stated in § 1.6109-2 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
§ 157.6151-1 Time and place for paying of tax shown on returns.
The tax under chapter 55 (Structured Settlement Factoring Transactions) of the Internal Revenue Code shown on any return must, without assessment or notice and demand, be paid at the time and place specified in the forms and instructions provided by the Internal Revenue Service. For provisions relating to the time and place for filing such return, see § 157.6071-1 and § 157.6091-1. For provisions relating to the extension of time for paying the tax, see § 157.6161-1.
§ 157.6161-1 Extension of time for paying tax.
(a) In general—(1) Tax shown or required to be shown on return. The Internal Revenue Service may, at the request of the taxpayer, grant a reasonable extension of time for payment of the amount of any tax imposed by chapter 55 (Structured Settlement Factoring Transactions) of the Internal Revenue Code and shown or required to be shown on any return. The period of such extension shall not exceed 6 months from the date fixed for payment of such tax, except that in the case of a taxpayer that is abroad, such extension may exceed 6 months.
(2) Extension of time for filing distinguished. The granting of an extension of time for filing a return does not extend the time for the payment of the tax or any part thereof unless so specified in the extension.
(b) Certain rules relating to extension of time for paying income tax to apply. The provisions of § 1.6161-1(b), (c), and (d) of this chapter (relating to a requirement for undue hardship, to the application for extension, and to payment pursuant to an extension) shall apply to extensions of time for payment of the tax imposed by chapter 55 of the Code.
§ 157.6165-1 Bonds where time to pay tax has been extended.
If an extension of time for payment is granted under section 6161, the Internal Revenue Service may, if it deems necessary, require a bond for the payment, in accordance with the terms of the extension, of the amount with respect to which the extension is granted. However, the bond shall not exceed double the amount with respect to which the extension is granted. For provisions relating to the form of bonds, see the regulations under section 7101 contained in part 301 (Regulations on Procedure and Administration) of this chapter.
§ 157.6694-1 Section 6694 penalties applicable to tax return preparer.
(a) In general. For general definitions regarding section 6694 penalties applicable to preparers of tax returns or claims for refund for tax under section 5891 of the Internal Revenue Code see § 1.6694-1 of this chapter.
(b) Effective/applicability date. Paragraph (a) of this section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
§ 157.6694-2 Penalties for understatement due to an unreasonable position.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under section 5891 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(a) of the Code in the manner stated in § 1.6694-2 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
§ 157.6694-3 Penalty for understatement due to willful, reckless, or intentional conduct.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under section 5891 of the Internal Revenue Code (Code) shall be subject to penalties under section 6694(b) of the Code in the manner stated in § 1.6694-3 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
§ 157.6694-4 Extension of period of collection when preparer pays 15 percent of a penalty for understatement of taxpayer's liability and certain other procedural matters.
(a) In general. For rules relating to the extension of period of collection when a tax return preparer who prepared a return or claim for refund for tax under section 5891 of the Internal Revenue Code pays 15 percent of a penalty for understatement of taxpayer's liability and procedural matters relating to the investigation, assessment and collection of the penalties under section 6694(a) and (b), the rules under § 1.6694-4 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78462, Dec. 22, 2008]
§ 157.6695-1 Other assessable penalties with respect to the preparation of tax returns or claims for refund for other persons.
(a) In general. A person who is a tax return preparer of any return or claim for refund of tax under section 5891 of the Internal Revenue Code (Code) shall be subject to penalties for failure to furnish a copy to the taxpayer under section 6695(a) of the Code, failure to sign the return under section 6695(b) of the Code, failure to furnish an identification number under section 6695(c) of the Code, failure to retain a copy or list under section 6695(d) of the Code, failure to file a correct information return under section 6695(e) of the Code, and negotiation of a check under section 6695(f) of the Code, in the manner stated in § 1.6695-1 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed after December 31, 2008.
[T.D. 9436, 73 FR 78463, Dec. 22, 2008]
§ 157.6696-1 Claims for credit or refund by tax return preparers.
(a) In general. For rules for claims for credit or refund by a tax return preparer who prepared a return or claim for refund for tax under section 5891 of the Internal Revenue Code, the rules under § 1.6696-1 of this chapter will apply.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78463, Dec. 22, 2008]
§ 157.7701-1 Tax return preparer.
(a) In general. For the definition of a tax return preparer, see § 301.7701-15 of this chapter.
(b) Effective/applicability date. This section is applicable to returns and claims for refund filed, and advice provided, after December 31, 2008.
[T.D. 9436, 73 FR 78463, Dec. 22, 2008]