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									                                                                                                   Bulletin No. 2007-6
                                                                                                     February 5, 2007



HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.


INCOME TAX                                                             EMPLOYEE PLANS

Rev. Rul. 2007–9, page 422.                                            T.D. 9298, page 434.
Federal rates; adjusted federal rates; adjusted federal                Final regulations under section 9802 of the Code provide guid-
long-term rate and the long-term exempt rate. For pur-                 ance which prohibits group health plans from discriminating in
poses of sections 382, 642, 1274, 1288, and other sections             eligibility or premiums among those covered by the plan. The
of the Code, tables set forth the rates for February 2007.             regulations also provide guidance on the limited exception to
                                                                       the nondiscrimination requirements for programs of health pro-
T.D. 9304, page 423.                                                   motion or disease prevention.
REG–161919–05, page 463.
Final, temporary, and proposed regulations under section 1561          T.D. 9299, page 460.
of the Code affect component members of controlled groups              Final regulations under section 9802 of the Code provide guid-
and consolidated groups filing life-nonlife returns. They pro-         ance on an exception to the general nondiscrimination require-
vide guidance regarding the apportionment of tax benefit items         ments, which prohibit group health plans from discriminating in
and the amount and type of information these members are re-           eligibility or premiums among those covered by the plan. The
quired to submit with their federal income tax returns.                exception allows certain church plans to continue requiring ev-
                                                                       idence of good health of certain individuals.
T.D. 9306, page 420.
Final regulations under 31 USC 9701 increase the amount of
the user fees imposed under sections 300.1 and 300.2 for               EXCISE TAX
entering into and restructuring or reinstating installment agree-
ments. The regulations bring the fees in line with the actual
costs to the IRS. Currently, the IRS charges $43 for entering          T.D. 9298, page 434.
into an installment agreement and $24 for restructuring or re-         Final regulations under section 9802 of the Code provide guid-
instating an installment agreement that is in default. The IRS         ance which prohibits group health plans from discriminating in
recently completed a review of the installment agreement pro-          eligibility or premiums among those covered by the plan. The
gram and determined that the full cost of an installment agree-        regulations also provide guidance on the limited exception to
ment is $105, and the full cost of restructuring or reinstating        the nondiscrimination requirements for programs of health pro-
an installment agreement is $45. The regulations reflect these         motion or disease prevention.
costs, with one exception; the fee for entering into an install-
ment agreement paid by way of a direct debit from the tax-
payer’s checking account will be $52, to encourage this type
of payment arrangement.




                                                                                                 (Continued on the next page)


Actions Relating to Court Decisions is on the page following the Introduction.
Finding Lists begin on page ii.
T.D. 9299, page 460.
Final regulations under section 9802 of the Code provide guid-
ance on an exception to the general nondiscrimination require-
ments, which prohibit group health plans from discriminating in
eligibility or premiums among those covered by the plan. The
exception allows certain church plans to continue requiring ev-
idence of good health of certain individuals.


ADMINISTRATIVE

T.D. 9304, page 423.
REG–161919–05, page 463.
Final, temporary, and proposed regulations under section 1561
of the Code affect component members of controlled groups
and consolidated groups filing life-nonlife returns. They pro-
vide guidance regarding the apportionment of tax benefit items
and the amount and type of information these members are re-
quired to submit with their federal income tax returns.

Announcement 2007–10, page 464.
This document contains corrections to final and temporary reg-
ulations (T.D. 9278, 2006–34 I.R.B. 256) regarding the treat-
ment of controlled services transactions under section 482 of
the Code and the allocation of income from intangibles, in par-
ticular with respect to contributions by a controlled party to the
value of an intangible owned by another controlled party.

Announcement 2007–11, page 464.
This document contains corrections to a notice of proposed
rulemaking by cross-reference to temporary regulations,
notice of proposed rulemaking, and notice of public hearing
(REG–146893–02, 2006–34 I.R.B. 317) regarding the treat-
ment of controlled services transactions under section 482
of the Code and the allocation of income from intangibles, in
particular with respect to contributions by a controlled party to
the value of an intangible owned by another controlled party.

Announcement 2007–12, page 465.
This document contains corrections to final and temporary reg-
ulations (T.D. 9260, 2006–23 I.R.B. 1001) concerning the ap-
plication of separate foreign tax credit limitations to dividends
received from noncontrolled section 902 corporations under
section 904(d)(4) of the Code.




February 5, 2007                                                     2007–6 I.R.B.
The IRS Mission
Provide America’s taxpayers top quality service by helping                        applying the tax law with integrity and fairness to all.
them understand and meet their tax responsibilities and by


Introduction
The Internal Revenue Bulletin is the authoritative instrument of                  court decisions, rulings, and procedures must be considered,
the Commissioner of Internal Revenue for announcing official                      and Service personnel and others concerned are cautioned
rulings and procedures of the Internal Revenue Service and for                    against reaching the same conclusions in other cases unless
publishing Treasury Decisions, Executive Orders, Tax Conven-                      the facts and circumstances are substantially the same.
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
                                                                                  The Bulletin is divided into four parts as follows:
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.                                            Part I.—1986 Code.
                                                                                  This part includes rulings and decisions based on provisions of
It is the policy of the Service to publish in the Bulletin all sub-               the Internal Revenue Code of 1986.
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-                  Part II.—Treaties and Tax Legislation.
ify, or amend any of those previously published in the Bulletin.                  This part is divided into two subparts as follows: Subpart A,
All published rulings apply retroactively unless otherwise indi-                  Tax Conventions and Other Related Items, and Subpart B, Leg-
cated. Procedures relating solely to matters of internal man-                     islation and Related Committee Reports.
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.                                                          Part III.—Administrative, Procedural, and Miscellaneous.
                                                                                  To the extent practicable, pertinent cross references to these
                                                                                  subjects are contained in the other Parts and Subparts. Also
Revenue rulings represent the conclusions of the Service on the                   included in this part are Bank Secrecy Act Administrative Rul-
application of the law to the pivotal facts stated in the revenue                 ings. Bank Secrecy Act Administrative Rulings are issued by
ruling. In those based on positions taken in rulings to taxpayers                 the Department of the Treasury’s Office of the Assistant Sec-
or technical advice to Service field offices, identifying details                 retary (Enforcement).
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.                                                                     Part IV.—Items of General Interest.
                                                                                  This part includes notices of proposed rulemakings, disbar-
                                                                                  ment and suspension lists, and announcements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be                        The last Bulletin for each month includes a cumulative index
relied on, used, or cited as precedents by Service personnel in                   for the matters published during the preceding months. These
the disposition of other cases. In applying published rulings and                 monthly indexes are cumulated on a semiannual basis, and are
procedures, the effect of subsequent legislation, regulations,                    published in the last Bulletin of each semiannual period.



The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.




2007–6 I.R.B.                                                                                                                     February 5, 2007
Actions Relating to Decisions of the Tax Court
    It is the policy of the Internal Rev-                      certain regular Tax Court opinions. The                        will not follow the decision in disposing
enue Service to announce at an early date                      Service has expanded its acquiescence                          of cases involving other taxpayers. In
whether it will follow the holdings in cer-                    program to include other civil tax cases                       reference to an opinion of a circuit court
tain cases. An Action on Decision is the                       where guidance is determined to be help-                       of appeals, a “nonacquiescence” indicates
document making such an announcement.                          ful. Accordingly, the Service now may                          that the Service will not follow the hold-
An Action on Decision will be issued at                        acquiesce or nonacquiesce in the holdings                      ing on a nationwide basis. However, the
the discretion of the Service only on unap-                    of memorandum Tax Court opinions, as                           Service will recognize the precedential
pealed issues decided adverse to the gov-                      well as those of the United States District                    impact of the opinion on cases arising
ernment. Generally, an Action on Decision                      Courts, Claims Court, and Circuit Courts                       within the venue of the deciding circuit.
is issued where its guidance would be help-                    of Appeal. Regardless of the court decid-                         The Actions on Decisions published in
ful to Service personnel working with the                      ing the case, the recommendation of any                        the weekly Internal Revenue Bulletin are
same or similar issues. Unlike a Treasury                      Action on Decision will be published in                        consolidated semiannually and appear in
Regulation or a Revenue Ruling, an Action                      the Internal Revenue Bulletin.                                 the first Bulletin for July and the Cumula-
on Decision is not an affirmative statement                       The recommendation in every Action                          tive Bulletin for the first half of the year. A
of Service position. It is not intended to                     on Decision will be summarized as ac-                          semiannual consolidation also appears in
serve as public guidance and may not be                        quiescence, acquiescence in result only,                       the first Bulletin for the following January
cited as precedent.                                            or nonacquiescence. Both “acquiescence”                        and in the Cumulative Bulletin for the last
    Actions on Decisions shall be relied                       and “acquiescence in result only” mean                         half of the year.
upon within the Service only as conclu-                        that the Service accepts the holding of
sions applying the law to the facts in the                     the court in a case and that the Service                         The Commissioner does NOT ACQUI-
particular case at the time the Action on                      will follow it in disposing of cases with                      ESCE in the following decision:
Decision was issued. Caution should be                         the same controlling facts. However, “ac-
                                                                                                                                  North Dakota State University v.
exercised in extending the recommenda-                         quiescence” indicates neither approval
                                                                                                                                    United States,1
tion of the Action on Decision to similar                      nor disapproval of the reasons assigned
                                                                                                                                  255 F.3d 599 (8th Cir. 2001),
cases where the facts are different. More-                     by the court for its conclusions; whereas,
                                                                                                                                  nonacq., 2001–2 C.B. xv
over, the recommendation in the Action on                      “acquiescence in result only” indicates
Decision may be superseded by new legis-                       disagreement or concern with some or all
lation, regulations, rulings, cases, or Ac-                    of those reasons. “Nonacquiescence” sig-
tions on Decisions.                                            nifies that, although no further review was
    Prior to 1991, the Service published                       sought, the Service does not agree with
acquiescence or nonacquiescence only in                        the holding of the court and, generally,




1Nonacquiescence relating to whether early retirement payments that the taxpayer made to tenured faculty members are wages subject to Federal Insurance Contributions Act (“FICA”) taxes.
The litigating position in the Action on Decision dated December 31, 2001, is modified and replaced. The Service’s nonacquiescence in the Eighth Circuit’s decision remains unchanged.


February 5, 2007                                                                                                                                             2007–6 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income                                   ology, Eva Williams, 202–435–5514; con-        other measure as the Secretary may adopt.
Housing Credit                                           cerning the regulations, William Beard,        The IRS sought and received an additional
                                                         202–622–3620 (not toll-free numbers).          waiver from OMB to charge less than full
   The adjusted applicable federal short-term, mid-
                                                                                                        cost to low-income taxpayers.
term, and long-term rates are set forth for the month    SUPPLEMENTARY INFORMATION:
of February 2007. See Rev. Rul. 2007-9, page 422.
                                                                                                        Summary of Comments and
                                                         Background                                     Explanation of Revisions
Section 280G.—Golden                                         This document contains amendments
Parachute Payments                                                                                          Of the eight comments on the proposed
                                                         to 26 CFR part 300. On August 30,              regulations, five stated that the increased
   Federal short-term, mid-term, and long-term rates     2006, a notice of proposed rulemaking          fees would have an adverse impact on low-
are set forth for the month of February 2007. See Rev.   (REG–148576–05, 2006–40 I.R.B. 627)            income taxpayers. Other commentators
Rul. 2007-9, page 422.                                   relating to the user fees charged for pro-     stated that many low-income taxpayers do
                                                         cessing installment agreements was pub-        not have bank accounts and cannot take ad-
                                                         lished in the Federal Register (71 FR          vantage of the reduced fee for direct-debit
Section 300 (31 USC                                      51538). The charging of user fees imple-
9701).—Installment                                                                                      installment agreements. To accommodate
                                                         ments the Independent Offices Appropri-        these concerns, the final regulations except
Agreement Fee                                            ations Act (IOAA), which is codified at        low-income taxpayers from the increase
300.1: Installment agreement fee.                        31 U.S.C. 9701. The notice of proposed         of the fee for entering into an installment
                                                         rulemaking proposed an increase in the         agreement. Therefore the fee for entering
T.D. 9306                                                amount of the user fees to reflect the full    into an installment agreement remains $43
                                                         cost of the service provided, as directed by   for low-income taxpayers, that is, taxpay-
DEPARTMENT OF                                            OMB Circular A–25, 58 FR 38142 (July           ers whose income fall at or below 250%
                                                         15, 1993) (the OMB Circular).
THE TREASURY                                                                                            of the dollar poverty criteria established by
                                                             The notice of proposed rulemaking pro-     the U.S. Department of Health and Human
Internal Revenue Service                                 posed to increase the fee under §300.1         Services. The exception does not apply to
26 CFR Part 300                                          for entering into an installment agreement     the fee for restructuring or reinstating an
                                                         from $43 to $105 and to increase the fee       installment agreement.
User Fees for Processing                                 under §300.2 for restructuring an install-         Other commentators recommended that
Installment Agreements                                   ment agreement from $24 to $45. The no-        the installment agreement user fee be re-
                                                         tice of proposed rulemaking also proposed      duced for any taxpayer who requests an
AGENCY: Internal Revenue Service                         an exception to the full-cost requirement in   agreement on-line (over the internet). Un-
(IRS), Treasury.                                         cases where the taxpayer chooses to pay by     der the IOAA, user fees should be fair and
                                                         way of a direct debit from the taxpayer’s      based on the costs to the government, the
ACTION: Final regulations.                               bank account. The OMB Circular allows          value of the service to the recipient, and
SUMMARY: This document contains                          the Office of Management and Budget to         the public policy or interest served. No ex-
amendments to the regulations relating to                grant a waiver of the full cost requirement    ception was created for installment agree-
user fees for installment agreements. The                and, pursuant to such a waiver, the pro-       ments requested on-line because the ben-
amendments update the fees to reflect the                posed fee for entering into a direct-debit     efit of the installment agreement program
actual costs of the services provided and                agreement was $52 to encourage this type       to the taxpayer does not change depend-
create an exception to the increased fee for             of payment.                                    ing on how the installment agreement is
entering into installment agreements for                     No public hearing on the notice of pro-    requested, the convenience of on-line re-
low-income taxpayers. The amendments                     posed rulemaking was held because no           quests provides ample incentive for this
affect taxpayers who wish to pay their                   one requested to speak. Eight comments         type of application for taxpayers who have
liabilities through installment agreements.              were received. After consideration of          internet access, and taxpayers who do not
                                                         all the comments, this Treasury decision       have internet access could not take advan-
DATES: Effective Date: These regulations                 adopts the proposed regulations with the       tage of the lower fee. The IRS intends
are effective on December 28, 2006.                      following change: the fee for entering into    to consider a cost methodology for install-
   Applicability Date: These regulations                 an installment agreement will remain $43       ment agreement user fees that reflects cost
apply to installment agreements entered                  for low-income taxpayers, that is, taxpay-     differences attributable to various types of
into, restructured, or reinstated on or after            ers whose incomes fall at or below 250%        installment agreements, as well as whether
January 1, 2007.                                         of the dollar criteria established by the      additional exceptions to full cost are war-
                                                         poverty guidelines updated annually in the     ranted.
FOR   FURTHER     INFORMATION                            Federal Register by the U.S. Department
CONTACT: Concerning cost method-                         of Health and Human Services or such


2007–6 I.R.B.                                                               420                                            February 5, 2007
Special Analyses                               §300.0 User fees; in general.                 *****

    It has been determined that this notice    *****                                                                   Kevin M. Brown,
of rulemaking is not a significant regu-          (c) Effective date. This part 300 is ap-               Acting Deputy Commissioner for
latory action as defined in Executive Or-      plicable March 16, 1995, except that the                        Services and Enforcement.
der 12866. Therefore, a regulatory assess-     user fee for processing offers in compro-
ment is not required. It is hereby certi-      mise is applicable November 1, 2003; the      Approved December 21, 2006.
fied that these regulations will not have a    user fee for the special enrollment exam-
                                                                                                                            Eric Solomon,
significant economic impact on a substan-      ination, enrollment, and renewal of en-
                                                                                                                        Assistant Secretary
tial number of small entities. Accordingly,    rollment for enrolled agents is applicable
                                                                                                               of the Treasury (Tax Policy).
a regulatory flexibility analysis is not re-   November 6, 2006; the user fee for enter-
quired. This certification is based on the     ing into installment agreements on or after   (Filed by the Office of the Federal Register on December 27,
                                                                                             2006, 8:45 a.m., and published in the issue of the Federal
information that follows. The economic         January 1, 2007, is applicable January 1,     Register for December 28, 2006, 71 F.R. 78074)
impact of these regulations on any small       2007; and the user fee for restructuring or
entity would result from the entity being      reinstatement of an installment agreement
required to pay a fee prescribed by these      on or after January 1, 2007, is applicable    Section 382.—Limitation
regulations in order to obtain a particular    January 1, 2007.                              on Net Operating Loss
service. The dollar amount of the fee is          Par. 3. Section 300.1 is amended by        Carryforwards and Certain
not, however, substantial enough to have       revising paragraph (b) to read as follows:    Built-In Losses Following
a significant economic impact on any en-                                                     Ownership Change
tity subject to the fee. Pursuant to section   §300.1 Installment agreement fee.
7805(f) of the Internal Revenue Code, the                                                       The adjusted applicable federal long-term rate is
                                               *****
notice of proposed rulemaking preceding                                                      set forth for the month of February 2007. See Rev.
                                                   (b) Fee. The fee for entering into an     Rul. 2007-9, page 422.
this regulation was submitted to the Chief
                                               installment agreement before January 1,
Counsel for Advocacy of the Small Busi-
                                               2007, is $43. The fee for entering into an
ness Administration for comment on its
                                               installment agreement on or after January     Section 412.—Minimum
impact on small business.
                                               1, 2007, is $105, except that:                Funding Standards
    Although the Administrative Proce-
                                                   (1) The fee is $52 when the taxpayer         The adjusted applicable federal short-term, mid-
dures Act prescribes a thirty-day waiting
                                               pays by way of a direct debit from the tax-   term, and long-term rates are set forth for the month
period between the date of publication in
                                               payer’s bank account; and                     of February 2007. See Rev. Rul. 2007-9, page 422.
the Federal Register and the applicability
                                                   (2) Notwithstanding the method of pay-
date, this regulation is being made appli-
                                               ment, the fee is $43 if the taxpayer is a
cable after a shorter period under the au-
                                               low-income taxpayer, that is, an individual   Section 467.—Certain
thority provided by section 7805(b)(1)(B).
                                               who falls at or below 250% of the dollar      Payments for the Use of
                                               criteria established by the poverty guide-    Property or Services
Drafting Information
                                               lines updated annually in the Federal Reg-       The adjusted applicable federal short-term, mid-
    The principal author of these regula-      ister by the U.S. Department of Health and    term, and long-term rates are set forth for the month
tions is William Beard, Office of Associate    Human Services under authority of section     of February 2007. See Rev. Rul. 2007-9, page 422.
Chief Counsel (Procedure and Adminis-          673(2) of the Omnibus Budget Reconcili-
tration), Collection, Bankruptcy and Sum-      ation Act of 1981 (95 Stat. 357, 511), or
                                               such other measure that is adopted by the
                                                                                             Section 468.—Special
monses Division.
                                               Secretary.                                    Rules for Mining and Solid
                  *****                                                                      Waste Reclamation and
                                               *****                                         Closing Costs
Adoption of Amendments to the                     Par. 4. Section 300.2 is amended by
Regulations                                    revising paragraph (b) to read as follows:       The adjusted applicable federal short-term, mid-
                                                                                             term, and long-term rates are set forth for the month
  Accordingly, 26 CFR part 300 is              §300.2 Restructuring or reinstatement of      of February 2007. See Rev. Rul. 2007-9, page 422.
amended as follows:                            installment agreement fee.

PART 300—USER FEES                             *****                                         Section 482.—Allocation
                                                  (b) Fee. The fee for restructuring or      of Income and Deductions
   Paragraph 1. The authority citation for     reinstating an installment agreement be-      Among Taxpayers
part 300 continues to read as follows:         fore January 1, 2007, is $24. The fee for        Federal short-term, mid-term, and long-term rates
   Authority: 31 U.S.C. 9701.                  restructuring or reinstating an installment   are set forth for the month of February 2007. See Rev.
   Par. 2. Section 300.0 is amended by         agreement on or after January 1, 2007, is     Rul. 2007-9, page 422.
revising paragraph (c) to read as follows:     $45.




February 5, 2007                                                  421                                                          2007–6 I.R.B.
Section 483.—Interest on                                 Section 846.—Discounted                                 purposes for February 2007 (the current
Certain Deferred Payments                                Unpaid Losses Defined                                   month). Table 1 contains the short-term,
                                                                                                                 mid-term, and long-term applicable fed-
   The adjusted applicable federal short-term, mid-         The adjusted applicable federal short-term, mid-
                                                                                                                 eral rates (AFR) for the current month
term, and long-term rates are set forth for the month    term, and long-term rates are set forth for the month
of February 2007. See Rev. Rul. 2007-9, page 422.        of February 2007. See Rev. Rul. 2007-9, page 422.
                                                                                                                 for purposes of section 1274(d) of the
                                                                                                                 Internal Revenue Code. Table 2 contains
                                                                                                                 the short-term, mid-term, and long-term
Section 642.—Special                                     Section 1274.—Determi-                                  adjusted applicable federal rates (adjusted
Rules for Credits and                                    nation of Issue Price in the                            AFR) for the current month for purposes
Deductions                                               Case of Certain Debt Instru-                            of section 1288(b). Table 3 sets forth the
                                                         ments Issued for Property                               adjusted federal long-term rate and the
   Federal short-term, mid-term, and long-term rates
are set forth for the month of February 2007. See Rev.   (Also Sections 42, 280G, 382, 412, 467, 468, 482,
                                                                                                                 long-term tax-exempt rate described in
Rul. 2007-9, page 422.                                   483, 642, 807, 846, 1288, 7520, 7872.)                  section 382(f). Table 4 contains the ap-
                                                                                                                 propriate percentages for determining the
                                                            Federal rates; adjusted federal rates;               low-income housing credit described in
Section 807.—Rules for                                   adjusted federal long-term rate and the                 section 42(b)(2) for buildings placed in
Certain Reserves                                         long-term exempt rate. For purposes of                  service during the current month. Finally,
   The adjusted applicable federal short-term, mid-
                                                         sections 382, 642, 1274, 1288, and other                Table 5 contains the federal rate for deter-
term, and long-term rates are set forth for the month    sections of the Code, tables set forth the              mining the present value of an annuity, an
of February 2007. See Rev. Rul. 2007-9, page 422.        rates for February 2007.                                interest for life or for a term of years, or
                                                                                                                 a remainder or a reversionary interest for
                                                         Rev. Rul. 2007–9                                        purposes of section 7520.
                                                            This revenue ruling provides various
                                                         prescribed rates for federal income tax


                                                               REV. RUL. 2007–9 TABLE 1
                                                  Applicable Federal Rates (AFR) for February 2007
                                                                   Period for Compounding
                              Annual                               Semiannual                          Quarterly                       Monthly
    Short-term
        AFR                   4.93%                                4.87%                               4.84%                           4.82%
   110% AFR                   5.43%                                5.36%                               5.32%                           5.30%
   120% AFR                   5.93%                                5.84%                               5.80%                           5.77%
   130% AFR                   6.43%                                6.33%                               6.28%                           6.25%

      Mid-term
        AFR                   4.69%                                4.64%                               4.61%                           4.60%
   110% AFR                   5.17%                                5.10%                               5.07%                           5.05%
   120% AFR                   5.65%                                5.57%                               5.53%                           5.51%
   130% AFR                   6.12%                                6.03%                               5.99%                           5.96%
   150% AFR                   7.08%                                6.96%                               6.90%                           6.86%
   175% AFR                   8.28%                                8.12%                               8.04%                           7.99%

    Long-term
        AFR                   4.86%                                4.80%                               4.77%                           4.75%
   110% AFR                   5.35%                                5.28%                               5.25%                           5.22%
   120% AFR                   5.84%                                5.76%                               5.72%                           5.69%
   130% AFR                   6.34%                                6.24%                               6.19%                           6.16%




2007–6 I.R.B.                                                                   422                                                 February 5, 2007
                                                             REV. RUL. 2007–9 TABLE 2
                                                            Adjusted AFR for February 2007
                                                                Period for Compounding
                                           Annual                      Semiannual                              Quarterly                Monthly
 Short-term adjusted                       3.46%                       3.43%                                   3.42%                    3.41%
 AFR
 Mid-term adjusted AFR                     3.58%                           3.55%                               3.53%                    3.52%
 Long-term adjusted                        4.07%                           4.03%                               4.01%                    4.00%
 AFR



                                                  REV. RUL. 2007–9 TABLE 3
                                           Rates Under Section 382 for February 2007
 Adjusted federal long-term rate for the current month                                                                                  4.07%
 Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
 federal long-term rates for the current month and the prior two months.)                                                               4.14%



                                                REV. RUL. 2007–9 TABLE 4
                               Appropriate Percentages Under Section 42(b)(2) for February 2007
 Appropriate percentage for the 70% present value low-income housing credit                                                             8.11%
 Appropriate percentage for the 30% present value low-income housing credit                                                             3.48%



                                                  REV. RUL. 2007–9 TABLE 5
                                           Rate Under Section 7520 for February 2007
 Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
 or a remainder or reversionary interest                                                                                                5.6%


                                                        Section 1561.—Limitations                                AGENCY: Internal Revenue Service
                                                        on Certain Multiple Tax                                  (IRS), Treasury.
Section 1288.—Treatment                                 Benefits in the Case
of Original Issue Discount                              of Certain Controlled                                    ACTION: Final and temporary regula-
on Tax-Exempt Obligations                               Corporations                                             tions.

   The adjusted applicable federal short-term, mid-     26 CFR 1.1561–1T: General rules regarding certain        SUMMARY: This document contains tem-
term, and long-term rates are set forth for the month   tax benefits available to the component members of a     porary regulations that affect component
of February 2007. See Rev. Rul. 2007-9, page 422.       controlled group of corporations (temporary).            members of controlled groups of corpora-
                                                                                                                 tions and consolidated groups filing life-
                                                        T.D. 9304                                                nonlife Federal income tax returns. They
                                                                                                                 provide guidance regarding the apportion-
                                                        DEPARTMENT OF                                            ment of tax benefit items and the amount
                                                        THE TREASURY                                             and type of information these members
                                                        Internal Revenue Service                                 are required to submit with their returns.
                                                        26 CFR Parts 1 and 5                                     The text of the temporary regulations also
                                                                                                                 serves as the text of the proposed regu-
                                                        Guidance Necessary to                                    lations (REG–161919–05) set forth in the
                                                        Facilitate Business Electronic                           notice of proposed rulemaking on this sub-
                                                                                                                 ject in this issue of the Bulletin.
                                                        Filing Under Section 1561



February 5, 2007                                                               423                                                       2007–6 I.R.B.
DATES: Effective Date: These regulations      requisite information, whether or not it       each member of a controlled group to
are effective on December 22, 2006.           consents to adopt an apportionment plan,       attach to its return, for each year fol-
   Applicability Date: For dates of ap-       on a form (i.e., Schedule O or any suc-        lowing the adoption of the plan, a copy
plicability,   see §§1.1502–43T(e)(1),        cessor to that form) to be filed with each     of its signed consent to such plan. As
1.1502–47T(t)(1),        1.1561–1T(d)(1),     member’s Federal income tax return for         explained in T.D. 9264, that signature
1.1561–2T(f)(1), 1.1561–3T(d)(1) and          each taxable year for which it is a compo-     requirement presents an impediment to
1.1563–1T(e)(1). The applicability of         nent member of a controlled group.             e-filing. These temporary regulations
these regulations will expire on December                                                    eliminate this impediment and provide
21, 2009.                                     Explanation of Provisions                      that the form will be the mechanism by
                                                                                             which such member adopts (and also
FOR       FURTHER         INFORMATION         1. Revision of the regulations under           amend or terminate) such plan. Thus,
CONTACT: Grid Glyer, (202) 622–7930           section 1561.                                  each member of the group (that is not
(not a toll-free number).                                                                    a member of a consolidated group) will
                                                  The IRS and Treasury Department are        file this form to consent to adopt a plan,
SUPPLEMENTARY INFORMATION:
                                              publishing temporary regulations under         even if it is a wholly-owned subsidiary of
Background                                    section 1561 for several reasons. First,       the group. Compare §1.1561–3(b)(2)(i)
                                              the current regulations are outdated in that   (a wholly-owned subsidiary of a con-
    Section 1561(a) provides that the com-    they refer to tax benefit items that are no    trolled group was not required to consent
ponent members of a controlled group of       longer listed in section 1561(a). Except       to adopt a plan because it was deemed to
corporations (as those terms are defined      as provided below, to minimize this issue      consent if all the component members of
in section 1563) are limited to using the     in the future, the temporary regulations       that group that are not wholly owned sub-
amounts of certain tax benefit items de-      refer generically to the tax benefit items     sidiaries consent). Thus, these temporary
scribed therein in the same manner as if      listed in section 1561(a) rather than refer    regulations eliminate the deemed consent
they were one corporation. Although sec-      specifically to those items by listing and     provision of §1.1561–3(b)(2)(i).
tion 1561(a) provides that these amounts      describing each one.
shall generally be divided equally among          Second, the current regulations do not     2. Regulation authorizing the component
those members, it also provides that if       provide guidance to taxpayers regarding        members of a controlled group to
those members consent to adopt an appor-      how to allocate the amounts of the section     apportion the accumulated earnings
tionment plan, then, except as provided       1561(a) tax benefit items among the com-       credit unequally if they have an
below, they will be permitted to allocate     ponent members of a controlled group of        apportionment plan in effect.
these amounts among themselves un-            corporations which have an apportionment
equally. Section 1.1561–3(b) provides the     plan in effect. As a result, the IRS often        Section 1561(a) provides that the com-
procedural format by which those mem-         can not determine whether taxpayers have       ponent members of a controlled group
bers may adopt an apportionment plan.         correctly allocated these items. Thus, the     of corporations must divide the amount
    On May 26, 2006, the IRS and Trea-        temporary regulations refer to a new form      of the accumulated earnings credit (the
sury Department released temporary regu-      (i.e., Schedule O or any successor to that     credit) equally unless the Secretary pre-
lations (T.D. 9264, 2006–26 I.R.B. 1150),     form) on which such members will provide       scribes regulations permitting an unequal
which, among other things, eliminated         information about these items.                 allocation of that amount.       However,
regulatory impediments to the electronic          Except as provided below, each com-        §1.1561–2(c) requires that they divide that
filing (e-filing) of many statements that     ponent member of a controlled group must       amount equally. The IRS and Treasury
corporate taxpayers were previously re-       file this form every year with its Federal     Department have concluded that they no
quired to include on or with their Federal    income tax return whether or not: (1) an       longer will require such members to divide
income tax returns. As noted in section       apportionment plan is in effect, or (2) any    that amount equally. Therefore, these tem-
2.C. of the preamble to those regulations,    change is made to the group’s apportion-       porary regulations now provide that the
§1.1561–3(b) presents an impediment to        ment of its section 1561(a) tax benefit        component members of a controlled group
the e-filing of that information which each   items from the previous year. However,         may choose to allocate the amount of that
member of a controlled group is required      whenever one or more of the component          credit unequally among themselves if they
to provide with its Federal income tax        members of a controlled group of corpora-      have an apportionment plan in effect.
return when it makes the consent provided     tions are also members of a consolidated       3. Revisions to §1.1563–1.
therein. These temporary regulations re-      group, the parent of such consolidated
move that impediment and also clarify         group shall file one form on behalf of all     A. Reformatting the regulation.
the amount and type of information that       of its members. That form shall contain
each member of such group is required         all the information required for each such        For the sake of consistency, the IRS
to submit with its return, whether or not     member.                                        and Treasury Department are reformatting
the group chooses to apportion unequally          Finally, §1.1561–3(b) presents an im-      §1.1563–1 to conform it to current format-
the specified tax benefit items among its     pediment to e-filing where such members        ting conventions. It is not intended that
members. Thus, these regulations require      have consented to the adoption of an ap-       any such reformatting constitute a substan-
each member of such group to provide the      portionment plan. That section requires        tive change. Moreover, the changes de-


2007–6 I.R.B.                                                    424                                            February 5, 2007
scribed in this paragraph of the pream-         amendment to section 1563(a)(2) is effec-      C corporation that it must now recapture.
ble are only limited to formatting. Thus,       tive for tax years beginning after October     See, e.g., sections 167(g), 460(b), 1363(d)
for example, except for the changes de-         22, 2004.                                      and 1371(d)(2). However, these recapture
scribed below, no examples in §1.1563–1                                                        taxes are not being imposed on an S cor-
have been updated to reflect current law.       C. Clarifying that an S corporation is         poration’s own income.
Such changes are beyond the scope of this       treated as an excluded member of a                Since an S corporation is not currently
project and will be addressed in a separate     controlled group under current law.            subject to any tax to which either the tax
regulation project.                                                                            bracket amounts of section 11(b) apply, or
                                                    Section 1.1561–1(c)(1) provides that,
                                                                                               any other tax benefit item to which section
B. Updating the definition of a                 for purposes of sections 1561 and 1563,
                                                                                               1561(a) applies, it is appropriate to treat
brother-sister controlled group.                the term corporation includes an electing
                                                                                               that corporation as an excluded member of
                                                small business corporation and refers to
                                                                                               a controlled group.
    Section 900 of the American Jobs Cre-       §1.1563–1(b)(2)(ii)(c) for the treatment of
                                                                                                  These temporary regulations clarify
ation Act of 2004, Pub. L. 108–357, 118         such a corporation as an excluded mem-
                                                                                               that only to the extent that a particular
Stat. 1418 (the 2004 amendment), revised        ber of a controlled group of corporations.
                                                                                               tax (and thus a particular tax benefit item
the definition of a brother-sister controlled   Specifically, §1.1563–1(b)(2)(ii)(c) pro-
                                                                                               to which section 1561(a)) applies to an
group in section 1563(a)(2). Prior to           vides that only an electing small business
                                                                                               S corporation is that type of corporation
this 2004 amendment, commonly owned             corporation which is not subject to the tax
                                                                                               treated as a component member of the
corporations qualified as a brother-sister      imposed by section 1378 will be treated as
                                                                                               group. This general reference to a tax that
controlled group if five or fewer persons       an excluded member.
                                                                                               applies to an S corporation is intended to
who are individuals, estates, or trusts own         Section 1378, as in effect when
                                                                                               avoid the issue in §1.1563–1(b)(2)(ii)(c)
(within the meaning of section 1563(d)(2))      §1.1563–1(b)(2)(ii)(c) was published (old
                                                                                               of referring to a particular Code section
stock possessing: (A) at least 80 percent       section 1378), taxed the income of an
                                                                                               that later became obsolete (i.e., old section
of the total combined voting power of all       electing small business corporation if its
                                                                                               1378).
classes of stock entitled to vote or at least   income exceeded a certain threshold. That
80 percent of the total value of shares of      income was taxed at the lower of the rate      D. Clarifying that the life insurance
all classes of stock of each corporation        determined under section 1201(a) or sec-       company provisions do not apply to the
(the 80 percent requirement) and (B) more       tion 11. Thus, when such corporation was       controlled group rules where that type of
than 50 percent of the total combined vot-      subject to tax under section 11, it was        company is a member (whether eligible or
ing power of all classes of stock entitled to   appropriate to treat such corporation as a     ineligible) of a life-nonlife affiliated group
vote or more than 50 percent of the total       component member of a controlled group         for the consolidated return year for which
value of shares of all classes of stock of      for purposes of allocating its section 11      a section 1504(c)(2) election is effective.
each corporation, taking into account the       tax benefit amount.
stock ownership of each such person only            Old section 1378 was ultimately re-            The current regulations under section
to the extent such stock ownership is iden-     pealed as part of the Tax Reform Act of        1563 describe the treatment of life in-
tical with respect to each such corporation     1986 (Pub. L. 99–514, 100 Stat. 2085).         surance companies under the controlled
(the more-than-50 percent requirement).         Thus, §1.1563–1(b)(2)(ii)(c) became ob-        group rules. Section 1.1563–1(a)(5) pro-
    The 2004 amendment eliminated the           solete.                                        vides that two or more life insurance
80 percent requirement from the section             Under current law, an S corporation (the   companies that are members of a con-
1563(a)(2) definition of a brother-sister       successor to an electing small business cor-   trolled group are treated as a distinct
controlled group. As a result, for pur-         poration) is generally subject to tax at the   controlled group of corporations com-
poses of section 1561, corporations are         entity level under only two provisions: (1)    posed only of life insurance companies.
component members of a brother-sister           section 1374, which imposes tax on certain     Section 1.1563–1(b)(2)(ii)(e) defines a
controlled group if just the more-than-50       recognized built-in gain, and (2) section      life insurance company as an excluded
percent requirement is satisfied. How-          1375, which imposes tax on passive invest-     member unless that type of company is
ever, for all other provisions of law that      ment income under certain circumstances.       a member of a separate life insurance
incorporate the section 1563(a) definition      However, in both cases, the amount of          company controlled group described in
of a brother-sister controlled group, both      tax imposed on an S corporation is com-        §1.1563–1(a)(5).
the more-than-50 percent requirement and        puted by applying the highest rate of tax          Section 1504(c)(2) provides that if an
the 80 percent requirement must be satis-       specified in section 11(b). See sections       affiliated group includes any domestic life
fied in order to qualify as a brother-sister    1374(b)(1) and 1375(a). Thus, under ei-        insurance companies that would otherwise
controlled group. See section 1563(f)(5).       ther of these provisions, no portion of any    not be treated as includible members of the
Therefore, these temporary regulations          of the lower tax bracket amounts of section    group, then, except as provided therein,
reflect this change.                            11(b) could be allocated to such a corpora-    the common parent of such group may
    These temporary regulations apply to        tion.                                          elect (pursuant to regulations prescribed
tax years beginning on or after the date            In other instances, an S corporation       by the Secretary) to treat all such compa-
they are published in the Federal Regis-        is partially liable for taxes that were im-    nies as includible corporations. Paragraph
ter. However, the above described 2004          posed on the income of its predecessor



February 5, 2007                                                   425                                                   2007–6 I.R.B.
(f)(6) of §1.1502–47 implements section        face of its return identifying it as a life-    PART 1—INCOME TAXES
1504(c)(2) as it relates to section 1563.      nonlife return. This requirement presents
    These temporary regulations provide        an impediment to e-filing. These tempo-            Paragraph 1. The authority citation for
that if one or more life insurance com-        rary regulations remove the impediment          part 1 is amended by adding entries in nu-
panies are members (whether eligible or        by deleting the requirement to provide that     merical order to read, in part, as follows:
ineligible) of an affiliated group for the     notation.                                          Authority: 26 U.S.C. 7805 * * *
consolidated return year for which a sec-                                                         Section 1.1502–43T also issued under
tion 1504(c)(2) election is effective, then    5. Deleting obsolete regulations.               26 U.S.C. 1502. * * *
those members are not treated as either                                                           Section 1.1561–2T also issued under
                                                  As part of this Treasury decision, the       26 U.S.C. 1561. * * *
excluded members of the controlled group
                                               IRS and Treasury Department are deleting
or as members of a separate life insurance
                                               numerous obsolete regulations. This effort      §1.108–1 [Removed]
controlled group. See §1.1502–47(f)(6).
                                               is part of an ongoing process to remove
Rather, any eligible members are treated                                                          Par. 2. Section 1.108–1 is removed and
                                               those types of regulations from the Code of
as members of the consolidated group, and                                                      reserved.
                                               Federal Regulations (the CFR). Therefore,
any ineligible members are treated, along
                                               the following regulations are deleted from
with the eligible and includible members                                                       §1.342–1 [Removed]
                                               the CFR: §§1.342–1, 1.371–1 through
of the consolidated group, as members of
                                               1.371–2, 1.372–1, 1.374–1 through                  Par. 3. Section 1.342–1 is removed.
a life-nonlife controlled group.
                                               1.374–4, 1.1018–1, 1.1562–0 through
    These temporary regulations apply
                                               1.1562–7, 1.1564–1 and 5.1561–1.                §1.371–1 [Removed]
to tax years beginning on or after the
date they are published in the Federal         Special Analyses                                   Par. 4. Section 1.371–1 is removed.
Register. However, paragraph (f)(6) of
§1.1502–47 applies to tax years of con-            It has been determined that this Trea-      §1.371–2 [Removed]
solidated groups beginning on or after         sury decision is not a significant regula-
January 1, 1982. See T.D. 7877, 1983–1                                                            Par. 5. Section 1.371–2 is removed.
                                               tory action as defined in Executive Order
C.B. 207.                                      12866. Therefore, a regulatory assessment       §1.372–1 [Removed]
                                               is not required. It has also been deter-
4. Revisions to two consolidated return
                                               mined that section 553(b) of the Admin-            Par. 6. Section 1.372–1 is removed.
regulations.
                                               istrative Procedure Act (5 U.S.C. chapter
                                               5) does not apply to these regulations. For     §1.374–1 [Removed]
A. §1.1502–43.
                                               the applicability of the Regulatory Flexi-
                                                                                                  Par. 7. Section 1.374–1 is removed.
   Section 1.1502–43 provides rules for        bility Act (5 U.S.C. chapter 6), refer to the
calculating the consolidated accumulated       Special Analyses section of the preamble        §1.374–2 [Removed]
earnings tax. Section 1.1502–43(d) is cur-     to the cross-reference notice of proposed
rently reserved. These temporary regula-       rulemaking published in this issue of the          Par. 8. Section 1.374–2 is removed.
tions clarify that if the consolidated group   Bulletin. Pursuant to section 7805(f) of the
is part of a controlled group then section     Code, these temporary regulations will be       §1.374–3 [Removed]
1561 applies in determining the amount of      submitted to the Chief Counsel for Advo-
                                                                                                  Par. 9. Section 1.374–3 is removed.
that credit.                                   cacy of the Small Business Administration
   These temporary regulations apply to        for comment on their impact on small busi-      §1.374–4 [Removed]
consolidated return years for which a re-      ness.
turn is due (without extensions) after the                                                        Par. 10. Section 1.374–4 is removed.
date it is published in the Federal Regis-     Drafting Information
ter. However, pursuant to the Tax Reform                                                       §1.924(a)–1T [Amended]
                                                  The principal author of these regula-
Act of 1969, Pub. L. 91–172, 78 Stat. 116,
                                               tions is Grid Glyer, Office of Associate           Par. 10A. For each entry in the “Lo-
the accumulated earnings credit became a
                                               Chief Counsel (Corporate). However,             cation” column of the following table, re-
full tax benefit item under section 1561(a)
                                               other personnel from the IRS and Treasury       move the language in the “Remove” col-
for tax years beginning after December 31,
                                               Department participated in their develop-       umn and add the language in the “Add”
1974.
                                               ment.                                           column in its place:
B. §1.1502–47.                                                   *****
    Section 1.1502–47 provides rules for a     Adoption of Amendments to the
life-nonlife consolidated group to calcu-      Regulations
late its consolidated taxable income. Para-
graph (s) of §1.1502–47 requires a consol-       Accordingly, 26 CFR parts 1 and 5 are
idated group to provide a notation on the      amended as follows:




2007–6 I.R.B.                                                      426                                            February 5, 2007
 Location                                      Remove                                         Add
 The fifth sentence of                         a statement                                    completing the form (i.e., Schedule O or
 §1.924(a)–1T(j)(2)(i)                                                                        any successor to that form)
 The fifth sentence of                         §1.1561–3(b)                                   §1.1561–3T
 §1.924(a)–1T(j)(2)(i)
 The sixth sentence of                         §1.1561–3(c)                                   §1.1561–3T(a)
 §1.924(a)–1T(j)(2)(i)

§1.1018–1 [Removed]                            §1.1502–47 Consolidated returns by                1. Removing and reserving the entry for
                                               life-nonlife groups.                           §1.1502–95(e)(8).
   Par. 11. Section 1.1018–1 is removed.                                                         2. Removing and reserving the entry for
   Par. 12. Section 1.1502–43 is amended       *****                                          §1.1502–95(f).
by revising paragraph (d) and adding para-        (s) [Reserved]. For further guidance,          3.       Reserving an entry for
graph (e) to read as follows:                  see §1.1502–47T(s).                            §1.1502–95(g).
                                                  (t) [Reserved]. For further guidance,          4. Adding entries for §1.1502–95T.
§1.1502–43 Consolidated accumulated            see §1.1502–47T(t)(1).                            The additions read as follows:
earnings tax.                                     Par.    15.   Section 1.1502–47T is
                                               amended by revising paragraph (s) and          §1.1502–90 Table of contents.
*****                                          adding paragraph (t) to read as follows:
   (d) [Reserved]. For further guidance,                                                      *****
see §1.1502–43T(d).                            §1.1502–47T Consolidated returns by
   (e) [Reserved]. For further guidance,       life-nonlife groups (temporary).               §1.1502–95 Rules on ceasing to be a
see §1.1502–43T(e)(1).                                                                        member of a consolidated group (or loss
   Par. 13. Section 1.1502–43T is added        *****                                          subgroup).
to read as follows:                                (s) Filing requirements. Nonlife con-
                                               solidated taxable income or loss under         *****
§1.1502–43T Consolidated accumulated           paragraph (h) of §1.1502–47 shall be             (g) [Reserved]
earnings tax (temporary).                      determined on a separate Form 1120 or
                                                                                              §1.1502–95T Rules on ceasing to be a
                                               1120–PC, and consolidated partial LICTI
                                                                                              member of a consolidated group (or loss
    (a) through (c) [Reserved]. For further    under paragraph (j) of §1.1502–47 shall be
                                                                                              subgroup) (temporary).
guidance, see §1.1502–43(a) through (c).       determined on a separate Form 1120–L.
    (d) Consolidated accumulated earnings      The consolidated return shall be made on a        (a) through (e)(7) [Reserved]
credit— (1) In general. [Reserved]             separate Form 1120, 1120–PC, or 1120–L            (e)(8) Reporting requirements.
    (2) Special rule if consolidated group     filed by the common parent (if the group          (i) Common Parent.
part of controlled group. If a consolidated    includes a life company), which shows the         (ii) Former Member.
group is treated as a component member of      set-offs under paragraphs (g), (m), and (n)       (iii) Exception.
a controlled group, or if each member of       of §1.1502–47 and clearly indicates on the        (f) Filing the election to apportion the
a consolidated group is treated as a com-      face of the return that it is a life-nonlife   section 382 limitation and net unrealized
ponent member of a controlled group, see       consolidated return (if the group includes     built-in gain.
section 1561 for determining the portion of    a life company). See also §1.1502–75(j),          (1) Form of the election to apportion.
the accumulated earnings credit to be allo-    relating to statements and schedules for          (i) Statement.
cated to such group or to such members.        subsidiaries.                                     (ii) Agreement.
    (e) Effective date— (1) Applicability          (t) Effective date— (1) Applicability         (2) Signing the agreement.
date. This section applies to any consoli-     date. Paragraph (s) of this section ap-           (3) Filing of the election.
dated Federal income tax return due (with-     plies to any consolidated Federal income          (i) Filing by the common parent.
out extensions) after December 22, 2006.       tax return due (without extensions) after         (ii) Filing by the former member.
However, a consolidated group may apply        December 22, 2006. However, a consol-             (4) Revocation of election.
this section to any consolidated Federal in-   idated group may apply paragraph (s) of           (g) Effective date.
come tax return filed on or after December     this section to any consolidated Federal          (1) Applicability date.
22, 2006.                                      income tax return filed on or after Decem-        (2) Expiration date.
    (2) Expiration date. The applicability     ber 22, 2006.
of this section will expire on December 21,        (2) Expiration date. The applicability     §1.1561–0 [Removed]
2009.                                          of paragraph (s) of this section will expire
    Par. 14. Section 1.1502–47 is amended      on December 21, 2009.                             Par. 17. Section 1.1561–0 is removed.
by revising paragraph (s) and adding para-         Par. 16. Section 1.1502–90 is amended
graph (t) to read as follows:                  by:


February 5, 2007                                                  427                                                 2007–6 I.R.B.
§1.1561–1 [Removed]                               year beginning on or after December 22,       component member of the same controlled
                                                  2006. However, taxpayers may apply this       group of corporations on a December 31,
   Par. 18. Section 1.1561–1 is removed.          section to any Federal income tax return      for its taxable year that includes such De-
   Par. 19. Section 1.1561–1T is added to         filed on or after December 22, 2006.          cember 31, such corporation and all other
read as follows:                                      (2) Expiration date. The applicability    component members of such group must
                                                  of this section will expire on December 21,   each file the required form (i.e., Schedule
§1.1561–1T General rules regarding                2009.                                         O or any successor to that form) with each
certain tax benefits available to the                 Par. 20. Section 1.1561–2 is amended      Federal income tax return. Each such cor-
component members of a controlled group           by removing and reserving paragraphs (a)      poration must file that form with its return
of corporations (temporary).                      and (b), revising paragraph (c), removing     whether or not—
                                                  and reserving paragraph (d) and adding            (i) An apportionment plan is in effect;
    (a) In general. (1) Part II (section 1561     paragraph (f) to read as follows:             or
and following) of subchapter B of chap-                                                             (ii) Any change is made in the group’s
ter 6 of the Internal Revenue Code (part          §1.1561–2 Determination of amount of          apportionment of its section 1561(a) tax
II) provides rules to limit the amounts of        tax benefits.                                 benefit items from the previous year.
certain specified tax benefit items of com-                                                         (2) Exception for component members
ponent members of a controlled group of           *****                                         that are members of a consolidated group.
corporations on a December 31, for their             (c) [Reserved]. For further guidance,      If one or more of the component mem-
taxable years which include such Decem-           see §1.1561–2T(c).                            bers of a controlled group of corporations
ber 31. The component members of such a           *****                                         are also members of a consolidated group,
group shall be limited for purposes of sub-          (f) [Reserved]. For further guidance,      the parent of such consolidated group shall
title A of the Code to the amounts of cer-        see §1.1561–2T(f)(1).                         file only one form on behalf of all of such
tain items, set forth in section 1561(a), as         Par. 21. Section 1.1561–2T is added to     members. Such form shall contain the in-
if they were one corporation. Certain other       read as follows:                              formation required for each such member.
tax items also set forth in section 1561(a)                                                         (b) No apportionment plan in effect. If
(e.g., the additional tax imposed by section      §1.1561–2T Determination of amount of         the component members of a controlled
11(b)(1) and the section 55(d)(3) phase out       tax benefits (temporary).                     group of corporations do not have an ap-
of the alternative minimum tax exemption                                                        portionment plan in effect, the amounts of
amount) will be determined by combin-                 (a) through (b) [Reserved]                the section 1561(a) items must be divided
ing the taxable income of all such mem-               (c) Accumulated earnings credit. The      equally among all such members. For pur-
bers and then allocating the amount of such       component members of a controlled group       poses of the preceding sentence, if any
items among such members.                         of corporations may allocate the amount of    component members of a controlled group
    (2) For certain definitions (including        the accumulated earnings credit unequally     of corporations are also members of a con-
the definition of a controlled group of cor-      if they have an apportionment plan in ef-     solidated group, such members will each
porations and a component member) and             fect.                                         be treated as a separate component mem-
special rules for purposes of this part II, see       (d) [Reserved]                            ber of the controlled group.
section 1563.                                         (e) [Reserved]. For further guidance,         (c) Apportionment plan in effect— (1)
    (b) Special rules. (1) For purposes of        see §1.1561–2(e).                             Adoption of plan. The component mem-
this part II, the term corporation includes           (f) Effective date— (1) Applicability     bers of a controlled group of corporations
a small business corporation (as defined in       date. This section applies to any taxable     consent to the adoption (or amendment) of
section 1361). However, for the treatment         year beginning on or after December 22,       an apportionment plan by checking the box
of such a corporation as an excluded mem-         2006. However, taxpayers may apply this       to that effect on such form. For purposes
ber of a controlled group of corporations         section to any Federal income tax return      of this paragraph (c)—
see §1.1563–1(b)(2)(ii)(C).                       filed on or after December 22, 2006.              (i) An apportionment plan that is
    (2) In the case of corporations electing          (2) Expiration date. The applicability    adopted (including a plan that has been
a 52–53-week taxable year under section           of this section will expire on December 21,   amended) continues in effect until it is
441(f)(1), the provisions of this part II shall   2009.                                         terminated;
be applied in accordance with the special                                                           (ii) A consolidated group is treated as
                                                  §1.1561–3 [Removed]
rule of section 441(f)(2)(A). See §1.441–2.                                                     one component member of such group;
    (c) Tax avoidance. The provisions of             Par. 22. Section 1.1561–3 is removed.      and
this part II do not delimit or abrogate any          Par. 23. Section 1.1561–3T is added to         (iii) The members must allocate the
principle of law established by judicial de-      read as follows:                              amounts of the section 1561(a) items be-
cision, or any existing provisions of the                                                       tween or among themselves as described
Code, such as sections 269, 482, and 1551,        §1.1561–3T Allocation of the section          in the plan.
which have the effect of preventing the           1561(a) tax items (temporary).                    (2) Limitation on adopting a plan— (i)
avoidance or evasion of income taxes.                                                           Sufficient statute of limitations period. The
    (d) Effective date— (1) Applicability            (a) Filing of form— (1) In general. For    members may only adopt or amend such
date. This section applies to any taxable         each taxable year that a corporation is a     a plan if there is at least one year remain-


2007–6 I.R.B.                                                        428                                           February 5, 2007
ing in the statutory period (including any     §1.1562–2 [Removed]                              except the common parent corporation, is
extensions thereof) for the assessment of a                                                     owned (directly and with the application
deficiency against every member the tax li-       Par. 26. Section 1.1562–2 is removed.         of §1.1563–3(b)(1), relating to options) by
ability of which would be increased by the                                                      one or more of the other corporations; and
adoption of such a plan.                       §1.1562–3 [Removed]                                 (B) The common parent corporation
    (ii) Insufficient statute of limitations      Par. 27. Section 1.1562–3 is removed.         owns (directly and with the application of
period. If any member cannot satisfy the                                                        §1.1563–3(b)(1), relating to options) stock
requirement of paragraph (c)(2)(i) of this     §1.1562–4 [Removed]                              possessing at least 80 percent of the total
section, the members may not adopt or                                                           combined voting power of all classes of
amend such a plan unless the member not           Par. 28. Section 1.1562–4 is removed.         stock entitled to vote or at least 80 percent
satisfying such requirement has entered                                                         of the total value of shares of all classes of
into an agreement with the Internal Rev-       §1.1562–5 [Removed]                              stock of at least one of the other corpora-
enue Service to extend the statute of limi-                                                     tions, excluding, in computing such voting
tations for the limited purpose of assessing      Par. 29. Section 1.1562–5 is removed.         power or value, stock owned directly by
any deficiency against such member at-         §1.1562–6 [Removed]                              such other corporations.
tributable to the adoption of such a plan.                                                         (ii) The definition of a parent-sub-
    (3) Termination of plan. An apportion-        Par. 30. Section 1.1562–6 is removed.         sidiary controlled group of corporations
ment plan that is in effect for the compo-                                                      may be illustrated by the following exam-
nent members of a controlled group with        §1.1562–7 [Removed]                              ples:
respect to a particular December 31 is ter-                                                          Example 1. P Corporation owns stock possessing
minated with respect to a succeeding De-          Par. 31. Section 1.1562–7 is removed.         80 percent of the total combined voting power of all
                                                                                                classes of stock entitled to vote of S Corporation. P is
cember 31 if—                                                                                   the common parent of a parent-subsidiary controlled
    (i) Each member of such group consents     §1.1563–1 [Removed]
                                                                                                group consisting of member corporations P and S.
to the termination of such a plan for such        Par. 32. Section 1.1563–1 is removed.              Example 2. Assume the same facts as in Exam-
succeeding December 31 by checking the                                                          ple 1. Assume further that S owns stock possessing
                                                  Par. 33. Section 1.1563–1T is amended         80 percent of the total value of shares of all classes
box to that effect on its form;                by revising paragraphs (a), (b), (c)(1),         of stock of T Corporation. P is the common parent
    (ii) The controlled group ceases to re-    (c)(2)(iv), (d) and (e) to read as follows:      of a parent-subsidiary controlled group consisting of
main in existence (within the meaning of                                                        member corporations P, S, and T. The result would be
section 1563(a)) during the calendar year      §1.1563–1T Definition of controlled group        the same if P, rather than S, owned the T stock.
ending on such succeeding December 31;                                                               Example 3. L Corporation owns 80 percent of the
                                               of corporations and component members
    (iii) Any corporation which was a com-                                                      only class of stock of M Corporation and M, in turn,
                                               (temporary).                                     owns 40 percent of the only class of stock of O Cor-
ponent member of such group on the par-                                                         poration. L also owns 80 percent of the only class of
ticular December 31 is not a component             (a) Controlled group of corporations—        stock of N Corporation and N, in turn, owns 40 per-
member of such group on such succeeding        (1) In general. For purposes of sections         cent of the only class of stock of O. L is the common
December 31; or                                1561 through 1563, the term controlled           parent of a parent-subsidiary controlled group con-
    (iv) Any corporation which was not a       group of corporations means any group            sisting of member corporations L, M, N, and O.
                                                                                                     Example 4. X Corporation owns 75 percent of
component member of such group on the          of corporations which is either a parent-        the only class of stock of Y and Z Corporations;
particular December 31 is a component          subsidiary controlled group (as defined in       Y owns all the remaining stock of Z; and Z owns
member of such group on such succeeding        paragraph (a)(2) of this section), a brother-    all the remaining stock of Y. Since intercompany
December 31.                                   sister controlled group (as defined in para-     stockholdings are excluded (that is, are not treated
    (d) Effective date— (1) Applicability      graph (a)(3)(i) of this section), a combined     as outstanding) for purposes of determining whether
                                                                                                X owns stock possessing at least 80 percent of the
date. This section applies to any taxable      group (as defined in paragraph (a)(4) of         voting power or value of at least one of the other
year beginning on or after December 22,        this section), or a life insurance controlled    corporations, X is treated as the owner of stock pos-
2006. However, taxpayers may apply this        group (as defined in paragraph (a)(5) of         sessing 100 percent of the voting power and value of
section to any Federal income tax return       this section). For the exclusion of certain      Y and of Z for purposes of paragraph (a)(2)(i)(B) of
filed on or after December 22, 2006.           stock for purposes of applying the defini-       this section. Also, stock possessing 100 percent of
                                                                                                the voting power and value of Y and Z is owned by
    (2) Expiration date. The applicability     tions contained in this paragraph, see sec-      the other corporations in the group within the mean-
of this section will expire on December 21,    tion 1563(c) and §1.1563–2.                      ing of paragraph (a)(2)(i)(A) of this section. (X and
2009.                                              (2) Parent-subsidiary controlled group.      Y together own stock possessing 100 percent of the
                                               (i) The term parent-subsidiary controlled        voting power and value of Z, and X and Z together
§1.1562–0 [Removed]                            group means one or more chains of corpo-         own stock possessing 100 percent of the voting
                                                                                                power and value of Y.) Therefore, X is the common
                                               rations connected through stock ownership        parent of a parent-subsidiary controlled group of
   Par. 24. Section 1.1562–0 is removed.
                                               with a common parent corporation if—             corporations consisting of member corporations X,
§1.1562–1 [Removed]                                (A) Stock possessing at least 80 percent     Y, and Z.
                                               of the total combined voting power of all            (3) Brother-sister controlled group—
   Par. 25. Section 1.1562–1 is removed.       classes of stock entitled to vote or at least    (i) In general. The term brother-sister
                                               80 percent of the total value of shares of all   controlled group means two or more cor-
                                               classes of stock of each of the corporations,    porations if the same five or fewer persons


February 5, 2007                                                   429                                                          2007–6 I.R.B.
who are individuals, estates, or trusts own                                             means two or more corporations if the                     each such corporation (the more-than-50
(directly and with the application of the                                               same five or fewer persons who are indi-                  percent identical ownership requirement);
rules contained in §1.1563–3(b)) stock                                                  viduals, estates, or trusts own (directly and             and
possessing more than 50 percent of the                                                  with the application of the rules contained                  (C) The five or fewer persons whose
total combined voting power of all classes                                              in §1.1563–3(b)) stock possessing—                        stock ownership is considered for pur-
of stock entitled to vote or more than 50                                                   (A) At least 80 percent of the total com-             poses of the 80 percent requirement must
percent of the total value of shares of all                                             bined voting power of all classes of stock                be the same persons whose stock own-
classes of stock of each corporation, tak-                                              entitled to vote or at least 80 percent of                ership is considered for purposes of the
ing into account the stock ownership of                                                 the total value of shares of all classes of               more-than-50 percent identical ownership
each such person only to the extent such                                                stock of each corporation (the 80 percent                 requirement.
stock ownership is identical with respect                                               requirement);                                                (iii) Examples. The principles of para-
to each such corporation.                                                                   (B) More than 50 percent of the to-                   graph (a)(3)(ii) of this section may be il-
   (ii) Additional stock ownership re-                                                  tal combined voting power of all classes                  lustrated by the following examples:
quirement for purposes of certain other                                                 of stock entitled to vote or more than 50                     Example 1. (i) The outstanding stock of corpo-
provisions of law. For purposes of any                                                  percent of the total value of shares of all               rations P, Q, R, S, and T, which have only one class
                                                                                                                                                  of stock outstanding is owned by the following unre-
provision of law (other than sections 1561                                              classes of stock of each corporation, tak-                lated individuals:
through 1563) that incorporates the section                                             ing into account the stock ownership of
1563(a) definition of a controlled group,                                               each such person only to the extent such
the term brother-sister controlled group                                                stock ownership is identical with respect to


                                                                                                                               CORPORATIONS
                      Individuals                                         P                      Q                R                 S               T          Identical ownership
 A. . . . . . . . . . . . . . . . . . . . . . . . . . . . .              55%                    51%              55%               55%             55%         51%
 B.............................                                          45%                    49%                                                            (45% in P & Q)
 C.............................                                                                                  45%
 D. . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                        45%
 E.............................                                                                                                                    45%
 Total . . . . . . . . . . . . . . . . . . . . . . . . . .             100%                    100%             100%              100%            100%


    (ii) Corporations P and Q are members of a                                          80 percent of the stock of each of those corporations         Example 2. (i) The outstanding stock of corpo-
brother-sister controlled group of corporations. Al-                                    is not owned by the same 5 or fewer persons whose         rations U and V, which have only one class of stock
though the more-than-50 percent identical ownership                                     stock ownership is considered for purposes of the         outstanding, is owned by the following unrelated in-
requirement is met for all 5 corporations, corpora-                                     more-than-50 percent identical ownership require-         dividuals:
tions R, S, and T are not members because at least                                      ment.


                                                                                                       Corporations
                                   Individuals                                                   U                     V
 A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          12%                  12%
 B...........................................                                                    12%                  12%
 C...........................................                                                    12%                  12%
 D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          12%                  12%
 E...........................................                                                    13%                  13%
 F...........................................                                                    13%                  13%
 G. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          13%                  13%
 H. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          13%                  13%
 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         100%                   100%


    (ii) Any group of five of the shareholders will own                                 at least 80 percent of the stock of each corporation is   from the definition of stock under section 1563(c).)
more than 50 percent of the stock in each corpora-                                      not owned by the same five or fewer persons.              Unrelated individuals A and B own the following per-
tion, in identical holdings. However, U and V are not                                        Example 3. (i) Corporation X and Y each have         centages of the class of stock entitled to vote (voting)
members of a brother-sister controlled group because                                    two classes of stock outstanding, voting common and       and of the total value of shares of all classes of stock
                                                                                        non-voting common. (None of this stock is excluded        (value) in each of corporations X and Y:


                                                                                                                   Corporations
                                  Individuals                                                           X                                 Y
 A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       100% voting, 60% value.             75% voting, 60% value.
 B..........................................                                                  0% voting, 10% value.             25% voting, 10% value.



2007–6 I.R.B.                                                                                                   430                                                       February 5, 2007
    (ii) No other shareholder of X owns (or is consid-      Z, and also is a member of a brother-sister controlled      share by the corporate charter, by-laws,
ered to own) any stock in Y. X and Y are a brother-         group of corporations consisting of X and Y.                or share certificate. On the other hand, if
sister controlled group of corporations. The group              Example 2. Assume the same facts as in Example          there is any agreement, whether express or
meets the more-than-50 percent identical ownership          1, and further assume that corporation X owns 80 per-
requirement because A and B own more than 50 per-           cent of the total value of shares of all classes of stock
                                                                                                                        implied, that a shareholder will not vote his
cent of the total value of shares of all classes of stock   of corporation T. X, Y, Z, and T are members of the         stock in a corporation, the formal voting
of X and Y in identical holdings. (The group also           same combined group.                                        rights possessed by his stock may be dis-
meets the more-than-50 percent identical ownership              (5) Life insurance controlled group. (i)                regarded in determining the percentage of
requirement because of A’s voting stock ownership.)         The term life insurance controlled group                    the total combined voting power possessed
The group meets the 80 percent requirement because
A and B own at least 80 percent of the total combined
                                                            means two or more life insurance com-                       by the stock owned by other shareholders
voting power of all classes of stock entitled to vote.      panies each of which is a member of a                       in the corporation, if the result is that the
    Example 4. Assume the same facts as in Example          controlled group of corporations described                  corporation becomes a component mem-
3 except that the value of the stock owned by A and         in paragraph (a)(2), (a)(3)(i), or (a)(4) of                ber of a controlled group of corporations.
B is not more than 50 percent of the total value of         this section and to which §1.1502–47(f)(6)                  Moreover, if a shareholder agrees to vote
shares of all classes of stock of each corporation in
identical holdings. X and Y are not a brother-sister
                                                            does not apply. Such insurance companies                    his stock in a corporation in the manner
controlled group of corporations. The group meets           shall be treated as a controlled group of                   specified by another shareholder in the
the more-than-50 percent identical ownership re-            corporations separate from any other cor-                   corporation, the voting rights possessed
quirement because A owns more than 50 percent               porations which are members of a con-                       by the stock owned by the first shareholder
of the total combined voting power of the voting            trolled group described in such paragraph                   may be considered to be possessed by the
stock of each corporation. For purposes of the 80
percent requirement, B’s voting stock in Y cannot
                                                            (a)(2), (a)(3)(i), or (a)(4). For purposes of               stock owned by such other shareholder if
be combined with A’s voting stock in Y since B,             this section, the common parent of the con-                 the result is that the corporation becomes a
who does not own any voting stock in X, is not a            trolled group described in paragraph (a)(2)                 component member of a controlled group
person whose ownership is considered for purposes           of this section shall be referred to as the                 of corporations.
of the more-than-50 percent identical ownership re-         common parent of the life insurance con-                       (b) Component members— (1) In gen-
quirement. Because no other shareholder owns stock
in both X and Y, these other shareholders’ stock
                                                            trolled group.                                              eral.     For purposes of sections 1561
ownership is not counted towards meeting either the             (ii) The following examples illustrate                  through 1563, a corporation is a com-
more-than-50 percent identical ownership require-           the definition of a life insurance controlled               ponent member of a controlled group of
ment or the 80 percent ownership requirement.               group. In these examples, L indicates a life                corporations on a December 31 (and with
   (iv) Special rule if prior law applies.                  company, another letter indicates a non-                    respect to the taxable year which includes
Paragraph (a)(3)(ii) of this section, as                    life company and each corporation uses the                  such December 31) if such corporation—
amended by T.D. 8179, 1988–1 C.B. 122,                      calendar year as its taxable year.                             (i) Is a member of such controlled group
applies to taxable years ending on or after                     Example 1. Since January 1, 1999, corporation           on such December 31 and is not treated
December 31, 1970. See, however, the                        P has owned all the stock of corporations L and Y,          as an excluded member under paragraph
                                                                                                            1
                                                            and L has owned all the stock of corporation X. On
transitional rule in paragraph (d) of this                         1                                                    (b)(2) of this section; or
                                                            January 1, 2005, Y acquired all of the stock of cor-
section.                                                    poration L2. Since L1 and L2 are members of a par-             (ii) Is not a member of such controlled
   (4) Combined group. (i) The term com-                    ent-subsidiary controlled group of corporations, such       group on such December 31 but is treated
bined group means any group of three or                     companies are treated as members of a life insurance        as an additional member under paragraph
more corporations if—                                       controlled group separate from the parent-subsidiary        (b)(3) of this section.
                                                            controlled group consisting of P, X and Y. For pur-
   (A) Each such corporation is a mem-                                                                                     (2) Excluded members. (i) A corpora-
                                                            poses of this section, P is referred to as the common
ber of either a parent-subsidiary controlled                parent of the life insurance controlled group even          tion, which is a member of a controlled
group of corporations or a brother-sister                   though P is not a member of such group.                     group of corporations on the December
controlled group of corporations; and                           Example 2. The facts are the same as in Example         31 included within its taxable year, but
   (B) At least one of such corporations is                 1, except that, beginning with the 2005 tax year, the       was a member of such group for less than
                                                            P affiliated group elected to file a consolidated return
the common parent of a parent-subsidiary                                                                                one-half of the number of days in such tax-
                                                            and P made a section 1504(c)(2) election. Pursuant
controlled group and also is a member of a                  to paragraph (a)(5)(i) of this section, L1 and L2 are       able year which precede such December
brother-sister controlled group.                            not members of a separate life insurance controlled         31, shall be treated as an excluded mem-
   (ii) The definition of a combined group                  group. Instead, P, X, Y, L and L constitute one
                                                                                          1        2                    ber of such group on such December 31.
of corporations may be illustrated by the                   controlled group. See §1.1502–47(f)(6).                        (ii) A corporation which is a member
following examples:                                            (6) Voting power of stock. For pur-                      of a controlled group of corporations on
    Example 1. Smith, an individual, owns stock pos-        poses of this section, and §§1.1563–2                       any December 31 shall be treated as an
sessing 80 percent of the total combined voting power       and 1.1563–3, in determining whether
of all classes of the stock of corporations X and Y. Y,
                                                                                                                        excluded member of such group on such
                                                            the stock owned by a person (or persons)                    date if, for its taxable year including such
in turn, owns stock possessing 80 percent of the total
combined voting power of all classes of the stock of
                                                            possesses a certain percentage of the total                 date, such corporation is—
corporation Z. X, Y, and Z are members of the same          combined voting power of all classes of                        (A) Exempt from taxation under section
combined group since—                                       stock entitled to vote of a corporation,                    501(a) (except a corporation which is sub-
    (i) X, Y, and Z are each members of either a par-       consideration will be given to all the facts
ent-subsidiary or brother-sister controlled group of
                                                                                                                        ject to tax on its unrelated business taxable
                                                            and circumstances of each case. A share of                  income under section 511) or 521 for such
corporations; and
    (ii) Y is the common parent of a parent-subsidiary
                                                            stock will generally be considered as pos-                  taxable year;
controlled group of corporations consisting of Y and        sessing the voting power accorded to such


February 5, 2007                                                                     431                                                         2007–6 I.R.B.
    (B) A foreign corporation not subject to              1964 (the first day of its taxable year) and ending on     was a member of a controlled group of
taxation under section 882(a) for the tax-                December 30, 1964. Under paragraph (b)(3) of this          corporations for one-half (or more) of
able year;                                                section, Y is treated as an additional member of the       the number of days in its taxable year
                                                          group on December 31, 1964, since Y was a mem-
    (C) An S corporation (as defined in sec-              ber of the group for at least one-half of the number of
                                                                                                                     which precede the December 31 falling
tion 1361) for purposes of any tax benefit                days (107 out of 183 days) during the period begin-        within such taxable year. Therefore, the
item described in section 1561(a) to which                ning on July 1, 1964 (the first day of its taxable year)   constructive ownership rules contained in
it is not subject;                                        and ending on December 30, 1964.                           §1.1563–3(b) (to the extent applicable in
    (D) A franchised corporation (as                          Example 2. On January 1, 1964, corporation P           making such determination) must be ap-
                                                          owns all the stock of corporation S, which in turn
defined in section 1563(f)(4) and                         owns all the stock of corporation S–1. On Novem-
                                                                                                                     plied on a day-by-day basis. For example,
§1.1563–4); or                                            ber 1, 1964, P purchases all of the stock of corpora-      if P Corporation owns all the stock of X
    (E) An insurance company subject to                   tion X from the public and sells all of the stock of       Corporation on each day of 1964, and on
taxation under section 801, unless such                   S to the public. Corporation X owns all the stock          December 30, 1964, acquires an option to
insurance company (without regard to this                 of corporation Y during 1964. P, S, S–1, X, and Y          purchase all the stock of Y Corporation (a
                                                          file their returns on the basis of the calendar year.
paragraph (b)(2)(ii)(E)) is a component                   On December 31, 1964, P, X, and Y are members
                                                                                                                     calendar-year taxpayer which has been in
member of a life insurance controlled                     of a parent-subsidiary controlled group of corpora-        existence on each day of 1964), the appli-
group described in paragraph (a)(5)(i) of                 tions; also, corporations S and S–1 are members of a       cation of §1.1563–3(b)(1) on a day-by-day
this section or unless §1.1502–47(f)(6)                   different parent-subsidiary controlled group on such       basis results in Y being a member of the
applies (which treats a life insurance                    date. However, since X and Y have been members             brother-sister controlled group on only
                                                          of the parent-subsidiary controlled group of which
company, for which a section 1504(c)(2)                   P is the common parent for less than one-half the
                                                                                                                     one day of Y’s 1964 year which precedes
election is effective, as a member (whether               number of days during the period January 1 through         December 31, 1964. Accordingly, since Y
eligible or ineligible) of a life-nonlife af-             December 30, 1964, they are not component mem-             is not a member of such group for one-half
filiated group).                                          bers of such group on such date. On the other hand,        or more of the number of days in its 1964
    (3) Additional members. A corporation                 X and Y have been members of a parent-subsidiary           year preceding December 31, 1964, Y is
                                                          controlled group of which X is the common parent
shall be treated as an additional member of               for at least one-half the number of days during the
                                                                                                                     treated as an excluded member of such
a controlled group of corporations on the                 period January 1 through December 30, 1964, and            group on December 31, 1964.
December 31 included within its taxable                   therefore they are component members of such group             (c) Overlapping groups— (1) In gen-
year if it—                                               on December 31, 1964. Also since S and S–1 were            eral. If on a December 31 a corporation is
    (i) Is not a member of such group on                  members of the parent-subsidiary controlled group of       a component member of a controlled group
                                                          which P is the common parent for at least one-half the
such December 31;                                         number of days in the taxable years of each such cor-
                                                                                                                     of corporations by reason of ownership of
    (ii) Is not described, with respect                   poration during the period January 1 through Decem-        stock possessing at least 80 percent of the
to such taxable year, in paragraph                        ber 30, 1964, P, S, and S–1 are component members          total value of shares of all classes of stock
(b)(2)(ii)(A), (B), (C), (D), or (E) of this              of such group on December 31, 1964.                        of the corporation, and if on such Decem-
section; and                                                  Example 3. Throughout 1964, corporation M              ber 31 such corporation is also a compo-
                                                          owns all the stock of corporation F which, in turn,
    (iii) Was a member of such group for                  owns all the stock of corporations L–1, L–2, X,
                                                                                                                     nent member of another controlled group
one-half (or more) of the number of days                  and Y. M is a domestic mutual insurance company            of corporations by reason of ownership of
in such taxable year which precede such                   subject to taxation under section 821, F is a for-         other stock (that is, stock not used to sat-
December 31.                                              eign corporation not engaged in a trade or business        isfy the at-least-80 percent total value test)
    (4) Examples. The provisions of this                  within the United States, L–1 and L–2 are domestic         possessing at least 80 percent of the total
                                                          life insurance companies subject to taxation under
paragraph may be illustrated by the follow-               section 802, and X and Y are domestic corporations
                                                                                                                     combined voting power of all classes of
ing examples:                                             subject to tax under section 11 of the Code. Each          stock of the corporation entitled to vote,
     Example 1. Brown, an individual, owns all of the     corporation uses the calendar year as its taxable year.    then such corporation shall be treated as a
stock of corporations W and X on each day of 1964.        On December 31, 1964, M, F, L–1, L–2, X, and Y             component member only of the controlled
W and X each uses the calendar year as its taxable        are members of a parent-subsidiary controlled group
year. On January 1, 1964, Brown also owns all the
                                                                                                                     group of which it is a component member
                                                          of corporations. However, under paragraph (b)(2)(ii)
stock of corporation Y (a fiscal year corporation with    of this section, M, F, L–1, and L–2 are treated as
                                                                                                                     by reason of the ownership of at least 80
a taxable year beginning on July 1, 1964, and ending      excluded members of the group on December 31,              percent of the total value of its shares.
on June 30, 1965), which stock he sells on October        1964. Thus, on December 31, 1964, the component                (2) Brother-sister controlled groups.
15, 1964. On December 1, 1964, Brown purchases            members of the parent-subsidiary controlled group
all the stock of corporation Z (a fiscal year corpora-    of which M is the common parent include only X and
                                                                                                                     *****
tion with a taxable year beginning on September 1,        Y. Furthermore, since paragraph (b)(2)(ii)(E) of this         (iv) The provisions of this paragraph
1964, and ending on August 31, 1965). On Decem-           section does not result in L–1 and L–2 being treated       (c)(2) may be illustrated by the following
ber 31, 1964, W, X, and Z are members of the same         as excluded members of a life insurance controlled         examples (in which it is assumed that all
controlled group. However, the component members          group, L–1 and L–2 are component members of a life
of the group on such December 31 are W, X, and Y.
                                                                                                                     the individuals are unrelated):
                                                          insurance controlled group on December 31, 1964.
                                                                                                                         Example 1. (i) On each day of 1970 all the out-
Under paragraph (b)(2)(i) of this section, Z is treated
                                                             (5) Application of constructive own-                    standing stock of corporations M, N, and P is held in
as an excluded member of the group on December
31, 1964, since Z was a member of the group for less
                                                          ership rules. For purposes of paragraphs                   the following manner:
than one-half of the number of days (29 out of 121        (b)(2)(i) and (3) of this section, it is nec-
days) during the period beginning on September 1,         essary to determine whether a corporation




2007–6 I.R.B.                                                                     432                                                       February 5, 2007
                                                                                                                             Corporations
                                   Individuals                                                        M                           N          P
 A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                55%                          40%         5%
 B..........................................                                                         40%                          20%        40%
 C..........................................                                                          5%                          40%        55%


    (ii) Since the more-than-50 percent identical own-                                  the application of this paragraph (c)(2), be a compo-        (c)(2)(i) of this section, the Internal Revenue Service
ership requirement of section 1563(a)(2) is met with                                    nent member on December 31, 1970, of overlapping             will determine the group in which N is to be included.
respect to corporations M and N and with respect to                                     groups consisting of M and N and of N and P. If N                Example 2. (i) On each day of 1970, all the out-
corporations N and P, but not with respect to corpo-                                    does not file an election in accordance with paragraph       standing stock of corporations S, T, W, X, and Z is
rations M, N, and P, corporation N would, without                                                                                                    held in the following manner:


                                                                                                                                                         Corporations
                                                       Individuals                                                                      S        T             W                 X                Z
 D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           52    52               52               52               52
 E..............................................................                                                                        40     2                2                2                2
 F..............................................................                                                                         2    40                2                2                2
 G. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            2     2               40                2                2
 H. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            2     2                2               40                2
 I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2     2                2                2               40


    (ii) On December 31, 1970, the more-than-50                                         poration), or on any plan or other entity de-                that old member (or members) from being
percent identical ownership requirement of section                                      scribed in such sections (including plans,                   treated as a member of the old group under
1563(a)(2) may be met with regard to any combi-                                         etc., of corporations not part of such old                   paragraph (d)(2)(i) of this section in order
nation of the corporations but all five corporations
cannot be included as component members of a sin-
                                                                                        group), that would result solely from the                    to prevent the disallowance of a deduction
gle controlled group because the inclusion of all the                                   retroactive effect of the amendment to this                  or credit of another old member (or other
corporations in a single group would be dependent                                       section by T.D. 8179. An adverse effect in-                  corporation) or to prevent the disqualifi-
upon taking into account the stock ownership of more                                    cludes the disqualification of a plan or the                 cation of, or other adverse effect on, an-
than five persons. Therefore, if the corporations do                                    disallowance of a deduction or credit for                    other old member’s plan (or other entity)
not file a statement in accordance with paragraph
(c)(2)(ii) of this section, the Internal Revenue Service
                                                                                        a contribution to a plan. The Internal Rev-                  described in the sections of the Code and
will determine the group in which each corporation                                      enue Service, however, will not treat an old                 ERISA enumerated in such paragraph.
is to be included. The corporations or the Internal                                     member as a member of an old group to the                        (3) Election of general nonretroactiv-
Revenue Service, as the case may be, may designate                                      extent that such treatment will have an ad-                  ity. In the case of a taxable year ending
that three corporations be included in one group                                        verse effect on that old member.                             on or after December 31, 1970, and before
and two corporations in another, or that any four
corporations be included in one group and that the
                                                                                            (ii) Section 7805(b) will not be applied                 March 2, 1988, an old group will be treated
remaining corporation not be included in any group.                                     pursuant to paragraph (d)(2)(i) of this sec-                 as a brother-sister controlled group of cor-
    (d) Transitional rules— (1) In general.                                             tion to treat an old member of an old group                  porations for all purposes of the Code for
Treasury decision 8179 amended para-                                                    as a member of a brother-sister controlled                   such taxable year if—
graph (a)(3)(ii) of this section to revise                                              group to prevent an adverse effect for a                         (i) Each old member files a statement
the definition of a brother-sister controlled                                           taxable year if, for that taxable year, that                 consenting to such treatment for such tax-
group of corporations. In general, those                                                old member treats or has treated itself as                   able year with the District Director having
amendments are effective for taxable years                                              not being a member of that old group for                     audit jurisdiction over its return within six
ending on or after December 31, 1970.                                                   purposes of sections 401, 404(a), 408(k),                    months after March 2, 1988; and
    (2) Limited nonretroactivity. (i) Under                                             409A, 410, 411, 412, 414, 415, and 4971                          (ii) No old member—
the authority of section 7805(b), the Inter-                                            of the Code and sections 202, 203, 204,                          (A) Files or has filed, with respect to
nal Revenue Service will treat an old group                                             and 302 and Title IV of ERISA for such                       such taxable year, a return, amended re-
as a brother-sister controlled group corpo-                                             taxable year (such as by filing, with respect                turn, or claim for credit or refund in which
rations for purposes of applying sections                                               to such taxable year, a return, amended re-                  the amount of any deduction, credit, limi-
401, 404(a), 408(k), 409A, 410, 411, 412,                                               turn, or claim for credit or refund in which                 tation, or tax due is determined by treating
414, 415, and 4971 of the Code and sec-                                                 the amount of any deduction, credit, lim-                    any old member as not a member of the old
tions 202, 203, 204, and 302 of the Em-                                                 itation, or tax due is determined by treat-                  group; or
ployment Retirement Income Security Act                                                 ing itself as not being a member of the                          (B) Treats the employees of all mem-
of 1974 (ERISA) in a plan year or taxable                                               old group for purposes of those sections).                   bers of the old group as not being em-
year beginning before March 2, 1988, to                                                 However, the fact that one or more (but                      ployed by a single employer for purposes
the extent necessary to prevent an adverse                                              not all) of the old members do not qual-                     of sections 401, 404(a), 408(k), 409A, 410,
effect on any old member (or any other cor-                                             ify for section 7805(b) treatment because                    411, 412, 414, 415, and 4971 of the Code
                                                                                        of the preceding sentence will not preclude


February 5, 2007                                                                                                             433                                                     2007–6 I.R.B.
and sections 202, 203, 204, and 302 of           §1.1563–3 [Amended]                                            Section 9802.—Prohibiting
ERISA for such taxable year.                                                                                    Discrimination Against
    (4) Definitions. For purposes of this           Par. 34. In §1.1563–3, at the end                           Individual Participants
                                                 of paragraph (d)(3) Example 3, add
paragraph (d)—                                                                                                  and Beneficiaries Based
                                                 the phrase “for purposes of paragraph
    (i) An old group is a brother-sister con-                                                                   on Health Status
trolled group of corporations, determined        (a)(3)(ii) of §1.1563–1T”.
by applying paragraph (a)(3)(ii) of this                                                                        26 CFR 54.9802–1: Prohibiting discrimination
                                                 §1.1564–1 [Removed]                                            against participants and beneficiaries based on a
section as in effect before the amendments                                                                      health factor.
made by Treasury decision 8179, that                 Par. 35. Section 1.1564–1 is removed.
is not a brother-sister controlled group                                                                        T.D. 9298
of corporations, determined by apply-            PART 5—TEMPORARY INCOME
ing paragraph (a)(3)(ii) of this section as      TAX REGULATIONS UNDER THE                                      DEPARTMENT OF
amended by such Treasury decision; and           REVENUE ACT OF 1978
    (ii) An old member is any corporation
                                                                                                                THE TREASURY
that is a member of an old group.                   Par. 36. The authority citation for part                    Internal Revenue Service
    (5) Election to choose between mem-          5 continues to read as follows:                                26 CFR Part 54
bership in more than one controlled group.          Authority: 26 U.S.C. 7805.
If—                                                                                                             DEPARTMENT OF LABOR
                                                 §5.1561–1 [Removed]
    (i) An old member has filed an election
under paragraph (c)(2) of this section to be
                                                                                                                Employee Benefits
                                                     Par. 37. Section 5.1561–1 is removed.
treated as a component member of an old                                                                         Security Administration
group for a December 31 before March 2,                                     Mark E. Matthews,                   29 CFR Part 2590
1988; and                                                             Deputy Commissioner for
    (ii) That corporation would (without                              Services and Enforcement.                 DEPARTMENT OF HEALTH
regard to such paragraph) be a component
member of more than one brother-sister           Approved December 12, 2006.                                    AND HUMAN SERVICES
controlled group (not including an old                                                                          Centers for Medicare
                                                                             Eric Solomon,                      & Medicaid Services
group) on the December 31, that corpo-
                                                           Acting Deputy Assistant Secretary
ration may make an election under that
                                                                of the Treasury (Tax Policy).                   45 CFR Part 146
paragraph by filing an amended return
on or before September 2, 1988. This             (Filed by the Office of the Federal Register on December 21,   Final Rules for
                                                 2006, 8:45 a.m., and published in the issue of the Federal
paragraph (d)(5) does not apply to a cor-        Register for December 22, 2006, 71 F.R. 76904)                 Nondiscrimination and
poration that is treated as a member of an
                                                                                                                Wellness Programs in Health
old group under paragraph (d)(3) of this
section.                                         Section 7520.—Valuation                                        Coverage in the Group Market
    (6) Refunds. See section 6511(a) for         Tables                                                         AGENCIES: Internal Revenue Service,
period of limitation on filing claims for
                                                    The adjusted applicable federal short-term, mid-            Department of the Treasury; Employee
credit or refund.
                                                 term, and long-term rates are set forth for the month          Benefits Security Administration, Depart-
    (e) Effective date— (1) Applicability
                                                 of February 2007. See Rev. Rul. 2007-9, page 422.              ment of Labor; Centers for Medicare &
date. Paragraphs (a), (b), (c)(1), (c)(2)(iv)
                                                                                                                Medicaid Services, Department of Health
and (d) of this section apply to taxable
                                                                                                                and Human Services.
years beginning on or after December             Section 7872.—Treatment
22, 2006. However, taxpayers may apply           of Loans With Below-Market                                     ACTION: Final rules.
these paragraphs to any Federal income           Interest Rates
tax return filed on or after December 22,                                                                       SUMMARY: This document contains
                                                    The adjusted applicable federal short-term, mid-
2006. Paragraphs (c)(2)(i) through (iii) of      term, and long-term rates are set forth for the month
                                                                                                                final rules governing the provisions pro-
this section apply to any original Federal       of February 2007. See Rev. Rul. 2007-9, page 422.              hibiting discrimination based on a health
income tax return (including any amended                                                                        factor for group health plans and issuers
return filed on or before the due date                                                                          of health insurance coverage offered in
(including extensions) of such original                                                                         connection with a group health plan. The
return) timely filed on or after May 30,                                                                        rules contained in this document im-
2006.                                                                                                           plement changes made to the Internal
    (2) Expiration date. The applicability                                                                      Revenue Code of 1986 (Code), the Em-
of paragraphs (a), (b), (c)(1), (c)(2)(iv) and                                                                  ployee Retirement Income Security Act
(d) of this section will expire on December                                                                     of 1974 (ERISA), and the Public Health
21, 2009. The applicability of paragraphs                                                                       Service Act (PHS Act) enacted as part
(c)(2)(i) through (iii) of this section will                                                                    of the Health Insurance Portability and
expire on May 26, 2009.                                                                                         Accountability Act of 1996 (HIPAA).


2007–6 I.R.B.                                                              434                                                       February 5, 2007
DATES: Effective date: These final regu-       were published in the Federal Register         In general, these final regulations do not
lations are effective February 12, 2006.       on April 8, 1997 (T.D. 8716, 1997–1 C.B.       change the 2001 interim rules or the pro-
    Applicability dates: These final regula-   225 [62 FR 16894]) (1997 interim rules).       posed rules on wellness programs. How-
tions apply for plan years beginning on or     On December 29, 1997, the Department           ever, these regulations do not republish the
after July 1, 2007.                            of Labor, the Department of Health and         expired transitional rules regarding indi-
                                               Human Services, and the Department of          viduals who were denied coverage based
FOR FURTHER INFORMATION                        the Treasury (the Departments) published       on a health factor prior to the applicabil-
CONTACT: Russ Weinheimer, Inter-               a clarification of the April 1997 interim      ity date of the 2001 interim rules. (These
nal Revenue Service, Department of the         rules as they relate to individuals who        regulations do republish, and slightly mod-
Treasury, at (202) 622–6080; Amy Turner        were denied coverage before the effective      ify, the special transitional rule for self-
or Elena Lynett, Employee Benefits Secu-       date of HIPAA on the basis of any health       funded nonfederal governmental plans that
rity Administration, Department of Labor,      factor (62 FR 67689).                          had denied any individual coverage due to
at (202) 693–8335; or Karen Levin or              On January 8, 2001, the Departments         the plan’s election to opt out of the nondis-
Adam Shaw, Centers for Medicare &              published interim final regulations (2001      crimination requirements under 45 CFR
Medicaid Services, Department of Health        interim rules) on many issues under the        146.180, in cases where the plan spon-
and Human Services, at (877) 267–2323          HIPAA nondiscrimination provisions             sor subsequently chooses to bring the plan
extension 65445 and 61091, respectively.       (T.D. 8931, 2001–1 C.B. 542 [66 FR             into compliance with those requirements).
                                               1378]) and proposed regulations on well-       These regulations clarify how the source-
CUSTOMER SERVICE INFORMA-                      ness programs under those nondiscrimina-       of-injury rules apply to the timing of a di-
TION: Individuals interested in obtaining      tion provisions (REG–114084–00, 2001–1         agnosis of a medical condition and add an
copies of Department of Labor publica-         C.B. 633 [66 FR 1421]). These regula-          example to illustrate how the benefits rules
tions concerning health care laws may          tions being published today in the Federal     apply to the carryover feature of health re-
request copies by calling the Department       Register finalize both the 2001 interim        imbursement arrangements (HRAs). For
of Labor (DOL), Employee Benefits Se-          rules and the proposed rules.                  wellness programs, the final regulations
curity Administration (EBSA) Toll-Free                                                        clarify some ambiguities in the proposed
Hotline at 1–866–444–EBSA (3272) or            II. Overview of the Regulations                rules, make some changes in terminology
may request a copy of the Department of                                                       and organization, and add a description of
Health and Human Services (HHS), Cen-             Section 9802 of the Code, section 702
                                                                                              wellness programs not required to satisfy
ters for Medicare & Medicaid Services          of ERISA, and section 2702 of the PHS
                                                                                              additional standards.
(CMS) publication entitled “Protecting         Act (the HIPAA nondiscrimination provi-
Your Health Insurance Coverage” by             sions) establish rules generally prohibiting
                                                                                              Application to Benefits
calling 1–800–633–4227. These regu-            group health plans and group health insur-
lations as well as other information on        ance issuers from discriminating against
                                                                                                  Under the 2001 interim rules and these
HIPAA’s nondiscrimination rules and            individual participants or beneficiaries
                                                                                              regulations, a plan or issuer is not required
other health care laws are also available      based on any health factor of such partic-
                                                                                              to provide coverage for any particular ben-
on the Department of Labor’s website           ipants or beneficiaries. The 2001 interim
                                                                                              efit to any group of similarly situated indi-
(http://www.dol.gov/ebsa), including the       rules —
                                                                                              viduals. However, benefits provided must
interactive web pages Health Elaws.
                                               •   Explained the application of these pro-    be uniformly available to all similarly sit-
SUPPLEMENTARY INFORMATION:                         visions to benefits;                       uated individuals. Likewise, any restric-
                                                                                              tion on a benefit or benefits must apply
I. Background                                  •   Clarified the relationship between the     uniformly to all similarly situated individ-
                                                   HIPAA nondiscrimination provisions         uals and must not be directed at individual
   The Health Insurance Portability and            and the HIPAA preexisting condition        participants or beneficiaries based on any
Accountability Act of 1996 (HIPAA),                exclusion limitations;                     health factor of the participants or benefi-
Public Law 104–191 (110 Stat. 1936),                                                          ciaries (determined based on all the rele-
was enacted on August 21, 1996. HIPAA          •   Explained the application of these pro-    vant facts and circumstances).
amended the Internal Revenue Code of               visions to premiums;                           With respect to these benefit rules,
1986 (Code), the Employee Retirement                                                          the Departments received many inquiries
Income Security Act of 1974 (ERISA),
                                               •   Described similarly situated individu-
                                                                                              about HRAs and one comment about
                                                   als;
and the Public Health Service Act (PHS                                                        nondiscrimination requirements under
Act) to provide for, among other things,       •   Explained the application of these pro-    other laws. Under HRAs, employees are
improved portability and continuity of             visions to actively-at-work and non-       reimbursed for medical expenses up to a
health coverage. HIPAA added section               confinement clauses; and                   maximum amount for a period, based on
9802 of the Code, section 702 of ERISA,                                                       the employer’s contribution to the plan.
and section 2702 of the PHS Act, which         •   Clarified that more favorable treatment    These plans may or may not be funded.
prohibit discrimination in health coverage         of individuals with medical needs gen-     Another common feature is that the plans
based on a health factor. Interim final            erally is permitted.                       typically allow amounts remaining avail-
rules implementing the HIPAA provisions                                                       able at the end of the period to be used


February 5, 2007                                                  435                                                   2007–6 I.R.B.
to reimburse medical expenses in later         effect on other laws.” This section clari-       2001 interim rules illustrate the application
periods. Because the maximum reim-             fies that compliance with the nondiscrimi-       of this rule, to injuries resulting from an at-
bursement available under a plan to an         nation rules is not determinative of compli-     tempted suicide due to depression and to
employee in any single period may vary         ance with any other provision of ERISA,          injuries resulting from bungee jumping.
based on the claims experience of the em-      or any other State or Federal law, includ-           These final regulations retain the pro-
ployee, concerns have arisen about the         ing the ADA. Moreover, in paragraph (b)          visions in the 2001 interim rules and add a
application of the HIPAA nondiscrimina-        of the 2001 interim rules and these final        clarification. Some people have inquired if
tion rules to these plans.                     regulations, the general rule governing the      a suicide exclusion can apply if an individ-
    To address these concerns, these fi-       application of the nondiscrimination rules       ual had not been diagnosed with a medi-
nal regulations include an example un-         to benefits clarifies that whether any plan      cal condition such as depression before the
der which the carryforward of unused           provision or practice with respect to bene-      suicide attempt. These final regulations
employer-provided medical care reim-           fits complies with these rules does not af-      clarify that benefits may not be denied for
bursement amounts to later years does          fect whether the provision or practice is        injuries resulting from a medical condition
not violate the HIPAA nondiscrimination        permitted under any other provision of the       even if the medical condition was not di-
requirements, even though the maximum          Code, ERISA, or the PHS Act, the Amer-           agnosed before the injury.
reimbursement amount for a year varies         icans with Disabilities Act, or any other            Some comments expressed concern
among employees within the same group          law, whether State or Federal.                   that the discussion of the source-of-in-
of similarly situated individuals based on         Many other laws may regulate plans           jury rule in the 2001 interim rules might
prior claims experience. In the example,       and issuers in their provision of benefits       be used to support the use of vague lan-
an employer sponsors a group health plan       to participants and beneficiaries. These         guage to identify plan benefit exclusions,
under which medical care expenses are          laws include the ADA, Title VII, the             especially to identify source-of-injury ex-
reimbursed up to an annual maximum             Family and Medical Leave Act, ERISA’s            clusions. Requirements for plan benefit
amount. The maximum reimbursement              fiduciary provisions, and State law. The         descriptions are generally outside of the
amount with respect to an employee for         Departments have not attempted to sum-           scope of these regulations. Nonetheless,
a year is a uniform amount multiplied by       marize the requirements of those laws in         Department of Labor regulations at 29
the number of years the employee has           the HIPAA nondiscrimination rules. In-           CFR 2520.102–2(b) provide, “The format
participated in the plan, reduced by the       stead, these rules clarify the application       of the summary plan description must not
total reimbursements for prior years. Be-      of the HIPAA nondiscrimination rules to          have the effect of misleading, misinform-
cause employees who have participated          group health plans, which may permit             ing or failing to inform participants and
in the plan for the same length of time        certain practices that other laws prohibit.      beneficiaries. Any description of excep-
are eligible for the same total benefit over   Nonetheless, to avoid misleading plans           tion, limitations, reductions, and other
that length of time, the example concludes     and issuers as to the permissibility of any      restrictions of plan benefits shall not be
that the arrangement does not violate the      plan provision under other laws, the De-         minimized, rendered obscure or otherwise
HIPAA nondiscrimination requirements.          partments included, in both paragraph (h)        made to appear unimportant … The ad-
    The Equal Employment Opportunity           and paragraph (b) of the regulations, ref-       vantages and disadvantages of the plan
Commission (EEOC) asked the Depart-            erences to the potential applicability of        shall be presented without either exag-
ments to clarify that certain plan practices   other laws. Employers, plans, issuers, and       gerating the benefits or minimizing the
or provisions permitted under the bene-        other service providers should consider          limitations.” State laws governing group
fits paragraphs of the 2001 interim rules      the applicability of these laws to their cov-    insurance or nonfederal governmental
may violate the Americans with Disabil-        erage and contact legal counsel or other         plans may provide additional protections.
ities Act of 1990 (ADA) or Title VII of        government agencies such as the EEOC                 The Departments received thousands of
the Civil Rights Act of 1964 (Title VII).      and State insurance departments if they          comments protesting that the source-of-in-
Specifically, the 2001 interim rules allow     have questions under those laws.                 jury provisions in the 2001 interim rules
plans to exclude or limit benefits for cer-                                                     would generally permit plans or issuers to
tain types of conditions or treatments. The    Source-of-Injury Exclusions                      exclude benefits for the treatment of in-
EEOC commented that, if such a benefit                                                          juries sustained in the activities listed in
limit were applied to AIDS, it would be            Some plans and issuers, while generally      the conference report to HIPAA (motor-
a disability-based distinction that violates   providing coverage for the treatment of an       cycling, snowmobiling, all-terrain vehicle
the ADA (unless it is permitted under sec-     injury, deny benefits if the injury arose        riding, horseback riding, skiing, and other
tion 501(c) of the ADA). In addition, the      from a specified cause or activity. These        similar activities). Many comments re-
EEOC commented that an exclusion from          kinds of exclusions are known as source-         quested that the source-of-injury rule be
coverage of prescription contraceptives,       of-injury exclusions. Under the 2001 in-         amended to provide that a source-of-in-
but not of other preventive treatments,        terim rules, if a plan or issuer provides ben-   jury exclusion could not apply if the in-
would violate Title VII because prescrip-      efits for a particular injury, it may not deny   jury resulted from (in addition to an act of
tion contraceptives are used exclusively       benefits otherwise provided for treatment        domestic violence or a medical condition)
by women.                                      of the injury due to the fact that the injury    participation in legal recreational activities
    Paragraph (h) of the 2001 interim rules    results from a medical condition or an act       such as those listed in the conference re-
and these final regulations is entitled “No    of domestic violence. Two examples in the        port. Some comments expressed the con-


2007–6 I.R.B.                                                      436                                              February 5, 2007
cern that the rule in the 2001 interim rules      gin to impose source-of-injury exclusions        resolved. One interpretation is that the
would cause plans and issuers to begin ex-        with respect to the conference report ac-        succeeding issuer can never impose a non-
cluding benefits for treatment of injuries        tivities merely because such exclusions are      confinement clause, and if this has the
sustained in these kinds of activities.           not prohibited under the 2001 interim rules      effect under State law of not requiring the
    One comment generally supported the           and these final regulations.                     prior issuer to provide benefits beyond
position in the 2001 interim rules. That                                                           the nominal end of the policy, then the
comment expressed the belief that Con-            Relationship of Prohibition on                   prior issuer is not obligated to provide the
gress intended with this issue, as with           Nonconfinement Clauses to State                  extended benefits. This interpretation is
many other issues, to continue its long-          Extension-of-Benefits Laws                       consistent with the text of the nonconfine-
standing deference to the States on the                                                            ment rule and the main point of Example
regulation of benefit design under health             Questions have arisen about the rela-        2, though it could be read to conflict with
insurance. The comment also noted that            tionship of the prohibition on nonconfine-       the last sentence in Example 2.
the source-of-injury rule in the 2001 in-         ment clauses in the 2001 interim rules to            Another interpretation proposed by
terim rules would not change the practice         State extension-of-benefits laws. Plan pro-      some is that, consistent with the last sen-
of plans or issuers with regard to the ac-        visions that deny an individual benefits         tence of Example 2, the obligation of
tivities listed in the conference report and      based on the individual’s confinement to         a prior issuer is never affected by the
that the practice of plans and issuers in this    a hospital or other health care institution      HIPAA prohibition against nonconfine-
regard would continue to be governed, as          at the time coverage would otherwise be-         ment clauses. Under this interpretation, if
they had been before HIPAA, by market             come effective are often called noncon-          a State law conditions a prior issuer’s obli-
conditions and the States.                        finement clauses. The 2001 interim rules         gation on there being no succeeding issuer
    The Departments have not added the            prohibit such nonconfinement clauses. At         with the obligation, then in order to leave
list of activities from the conference re-        the same time, many States require issuers       the prior issuer’s obligation unaffected un-
port to the source-of-injury rule in the fi-      to provide benefits beyond the date on           der State law, the succeeding issuer could
nal regulations. The statute itself is unclear    which coverage under the policy would            apply a nonconfinement clause and the
about how benefits in general are affected        otherwise have ended to individuals who          HIPAA prohibition would not apply. This
by the nondiscrimination requirements and         continue to be hospitalized beyond that          interpretation elevates a minor clarifica-
is silent with respect to source-of-injury        date. Example 2 in the 2001 interim rules        tion at the end of an example to supersede
exclusions in particular. The legislative         illustrated that a current issuer cannot im-     not only the main point of the example
history provides that the inclusion of ev-        pose a nonconfinement clause that restricts      but also the express text of the rule the
idence of insurability in the list of health      benefits for an individual based on whether      example illustrates. This proposed inter-
factors is intended to ensure, among other        that individual is entitled to continued ben-    pretation is clearly contrary to the intent
things, that individuals are not excluded         efits from a prior issuer pursuant to a State    of the 2001 interim rules.
from health care coverage due to their par-       law requirement. The final sentence in               To avoid other interpretations, these fi-
ticipation in the activities listed in the con-   Example 2 provided that HIPAA does not           nal rules have replaced the final sentence
ference report. This language is unclear          affect the prior issuer’s obligation under       of Example 2 in the 2001 interim rules with
because the term “health care coverage”           State law and does not affect any State law      three sentences. The new language clari-
could mean only eligibility to enroll for         governing coordination of benefits.              fies that: State law cannot change the suc-
coverage under the plan, so that people               Under the laws of some States, a prior       ceeding issuer’s obligation under HIPAA;
who participate in the activities listed in       issuer has the obligation to provide health      a prior issuer may also have an obligation;
the conference report could not be kept out       benefits to an individual confined to a hos-     and in a case in which a succeeding issuer
of the plan but could be denied benefits for      pital beyond the nominal end of the policy       has an obligation under HIPAA and a prior
injuries sustained in those activities. Al-       only if the hospitalization is not covered by    issuer has an obligation under State law
ternatively, it could mean eligibility both       a succeeding issuer. Because HIPAA re-           to provide benefits for a confinement, any
to enroll for coverage and for benefits, so       quires a succeeding issuer to provide ben-       State laws designed to prevent more than
that people who participate in those activi-      efits that it would otherwise provide if not     100 percent reimbursement, such as State
ties could not be kept out of the plan or de-     for the nonconfinement clause, in such a         coordination-of-benefits laws, continue to
nied benefits for injuries sustained in those     case State law would not require the prior       apply. Thus, under HIPAA a succeed-
activities. Without any indication in the         issuer to provide benefits for a confine-        ing issuer cannot deny benefits to an in-
statute and without a clear indication in the     ment beyond the nominal end of the pol-          dividual on the basis of a nonconfinement
legislative history about this issue, and in      icy. In this context, the statement in the fi-   clause. If this requirement under HIPAA
light of the overall scheme of the statute,       nal sentence of Example 2 — that HIPAA           has the effect under State law of remov-
the Departments have made no changes to           does not affect the prior issuer’s obligation    ing a prior issuer’s obligation to provide
the regulations.                                  under State law — could be read to con-          benefits, then the prior issuer is not obli-
    Moreover, to the extent not prohibited        flict with the text of the rule and the main     gated to provide benefits for the confine-
by State law, plans and issuers have been         point of Example 2 that the succeeding is-       ment. If under State law this requirement
free to impose source-of-injury exclusions        suer must cover the confinement.                 under HIPAA has the effect of obligating
since before HIPAA. There is no reason                There has been some dispute about            both the prior issuer and the succeeding is-
to believe that plans and issuers will be-        how this potential ambiguity should be           suer to provide benefits, then any State co-


February 5, 2007                                                      437                                                   2007–6 I.R.B.
ordination-of-benefits law that is used to                       satisfying the 30-hour-per-week require-                      issuer fails to comply with the regula-
determine the order of payment and to pre-                       ment for employees seeking enrollment                         tions but complies in good faith with an
vent more than 100 percent reimbursement                         in the plan. Similarly, if a plan allowed                     otherwise reasonable interpretation of the
continues to apply.                                              employees to continue eligibility under                       statute.
                                                                 the plan while on paid leave and for an                           The HIPAA nondiscrimination provi-
Actively-at-Work Rules and Employer                              additional period of 30 days while on un-                     sions generally prohibit a plan or issuer
Leave Policies                                                   paid leave, the plan is generally required                    from charging similarly situated individ-
                                                                 to credit these same periods for employees                    uals different premiums or contributions
    The final regulations make no changes                        seeking enrollment in the plan.1 To help                      based on a health factor. These final reg-
to the 2001 interim rules relating                               ensure consistency in application, plans                      ulations also generally prohibit a plan or
to actively-at-work provisions.          Ac-                     and issuers may wish to clarify, in writing,                  issuer from requiring similarly situated
tively-at-work clauses are generally pro-                        how employees on various types of leave                       individuals to satisfy differing deductible,
hibited, unless individuals who are absent                       are treated for purposes of interpreting a                    copayment, or other cost-sharing require-
from work due to any health factor are                           service requirement. Without clear plan                       ments. However, the HIPAA nondiscrim-
treated, for purposes of health coverage, as                     rules, plans and issuers might slip into                      ination provisions do not prevent a plan
if they are actively at work. Nonetheless,                       inconsistent applications of their rules,                     or issuer from establishing premium dis-
a plan or issuer may distinguish between                         which could lead to violations of the ac-                     counts or rebates or modifying otherwise
groups of similarly situated individuals                         tively-at-work provisions.                                    applicable copayments or deductibles in
(provided the distinction is not directed                                                                                      return for adherence to programs of health
at individual participants or beneficiaries                      Wellness Programs                                             promotion and disease prevention. Thus,
based on a health factor). Examples in the                                                                                     there is an exception to the general rule
regulations illustrate that a plan or issuer                         The HIPAA nondiscrimination provi-                        prohibiting discrimination based on a
may condition coverage on an individual’s                        sions do not prevent a plan or issuer from                    health factor if the reward, such as a pre-
meeting the plan’s requirement of working                        establishing discounts or rebates or mod-                     mium discount or waiver of a cost-sharing
full-time (such as a minimum of 250 hours                        ifying otherwise applicable copayments                        requirement, is based on participation in
in a three-month period or 30 hours per                          or deductibles in return for adherence to                     a program of health promotion or disease
week).                                                           programs of health promotion and disease                      prevention.
    Several members of the regulated com-                        prevention. The 1997 interim rules refer                          Both the 1997 interim rules and the
munity have asked the Departments                                to these programs as “bona fide wellness                      2001 proposed regulations refer to pro-
to clarify the applicability of the ac-                          programs.” In the preamble to the 1997                        grams of health promotion and disease pre-
tively-at-work rules to various plan provi-                      interim rules, the Departments invited                        vention allowed under this exception as
sions that require an individual to perform                      comments on whether additional guid-                          “bona fide wellness programs.” These reg-
a minimum amount of service per week                             ance was needed concerning, among other                       ulations generally adopt the provisions in
in order to be eligible for coverage. It is                      things, the permissible standards for de-                     the 2001 proposed rules. However, as
the Departments’ experience that much                            termining bona fide wellness programs.                        more fully explained below, the final regu-
of the complexity in applying these rules                        The Departments also stated their intent                      lations no longer use the term “bona fide”
derives from the myriad variations in the                        to issue further regulations on the nondis-                   in connection with wellness programs, add
operation of employers’ leave policies.                          crimination requirements and that in no                       a description of wellness programs that do
The Departments believe that the 2001 in-                        event would the Departments take any                          not have to satisfy additional requirements
terim rules provide adequate principles for                      enforcement action against a plan or issuer                   in order to comply with the nondiscrim-
applying the actively-at-work provisions                         that had sought to comply in good faith                       ination requirements, reorganize the four
to different types of eligibility provisions.                    with section 9802 of the Code, section 702                    requirements from the proposed rules into
In order to comply with these rules, a plan                      of ERISA, and section 2702 of the PHS                         five requirements, provide that the reward
or issuer should apply the plan’s service                        Act before the publication of additional                      for a wellness program — coupled with the
requirements consistently to all similarly                       guidance. The preambles to the 2001 in-                       reward for other wellness programs with
situated employees eligible for coverage                         terim final and proposed rules noted that                     respect to the plan that require satisfaction
under the plan without regard to whether                         the period for nonenforcement in cases of                     of a standard related to a health factor —
an employee is seeking eligibility to en-                        good faith compliance with the HIPAA                          must not exceed 20% of the total cost of
roll in the plan or continued eligibility                        nondiscrimination provisions generally                        coverage under the plan, and add examples
to remain in the plan. Accordingly, if a                         ended on the applicability date of those                      and make other changes to more accurately
plan imposes a 30-hour-per-week require-                         regulations but continued with respect to                     describe how the requirements apply.
ment and treats employees on paid leave                          wellness programs until the issuance of                           The term “wellness program”. Com-
(including sick leave and vacation leave)                        further guidance. Accordingly, the nonen-                     ments suggested that the use of the term
who are already in the plan as if they are                       forcement policy of the Departments ends                      “bona fide” with respect to wellness pro-
actively-at-work, the plan generally is re-                      upon the applicability date of these final                    grams was confusing because, under the
quired to credit time on paid leave towards                      regulations for cases in which a plan or                      proposed rules, some wellness programs

1   These nondiscrimination rules do not address the applicability of the Family and Medical Leave Act to employers or group health coverage.



2007–6 I.R.B.                                                                              438                                                    February 5, 2007
that are not “bona fide” within the narrow     •   A program that reimburses employees         percent of the cost of coverage. The pro-
meaning of that term in the proposed rules         for the costs of smoking cessation pro-     posed regulations solicited comments on
nonetheless satisfy the HIPAA nondis-              grams without regard to whether the         the appropriate percentage. The percent-
crimination requirements. To address this          employee quits smoking.                     age limit is designed to avoid a reward or
concern, these final regulations do not use                                                    penalty being so large as to have the effect
the term “bona fide wellness program.”         •   A program that provides a reward to         of denying coverage or creating too heavy
Instead the final regulations treat all pro-       employees for attending a monthly           a financial penalty on individuals who
grams of health promotion or disease pre-          health education seminar.                   do not satisfy an initial wellness program
vention as wellness programs and specify                                                       standard that is related to a health factor.
which of those wellness programs must              Only programs under which any of the        Comments from one employer and two
satisfy additional standards to comply with    conditions for obtaining a reward is based      national insurance industry associations
the nondiscrimination requirements.            on an individual satisfying a standard re-      requested that the level of the percentage
   Programs not subject to additional          lated to a health factor must meet the five     for rewards should provide plans and is-
standards. The preamble to the 2001            additional requirements described in para-      suers maximum flexibility for designing
proposed rules described a number of           graph (f)(2) of these regulations in order      wellness programs. Comments suggested
wellness programs that comply with the         to comply with the nondiscrimination re-        that plans and issuers have a greater op-
HIPAA nondiscrimination requirements           quirements.                                     portunity to encourage healthy behaviors
without having to satisfy any additional           Limit on the reward. As under the pro-      through programs of health promotion
standards. However, the text of the reg-       posed rules, the total reward that may be       and disease prevention if they are allowed
ulation did not make such a distinction.       given to an individual under the plan for       flexibility in designing such programs.
The Departments have received many             all wellness programs is limited. A re-         The 20 percent limit on the size of the re-
comments and inquiries about whether           ward can be in the form of a discount or re-    ward in the final regulations allows plans
programs like those described in the 2001      bate of a premium or contribution, a waiver     and issuers to maintain flexibility in their
preamble would have to satisfy the ad-         of all or part of a cost-sharing mechanism      ability to design wellness programs, while
ditional standards in the proposed rules.      (such as deductibles, copayments, or coin-      avoiding rewards or penalties so large as
As a result, a paragraph has been added        surance), the absence of a surcharge, or the    to deny coverage or create too heavy a
to the final regulations defining and il-      value of a benefit that would otherwise not     financial penalty on individuals who do
lustrating programs that comply with the       be provided under the plan. Under the pro-      not satisfy an initial wellness program
nondiscrimination requirements without         posed rule, the reward for the wellness pro-    standard that is related to a health factor.
having to satisfy any additional standards     gram, coupled with the reward for other             Reasonably-designed and at-least-
(assuming participation in the program         wellness programs with respect to the plan      once-per-year requirements. In the 2001
is made available to all similarly situated    that require satisfaction of a standard re-     proposed rules, the second of four re-
individuals). Such programs are those          lated to a health factor, must not exceed       quirements was that the program must
under which none of the conditions for         a specified percentage of the cost of em-       be reasonably designed to promote good
obtaining a reward is based on an indi-        ployee-only coverage under the plan. The        health or prevent disease. The regulations
vidual satisfying a standard related to a      cost of employee-only coverage is deter-        also provided that a program did not meet
health factor or under which no reward is      mined based on the total amount of em-          this standard unless it gave individuals
offered. The final regulations include the     ployer and employee contributions for the       eligible for the program the opportunity
following list to illustrate the wide range    benefit package under which the employee        to qualify for the reward at least once per
of programs that would not have to satisfy     is receiving coverage.                          year.
any additional standards to comply with            Comments indicated that in some cir-            One comment suggested a safe harbor
the nondiscrimination requirements:            cumstances dependents are permitted to          under which a wellness program that al-
                                               participate in the wellness program in ad-      lows individuals to qualify at least once
•   A program that reimburses all or part      dition to the employee and that in those cir-   a year for the reward under the program
    of the cost for memberships in a fitness   cumstances the reward should be higher to       would satisfy the “reasonably designed”
    center.                                    reflect dependent participation in the pro-     standard without regard to other attributes
                                               gram. These final regulations provide that      of the program. The Departments have not
•   A diagnostic testing program that pro-     if, in addition to employees, any class of      adopted this suggestion. The “reasonably
    vides a reward for participation and       dependents (such as spouses or spouses          designed” standard is a broad standard. A
    does not base any part of the reward on    and dependent children) may participate in      wide range of factors could affect the rea-
    outcomes.                                  the wellness program, the limit on the re-      sonableness of the design of a wellness
                                               ward is based on the cost of the coverage       program, not just the frequency with which
•   A program that encourages preventive       category in which the employee and any          a participant could qualify for the reward.
    care through the waiver of the copay-      dependents are enrolled.                        For example, a program might not be rea-
    ment or deductible requirement under           The proposed regulations specified          sonably designed to promote good health
    a group health plan for the costs of,      three alternative percentages: 10, 15, and      or prevent disease if it imposed, as a condi-
    for example, prenatal care or well-baby    20. The final regulations provide that the      tion to obtaining the reward, an overly bur-
    visits.                                    amount of the reward may not exceed 20          densome time commitment or a require-


February 5, 2007                                                   439                                                  2007–6 I.R.B.
ment to engage in illegal behavior. The         to promote health or prevent disease. The      participating individuals in a way that is
once-per-year requirement was included in       examples serve as safe harbors, so that        not administratively burdensome or ex-
the proposed rules merely as a bright-line      a plan or issuer could adopt a program         pensive. Under the proposed and final
standard for determining the minimum fre-       identical to one described as satisfying       rules, it is permissible for a plan or issuer
quency that is consistent with a reason-        the wellness program requirements in the       to devise a reasonable alternative standard
able design for promoting good health or        examples and be assured of satisfying the      by lowering the threshold of the existing
preventing disease. Thus, this second re-       requirements in the regulations. Wellness      health-factor-related standard, substitut-
quirement of the proposed rules has been        programs similar to the examples also          ing a different standard, or waiving the
divided into two requirements in the fi-        would satisfy the “reasonably designed”        standard. (For the alternative standard
nal rules (the second and the third require-    requirement. The Departments, though,          to be reasonable, the individual must be
ments). This division was made to empha-        do not want plans or issuers to feel con-      able to satisfy it without regard to any
size that a program that must satisfy the ad-   strained by the relatively narrow range of     health factor.) To address the concern
ditional standards in order to comply with      programs described by the examples but         regarding the potential burden of this re-
the nondiscrimination requirements must         want plans and issuers to feel free to con-    quirement, the final regulations explicitly
allow eligible individuals to qualify for the   sider innovative programs for motivating       provide that a plan or issuer can waive the
reward at least once per year and must also     individuals to make efforts to improve         health-factor-related standard for all indi-
be otherwise reasonably designed to pro-        their health.                                  viduals for whom a reasonable alternative
mote health or prevent disease.                     Reasonable alternative standard. Un-       standard must be offered. Additionally,
    Comments also expressed other con-          der the 2001 proposed rules and these fi-      the final regulations include an example
cerns about the “reasonably designed”           nal regulations, a wellness program that       demonstrating that a reasonable alterna-
requirement. While acknowledging that           provides a reward requiring satisfaction of    tive standard could include following the
this standard provides significant flexibil-    a standard related to a health factor must     recommendations of an individual’s physi-
ity, these comments were concerned that         provide a reasonable alternative standard      cian regarding the health factor at issue.
this flexible approach might also require       for obtaining the reward for certain indi-     Thus, a plan or issuer need not assume the
substantial resources in evaluating all the     viduals. This alternative standard must be     burden of designing a discrete alternative
facts and circumstances of a proposed           available for individuals for whom, for that   standard for each individual for whom an
program to determine whether it was rea-        period, it is unreasonably difficult due to    alternative standard must be offered. An
sonable in its design.                          a medical condition to satisfy the other-      example also illustrates that if an alterna-
    The “reasonably designed” requirement       wise applicable standard, or for whom, for     tive standard is health-factor-related (i.e.,
is intended to be an easy standard to sat-      that period, it is medically inadvisable to    walking three days a week for 20 minutes
isfy. To make this clear, the final regula-     attempt to satisfy the otherwise applicable    a day), the wellness program must provide
tions have added language providing that if     standard. A program does not need to es-       an additional alternative standard (i.e.,
a program has a reasonable chance of im-        tablish the specific reasonable alternative    following the individual’s physician’s rec-
proving the health of participants and it is    standard before the program commences.         ommendations regarding the health factor
not overly burdensome, is not a subterfuge      It is sufficient to determine a reasonable     at issue) to the appropriate individuals.
for discriminating based on a health fac-       alternative standard once a participant in-        The 2001 proposed rules included an
tor, and is not highly suspect in the method    forms the plan that it is unreasonably dif-    example illustrating a smoking cessation
chosen to promote health or prevent dis-        ficult for the participant due to a medical    program. Comments expressed concern
ease, it satisfies this standard. There does    condition to satisfy the general standard      that, under the proposed regulations, indi-
not need to be a scientific record that the     (or that it is medically inadvisable for the   viduals addicted to nicotine who comply
method promotes wellness to satisfy this        participant to attempt to achieve the gen-     with a reasonable alternative standard year
standard. The standard is intended to allow     eral standard) under the program.              after year would always be entitled to the
experimentation in diverse ways of pro-             Some comments suggested that the           reward even if they did not quit using to-
moting wellness. For example, a plan or         requirement to devise and offer such a         bacco. Comments questioned whether this
issuer could satisfy this standard by pro-      reasonable alternative standard potentially    result is consistent with the goal of pro-
viding rewards to individuals who partic-       creates a significant burden on plans and      moting wellness. The final regulations re-
ipated in a course of aromatherapy. The         issuers. Comments also suggested that the      tain the example from the proposed rules.
requirement of reasonableness in this stan-     Departments should define a “safe harbor”      Comments noted that overcoming an ad-
dard prohibits bizarre, extreme, or illegal     for what constitutes a reasonable alterna-     diction sometimes requires a cycle of fail-
requirements in a wellness program.             tive standard, and that plans and issuers      ure and renewed effort. For those individ-
    One comment requested that the final        should be permitted to establish a single      uals for whom it remains unreasonably dif-
regulations set forth one or more safe har-     alternative standard, rather than having to    ficult due to an addiction, a reasonable al-
bors that would demonstrate compliance          tailor a standard for each individual for      ternative standard must continue to be of-
with the “reasonably designed” standard.        whom a reasonable alternative standard         fered. Plans and issuers can accommo-
The examples in the proposed and final          must be offered.                               date this health factor by continuing to of-
regulations present a range of wellness             The Departments understand that, in        fer the same or a new reasonable alterna-
programs that are well within the borders       devising wellness programs, plans and          tive standard. For example, a plan or is-
of what is considered reasonably designed       issuers strive to improve the health of        suer using a smoking cessation class might


2007–6 I.R.B.                                                      440                                            February 5, 2007
use different classes from year to year or        146.121. Under the interim final nondis-          III. Economic Impact and Paperwork
might change from using a class to provid-        crimination rules, if the plan sponsor sub-       Burden
ing nicotine replacement therapy. These           sequently chooses to bring the plan into
final regulations provide an additional ex-       compliance with the nondiscrimination re-         Summary — Department of Labor and
ample of a reasonable alternative standard        quirements, the plan must provide notice to       Department of Health and Human
of viewing, over a period of 12 months,           that effect to individuals who were denied        Services
a 12-hour video series on health problems         enrollment based on one or more health
                                                                                                        HIPAA’s nondiscrimination provisions
associated with tobacco use.                      factors, and afford those individuals an op-
                                                                                                    generally prohibit group health plans and
    Concern has been expressed that indi-         portunity, that continues for at least 30
                                                                                                    group health insurance issuers from dis-
viduals might claim that it would be un-          days, to enroll in the plan. (An individual
                                                                                                    criminating against individuals in eligibil-
reasonably difficult or medically inadvis-        is considered to have been denied cover-
                                                                                                    ity or premiums on the basis of health fac-
able to meet the wellness program stan-           age if he or she failed to apply for cover-
                                                                                                    tors. The Departments have crafted these
dard, when in fact the individual could           age because, given an exemption election
                                                                                                    regulations to secure the protections from
meet the standard. The final rules clarify        under 45 CFR 146.180, it was reasonable
                                                                                                    discrimination as intended by Congress in
that plans may seek verification, such as a       to believe that an application for coverage
                                                                                                    as economically efficient a manner as pos-
statement from a physician, that a health         would have been denied based on a health
                                                                                                    sible, and believe that the economic bene-
factor makes it unreasonably difficult or         factor). The notice must specify the effec-
                                                                                                    fits of the regulations justify their costs.
medically inadvisable for an individual to        tive date of compliance, and inform the in-
                                                                                                        The primary economic benefits associ-
meet a standard.                                  dividual regarding any enrollment restric-
                                                                                                    ated with securing HIPAA’s nondiscrim-
    Disclosure requirements. The fifth re-        tions that may apply under the terms of
                                                                                                    ination provisions derive from increased
quirement for a wellness program that pro-        the plan once the plan comes into compli-
                                                                                                    access to affordable group health plan cov-
vides a reward requiring satisfaction of a        ance. The plan may not treat the individ-
                                                                                                    erage for individuals with health problems.
standard related to a health factor is that all   ual as a late enrollee or a special enrollee.
                                                                                                    Increased access benefits both newly-cov-
plan materials describing the terms of the        These final regulations retain this transi-
                                                                                                    ered individuals and society at large. It
program must disclose the availability of         tional rule, and state that the plan must
                                                                                                    fosters expanded health coverage, timelier
a reasonable alternative standard. This re-       permit coverage to be effective as of the
                                                                                                    and more complete medical care, better
quirement is unchanged from the proposed          first day of plan coverage for which an ex-
                                                                                                    health outcomes, and improved productiv-
rules. The 2001 proposed rules and these          emption election under 45 CFR 146.180
                                                                                                    ity and quality of life. This is especially
final regulations include the same model          (with regard to the nondiscrimination re-
                                                                                                    true for the individuals most affected by
language that can be used to satisfy this         quirements) is no longer in effect. (These
                                                                                                    HIPAA’s nondiscrimination provisions —
requirement; examples also illustrate sub-        final regulations delete the reference giv-
                                                                                                    those with adverse health conditions. De-
stantially similar language that would sat-       ing the plan the option of having the cover-
                                                                                                    nied health coverage, individuals in poorer
isfy the requirement.                             age start July 1, 2001, because that option
                                                                                                    health are more likely to suffer economic
    The final regulations retain the two          implicated the expired transitional rules re-
                                                                                                    hardship, to forego badly needed care for
clarifications of this requirement. First,        garding individuals who were denied cov-
                                                                                                    financial reasons, and to suffer adverse
plan materials are not required to describe       erage based on a health factor prior to the
                                                                                                    health outcomes as a result. For them,
specific reasonable alternative standards.        applicability of the 2001 interim rules. As
                                                                                                    gaining health coverage is more likely to
It is sufficient to disclose that some rea-       previously stated, those transitional rules
                                                                                                    mean gaining economic security, receiv-
sonable alternative standard will be made         have not been republished in these final
                                                                                                    ing timely, quality care, and living health-
available. Second, any plan materials that        regulations.) Additionally, the examples
                                                                                                    ier, more productive lives. Similarly, par-
describe the general standard would also          illustrating how the special rule for non-
                                                                                                    ticipation by these individuals in wellness
have to disclose the availability of a rea-       federal governmental plans operates have
                                                                                                    programs fosters better health outcomes,
sonable alternative standard. However,            been revised slightly.
                                                                                                    increases productivity and quality of life,
if the program is merely mentioned (and
                                                  Applicability Date                                and has the same outcome in terms of over-
does not describe the general standard),
                                                                                                    all gains in economic security. The well-
disclosure of the availability of a reason-
                                                       These regulations apply for plan years       ness provisions of these regulations will
able alternative standard is not required.
                                                  beginning on or after July 1, 2007. Un-           result in fewer instances in which wellness
Special Rule for Self-Funded Nonfederal           til the applicability date for this regulation,   programs shift costs to high-risk individu-
Governmental Plans Exempted Under 45              plans and issuers are required to comply          als, and more instances in which these indi-
CFR 146.180                                       with the corresponding sections of the reg-       viduals succeed at improving health habits
                                                  ulations previously published in the Fed-         and health.
The sponsor of a self-funded nonfederal           eral Register (66 FR 1378) and other ap-              Additional economic benefits derive
governmental plan may elect under section         plicable regulations.                             directly from the improved clarity pro-
2721(b)(2) of the PHS Act and 45 CFR                                                                vided by the regulations. The regulations
146.180 to exempt its group health plan                                                             will reduce uncertainty and costly disputes
from the nondiscrimination requirements                                                             and promote confidence in health benefits’
of section 2702 of the PHS Act and 45 CFR                                                           value, thereby improving labor market ef-



February 5, 2007                                                       441                                                   2007–6 I.R.B.
ficiency and fostering the establishment           New economic costs may be also in-           assumptions are detailed below. The De-
and continuation of group health plans and     curred in connection with the wellness pro-      partments believe that the benefits of the
their wellness program provisions.             visions if reductions in rewards result in       final regulations justify their costs.
    The Departments estimate that the dol-     the reduction of wellness programs’ effec-
lar value of the expanded coverage attrib-     tiveness, but this effect is expected to be      Regulatory Flexibility Act — Department
utable to HIPAA’s nondiscrimination pro-       very small. Other new economic costs             of Labor and Department of Health and
visions is approximately $850 million an-      may be incurred by plan sponsors to make         Human Services
nually. The Departments believe that the       available reasonable alternative standards
                                                                                                    The Regulatory Flexibility Act
cost of HIPAA’s nondiscrimination provi-       where required. The Departments are un-
                                                                                                (5 U.S.C. 601 et seq.) (RFA) imposes
sions is borne by covered workers. Costs       able to estimate these costs due to the va-
                                                                                                certain requirements with respect to fed-
can be shifted to workers through increases    riety of options available to plan sponsors
                                                                                                eral rules that are subject to the notice and
in employee premium shares or reductions       for bringing wellness programs into com-
                                                                                                comment requirements of section 553(b)
(or smaller increases) in pay or other com-    pliance with these rules.
                                                                                                of the Administrative Procedure Act (5
ponents of compensation, by increases in
                                               Executive Order 12866 — Department               U.S.C. 551 et seq.) and likely to have
deductibles or other cost sharing, or by
                                               of Labor and Department of Health and            a significant economic impact on a sub-
reducing the richness of health benefits.
                                               Human Services                                   stantial number of small entities. Unless
Whereas the benefits of the nondiscrim-
                                                                                                an agency certifies that a final rule will
ination provisions are concentrated in a
                                                   Under Executive Order 12866, the De-         not have a significant economic impact
relatively small population, the costs are
                                               partments must determine whether a regu-         on a substantial number of small entities,
distributed broadly across plans and en-
                                               latory action is “significant” and therefore     section 604 of the RFA requires that the
rollees.
                                               subject to the requirements of the Execu-        agency present a final regulatory flexi-
    The proposed rules on wellness pro-
                                               tive Order and subject to review by the Of-      bility analysis (FRFA) at the time of the
grams impose certain requirements on
                                               fice of Management and Budget (OMB).             publication of the notice of final rulemak-
wellness programs providing rewards that
                                               Under section 3(f), the order defines a “sig-    ing describing the impact of the rule on
would otherwise discriminate based on a
                                               nificant regulatory action” as an action that    small entities. Small entities include small
health factor in order to ensure that the
                                               is likely to result in a rule (1) having an      businesses, organizations, and govern-
exception for wellness programs does not
                                               annual effect on the economy of $100 mil-        mental jurisdictions.
eviscerate the general rule contained in
                                               lion or more, or adversely and materially            Because the 2001 interim rules were
HIPAA’s nondiscrimination provisions.
                                               affecting a sector of the economy, produc-       issued as final rules and not as a notice
Costs associated with the wellness pro-
                                               tivity, competition, jobs, the environment,      of proposed rulemaking, the RFA did not
gram provisions are justified by the ben-
                                               public health or safety, or State, local or      apply and the Departments were not re-
efits received by those individuals now
                                               tribal governments or communities (also          quired to either certify that the rule would
able, through alternative standards, to par-
                                               referred to as “economically significant”);      not have a significant impact on a substan-
ticipate in such programs. Because the
                                               (2) creating serious inconsistency or oth-       tial number of small entities or conduct
new provisions limit rewards for well-
                                               erwise interfering with an action taken or       a regulatory flexibility analysis. The De-
ness programs that require an individual
                                               planned by another agency; (3) materially        partments nonetheless crafted those regu-
to satisfy a standard related to a health
                                               altering the budgetary impacts of entitle-       lations in careful consideration of effects
factor to 20 percent of the cost of single
                                               ment grants, user fees, or loan programs         on small entities, and conducted an analy-
coverage (with additional provisions re-
                                               or the rights and obligations of recipients      sis of the likely impact of the rules on small
lated to rewards that apply also to classes
                                               thereof; or (4) raising novel legal or pol-      entities. This analysis was detailed in the
of dependents), some rewards will be re-
                                               icy issues arising out of legal mandates, the    preamble to the interim final rule.
duced and this reduction might compel
                                               President’s priorities, or the principles set        The Departments also conducted an
some individuals to decline coverage. The
                                               forth in the Executive Order.                    initial regulatory flexibility analysis in
number of individuals affected, however,
                                                   Pursuant to the terms of the Executive       connection with the proposed regulations
is thought to be small. Moreover, the
                                               Order, this action is “economically signif-      on wellness programs and present here
Departments estimate that the cost of the
                                               icant” and subject to OMB review under           a FRFA with respect to the final regula-
reduction in rewards that would exceed
                                               Section 3(f) of the Executive Order. Con-        tions on wellness programs pursuant to
the limit will amount to only $6 million.
                                               sistent with the Executive Order, the De-        section 604 of the RFA. For purposes of
Establishing reasonable alternative stan-
                                               partments have assessed the costs and ben-       their unified FRFA, the Departments ad-
dards, which should increase coverage for
                                               efits of this regulatory action. The Depart-     hered to EBSA’s proposed definition of
those now eligible for discounts as well as
                                               ments performed a comprehensive, unified         small entities. The Departments consider
their participation in programs designed
                                               analysis to estimate the costs and bene-         a small entity to be an employee benefit
to promote health or prevent disease, is
                                               fits attributable to the final regulations for   plan with fewer than 100 participants. The
expected to cost between $2 million to $9
                                               purposes of compliance with the Execu-           basis of this definition is found in section
million. The total costs should therefore
                                               tive Order 12866, the Regulatory Flexibil-       104(a)(2) of ERISA, which permits the
fall within a range between $8 million and
                                               ity Act, and the Paperwork Reduction Act.        Secretary of Labor to prescribe simpli-
$15 million annually.
                                               The Departments’ analyses and underlying         fied annual reports for pension plans that



2007–6 I.R.B.                                                      442                                              February 5, 2007
cover fewer than 100 participants. The                            the wellness program will not violate the                         requirements for reasonable design in the
Departments believe that assessing the                            nondiscrimination provisions if additional                        proposed regulations. The Departments
impact of this final rule on small plans is                       requirements are met. The first require-                          did not anticipate that a cost would arise
an appropriate substitute for evaluating the                      ment limits the maximum allowable re-                             from the requirements related to reason-
effect on small entities as that term is de-                      ward or total of rewards to a maximum of                          able design when taken together, but re-
fined in the RFA. This definition of small                        20 percent of the cost of employee-only                           quested comments on their assumptions.
entity differs, however, from the defini-                         coverage under the plan (with additional                          Because no comments were received, the
tion of small business based on standards                         provisions related to rewards that apply                          Departments have not attributed a cost to
promulgated by the Small Business Ad-                             also to classes of dependents). The magni-                        this provision of the final rule.
ministration (13 CFR 121.201) pursuant                            tude of the limit is intended to offer plans                          The fourth requirement provides that
to the Small Business Act (15 U.S.C. 631                          maximum flexibility while avoiding the                            rewards under wellness programs must be
et seq.). Because of this difference, the                         effect of denying coverage or creating an                         available to all similarly situated individ-
Departments requested comments on the                             excessive financial penalty for individu-                         uals. Rewards are not available to simi-
appropriateness of this size standard for                         als who cannot satisfy the initial standard                       larly situated individuals unless a program
evaluating the impact of the proposed reg-                        based on a health factor.                                         allows a reasonable alternative standard
ulations on small entities. No comments                              The Departments estimate that 4,000                            or waiver of the applicable standard, if it
were received.                                                    small plans and 22,000 small plan partici-                        is unreasonably difficult due to a medical
    The Departments estimate that 35,000                          pants will be affected by this limit.3 These                      condition or medically inadvisable to at-
plans with fewer than 100 participants vary                       plans can comply with this requirement                            tempt to satisfy the otherwise applicable
employee premium contributions or cost-                           by reducing the discount to the regulated                         standard. The Departments believe that
sharing across similarly situated individu-                       maximum. This will result in an increase                          some small plans’ wellness programs do
als based on health factors.2 While this rep-                     in premiums (or decrease in cost-sharing)                         not currently satisfy this requirement and
resents just one percent of all small plans,                      by about $1.3 million on aggregate for                            will have to be modified.
the Departments believe that because of                           those participants receiving qualified pre-                           The Departments estimate that 3,000
the large number of plans, this may con-                          mium discounts.4 This constitutes an on-                          small plans’ wellness programs include
stitute a substantial number of small en-                         going, annual cost of $338 on average per                         initial standards that may be unreasonably
tities. The Departments also note that at                         affected plan. The regulation does not                            difficult due to a medical condition or
least some premium rewards may be large.                          limit small plans’ flexibility to shift this                      medically inadvisable for some partici-
Premium discounts associated with well-                           cost to all participants in the form of small                     pants to meet.5 These plans are estimated
ness programs are believed to range as                            premium increases or benefit cuts.                                to include 4,000 participants for whom the
high as $920 per affected participant per                            The second requirement provides that                           standard is in fact unreasonably difficult
year. Therefore, the Departments believe                          wellness programs must be reasonably de-                          due to a medical condition or medically
that the impact of this regulation on at least                    signed to promote health or prevent dis-                          inadvisable to meet.6 Satisfaction of alter-
some small entities may be significant.                           ease. Comments received by the Depart-                            native standards by these participants will
    Under these final regulations on well-                        ments and available literature on employee                        result in cost increases for plans as these
ness programs, such programs are not sub-                         wellness programs suggest that existing                           individuals qualify for discounts or avoid
ject to additional requirements if none of                        wellness programs generally satisfy this                          surcharges. If all of these participants
the conditions for obtaining a reward is                          requirement. The requirement therefore                            request and then satisfy an alternative
based on an individual satisfying a stan-                         is not expected to compel small plans to                          standard, the cost would amount to about
dard that is related to a health factor (or if                    modify existing wellness programs.                                $2 million annually. If one-half request
a wellness program does not provide a re-                            The third requirement is that the pro-                         alternative standards and one-half of those
ward).                                                            gram give individuals eligible for the pro-
    Where a condition for obtaining a re-                         gram the opportunity to qualify for the re-
ward is based on an individual satisfy-                           ward at least once per year. This provi-
ing a standard related to a health factor,                        sion was included within the terms of the


2 Based on tabulations of the 2003 Medical Expenditure Panel Survey Insurance Component (MEPS-IC) and 1997 Survey of Government Finances (SGF), the Departments estimate that
roughly 2.4 million small health plans exist. Of these, 1.2 percent of these plans are believed to vary premiums (as suggested in a 1993 study by the Robert Woods Johnson Foundation) while
.5 percent are thought to vary benefits (as suggested in, Spec Summary. United States Salaried Managed Health/Health Promotion Initiatives, 2003–2004, Hewitt Associates, July, 2003.).
Assuming that half of those that vary premiums also vary benefits, the Departments conclude that 1.5 percent of all small plans are potentially affected by the statute.
3 Simulations run by the Departments suggest that 10.7 percent of all plans exceed the capped premium discount. For the purposes of this analysis, it was assumed that the affected plans were
proportionally distributed between large and small plans. However, it is likely that larger plans would have more generous welfare programs and therefore, this estimate is likely an upper
bound.
4 Estimate is based on the 2003–04 Hewitt Study and various measures of the general health of the labor force suggest that roughly 30 percent of health plan participants will not qualify for
the discount. While plans exceeding the capped discount could meet the statutes requirements by transferring the excess amount, on average $57, to the non-qualifying participants, given
current trends in the health insurance industry, it is considered more likely that plans would instead lower the amount of the discount given to the 70 percent of participants that qualify. This
transfer would roughly total $1.3 million dollars.
5 The 2003–04 Hewitt Survey finds that 9 percent of its respondents require participants to achieve a certain health standard to be eligible for discounts. Based on assumptions about the
general health of the labor force, approximately 2.3 percent of health plan participants may and 1.5 percent will find these standards difficult to achieve.
6   Many small plans are very small, having fewer than 10 participants. Hence, many small plans will include no participant for whom either of these standards apply.



February 5, 2007                                                                             443                                                                       2007–6 I.R.B.
meet them, the cost would be $0.5 mil-                          This requirement is expected to represent a                      plans covered under Title I of ERISA are
lion.7                                                          negligible fraction of the ongoing, normal                       generally required to make certain disclo-
   In addition to the costs associated with                     cost of updating plans’ materials. This                          sures about the terms of a plan and mate-
new participants qualifying for discounts                       analysis therefore attributes no cost to this                    rial changes in terms through a Summary
through alternative standards, small plans                      requirement.                                                     Plan Description (SPD) or Summary of
may also incur new economic costs by                                                                                             Material Modifications (SMM) pursuant
simply providing alternative standards.                         Paperwork Reduction Act — Department                             to sections 101(a) and 102(a) of ERISA
However, plans can satisfy this require-                        of Labor and Department of the Treasury                          and related regulations. The ICR related to
ment by providing inexpensive alternative                                                                                        the SPD and SMM is currently approved
                                                                    The 2001 interim rules included an
standards and have the flexibility to select                                                                                     under OMB control number 1210–0039.
                                                                information collection request (ICR) re-
whatever reasonable alternative standard                                                                                         While these materials may in some cases
                                                                lated to the notice of the opportunity to
is most desirable or cost effective. Plans                                                                                       require revisions to comply with the final
                                                                enroll in a plan where coverage had been
not wishing to provide alternative stan-                                                                                         regulations, the associated burden is ex-
                                                                denied based on a health factor before
dards also have the option of eliminating                                                                                        pected to be negligible, and is in fact al-
                                                                the effective date of HIPAA. That ICR
health status-based variation in employee                                                                                        ready accounted for in connection with the
                                                                was approved under OMB control num-
premiums or waiving standards for indi-                                                                                          SPD and SMM ICR by a burden estima-
                                                                bers 1210–0120 and 1545–1728, and was
viduals for whom the program standard                                                                                            tion methodology that anticipates ongoing
                                                                subsequently withdrawn from OMB in-
is unreasonably difficult due to a med-                                                                                          revisions. Therefore, any change to the ex-
                                                                ventory because the notice, if applicable,
ical condition or medically inadvisable                                                                                          isting information collection request aris-
                                                                was to have been provided only once.
to meet. The Departments expect that the                                                                                         ing from these final regulations is not sub-
                                                                    The proposed regulations on wellness
economic cost to provide alternatives com-                                                                                       stantive or material. Accordingly, no ap-
                                                                programs did not include an information
bined with the associated cost of granting                                                                                       plication for approval of a revision to the
                                                                collection request. Like the proposed reg-
discounts or waiving surcharges will not                                                                                         existing ICR has been made to OMB in
                                                                ulations, the final regulations include a re-
exceed the cost associated with granting                                                                                         connection with these final regulations.
                                                                quirement that, if a plan’s wellness pro-
discounts or waiving surcharges for all
                                                                gram requires individuals to meet a stan-                        Paperwork Reduction Act — Department
participants who qualify for an alterna-
                                                                dard related to a health factor in order to                      of Health and Human Services
tive. Those costs are estimated here at
                                                                qualify for a reward and if the plan mate-
$0.5 million to $2 million, or about $160
                                                                rials describe this standard, the materials                      Collection of Information Requirements
to $650 per affected plan. Plans have the
                                                                must also disclose the availability of a rea-
flexibility to pass back some or all of this                                                                                         Under the Paperwork Reduction Act of
                                                                sonable alternative standard. If plan ma-
cost to all participants in the form of small                                                                                    1995, we are required to provide notice
                                                                terials merely mention that a program is
premium increases or benefit cuts.                                                                                               in the Federal Register and solicit pub-
                                                                available, the disclosure relating to alter-
   The fifth requirement provides that                                                                                           lic comment before a collection of infor-
                                                                natives is not required. The regulations in-
plan materials describing wellness pro-                                                                                          mation requirement is submitted to the Of-
                                                                clude samples of disclosures that could be
gram standards disclose the availability                                                                                         fice of Management and Budget (OMB)
                                                                used to satisfy the requirements of the final
of reasonable alternative standards. This                                                                                        for review and approval. In order to fairly
                                                                regulations.
requirement will affect the approximately                                                                                        evaluate whether an information collec-
                                                                    In concluding that the proposed rules
4,000 small plans that condition rewards                                                                                         tion should be approved by OMB, section
                                                                did not include an information collection
on satisfaction of a standard. These plans                                                                                       3506(c)(2)(A) of the Paperwork Reduction
                                                                request, the Departments reasoned that
will incur economic costs to revise af-                                                                                          Act of 1995 requires that we solicit com-
                                                                much of the information required was
fected plan materials. The estimated 1,000                                                                                       ment on the following issues:
                                                                likely already provided as a result of state
to 4,000 small plan participants who will
                                                                and local mandates or the usual business
succeed at satisfying these alternative
                                                                practices of group health plans and group                        •    The need for the information collection
standards will benefit from these disclo-                                                                                             and its usefulness in carrying out the
                                                                health insurance issuers in connection with
sures. The disclosures need not specify                                                                                               proper functions of our agency.
                                                                the offer and promotion of health care cov-
what alternatives are available unless
                                                                erage. In addition, the sample disclosures
the plan describes the initial standard in
                                                                would enable group health plans to make
                                                                                                                                 •    The accuracy of our estimate of the
writing and the regulation provides sample                                                                                            information collection burden.
                                                                any modifications necessary with minimal
language that can be used to satisfy this re-
quirement. Legal requirements other than
                                                                effort.                                                          •    The quality, utility, and clarity of the
                                                                    Finally, although neither the proposed                            information to be collected.
this regulation generally require plans and
                                                                or final regulations include a new infor-
issuers to maintain accurate materials de-
scribing plans. Plans and issuers generally
                                                                mation collection request, the regulations                       •    Recommendations to minimize the
                                                                might have been interpreted to require a                              information collection burden on the
update such materials on a regular basis
                                                                revision to an existing collection of infor-                          affected public, including automated
as part of their normal business practices.
                                                                mation. Administrators of group health                                techniques.

7 Simulations run by the Departments find that the average premium discount for all health plans after the cap is enforced will be approximately $450 dollars. This average is then applied to
the upper and lower bounds of those able to pass the alternative standards in small health plans in order to determine the upper and lower bound of the transfer cost.



2007–6 I.R.B.                                                                              444                                                              February 5, 2007
                                               ter 6) is not required. Pursuant to sec-        and describe the extent of their consulta-
    Department regulations in 45 CFR           tion 7805(f) of the Code, the notice of pro-    tion and the nature of the concerns of State
146.121(i)(4) require that if coverage has     posed rulemaking preceding these regula-        and local officials in the preamble to the
been denied to any individual because          tions was submitted to the Small Business       regulation.
the sponsor of a self-funded nonfederal        Administration for comment on its impact            In the Departments’ view, these final
governmental plan has elected under 45         on small business.                              regulations have federalism implications,
CFR Part 146 to exempt the plan from the                                                       because they have substantial direct ef-
requirements of this section, and the plan     Congressional Review Act                        fects on the States, the relationship be-
sponsor subsequently chooses to bring the                                                      tween the national government and States,
plan into compliance, the plan must: notify        These final regulations are subject to      or on the distribution of power and respon-
the individual that the plan will be coming    the Congressional Review Act provisions         sibilities among various levels of govern-
into compliance; afford the individual an      of the Small Business Regulatory Enforce-       ment. However, in the Departments’ view,
opportunity to enroll that continues for at    ment Fairness Act of 1996 (5 U.S.C. 801         the federalism implications of these final
least 30 days, specify the effective date      et seq.) and have been transmitted to Con-      regulations are substantially mitigated be-
of compliance; and inform the individual       gress and the Comptroller General for re-       cause, with respect to health insurance is-
regarding any enrollment restrictions that     view. These regulations, however, consti-       suers, the vast majority of States have en-
may apply once the plan is in compliance.      tute a “major rule,” as that term is defined    acted laws, which meet or exceed the fed-
    The burden associated with this require-   in 5 U.S.C. 804, because they are likely to     eral HIPAA standards prohibiting discrim-
ment was approved by The Office of Man-        result in (1) an annual effect on the econ-     ination based on health factors.
agement and Budget (OMB) under OMB             omy of $100 million or more; (2) a major            In general, through section 514, ERISA
control number 0938–0827, with a current       increase in costs or prices for consumers,      supersedes State laws to the extent that
expiration date of April 30, 2009.             individual industries, or federal, State or     they relate to any covered employee ben-
    In addition, CMS–2078–P, published in      local government agencies, or geographic        efit plan, and preserves State laws that
the Federal Register on January 8, 2001        regions; or (3) significant adverse effects     regulate insurance, banking, or securities.
(66 FR 1421) describes the bona fide well-     on competition, employment, investment,         While ERISA prohibits States from regu-
ness programs and specifies their criteria.    productivity, innovation, or on the ability     lating a plan as an insurance or investment
Section 146.121(f)(1)(iv) further stipulates   of United States-based enterprises to com-      company or bank, HIPAA added a new
that the plan or issuer disclose in all plan   pete with foreign-based enterprises in do-      preemption provision to ERISA (as well
materials describing the terms of the pro-     mestic or export markets.                       as to the PHS Act) narrowly preempting
gram the availability of a reasonable alter-                                                   State requirements for group health insur-
                                               Unfunded Mandates Reform Act
native standard to qualify for the reward                                                      ance coverage. With respect to the HIPAA
under a wellness program. However, in              For purposes of the Unfunded Man-           nondiscrimination provisions, States may
plan materials that merely mention that a      dates Reform Act of 1995 (Pub. L. 104–4),       continue to apply State law requirements
program is available, without describing       as well as Executive Order 12875, these fi-     except to the extent that such requirements
its terms, the disclosure is not required.     nal regulations do not include any federal      prevent the application of the portability,
    The burden associated with this require-   mandate that may result in expenditures by      access, and renewability requirements of
ment was approved by OMB control num-          state, local, or tribal governments, nor does   HIPAA, which include HIPAA’s nondis-
ber 0938–0819, with a current expiration       it include mandates which may impose an         crimination requirements provisions that
date of April 30, 2009.                        annual burden of $100 million or more on        are the subject of this rulemaking.
                                               the private sector.                                 In enacting these new preemption pro-
Special Analyses — Department of the                                                           visions, Congress intended to preempt
Treasury                                       Federalism Statement – Department of            State insurance requirements only to the
                                               Labor and Department of Health and              extent that those requirements prevent
   Notwithstanding the determinations of       Human Services                                  the application of the basic protections
the Departments of Labor and of Health                                                         set forth in HIPAA. HIPAA’s Conference
and Human Services, for purposes of the           Executive Order 13132 outlines fun-          Report states that the conferees intended
Department of the Treasury it has been         damental principles of federalism, and          the narrowest preemption of State laws
determined that this Treasury decision is      requires the adherence to specific criteria     with regard to health insurance issuers.
not a significant regulatory action. There-    by federal agencies in the process of their     H.R. Conf. Rep. No. 736, 104th Cong.
fore, a regulatory assessment is not re-       formulation and implementation of poli-         2d Session 205 (1996). State insurance
quired. It has also been determined that       cies that have “substantial direct effects”     laws that are more stringent than the fed-
section 553(b) of the Administrative Pro-      on the States, the relationship between the     eral requirements are unlikely to “prevent
cedure Act (5 U.S.C. chapter 5) does not       national government and States, or on the       the application of” the HIPAA nondis-
apply to these regulations, and, because       distribution of power and responsibilities      crimination provisions, and be preempted.
these regulations do not impose a collec-      among the various levels of government.         Accordingly, States have significant lat-
tion of information on small entities, a       Federal agencies promulgating regulations       itude to impose requirements on health
Regulatory Flexibility Analysis under the      that have these federalism implications         insurance issuers that are more restrictive
Regulatory Flexibility Act (5 U.S.C. chap-     must consult with State and local officials,    than the federal law.


February 5, 2007                                                   445                                                  2007–6 I.R.B.
    Guidance conveying this interpretation                       and the four U.S. territories. In most States                     of Labor has established a Health Bene-
was published in the Federal Register                            the Insurance Commissioner is appointed                           fits Education Campaign with more than
on April 8, 1997. (62 FR 16904) and on                           by the Governor, in approximately 14                              70 partners, including CMS, the NAIC
December 30, 2004 (T.D. 9166, 2005–1                             States the insurance commissioner is an                           and many business and consumer groups.
C.B. 558 [62 FR 78720]). These final                             elected official. Among other activities,                         CMS has sponsored conferences with the
regulations clarify and implement the                            it provides a forum for the development                           States — the Consumer Outreach and Ad-
statute’s minimum standards and do not                           of uniform policy when uniformity is ap-                          vocacy conferences in March 1999 and
significantly reduce the discretion given                        propriate. Its members meet, discuss, and                         June 2000 and the Implementation and En-
the States by the statute. Moreover, the                         offer solutions to mutual problems. The                           forcement of HIPAA National State-fed-
Departments understand that the vast ma-                         NAIC sponsors quarterly meetings to pro-                          eral Conferences in August 1999, 2000,
jority of States have requirements that                          vide a forum for the exchange of ideas, and                       2001, 2002, and 2003. Furthermore, both
meet or exceed the minimum require-                              in-depth consideration of insurance issues                        the Department of Labor and CMS Web
ments of the HIPAA nondiscrimination                             by regulators, industry representatives,                          sites offer links to important State Web
provisions.                                                      and consumers. CMS and Department of                              sites and other resources, facilitating coor-
    HIPAA provides that the States may en-                       Labor staff have attended the quarterly                           dination between the State and federal reg-
force the provisions of HIPAA as they per-                       meetings consistently to listen to the con-                       ulators and the regulated community.
tain to issuers, but that the Secretary of                       cerns of the State Insurance Departments                              Throughout the process of developing
Health and Human Services must enforce                           regarding HIPAA issues, including the                             these regulations, to the extent feasible
any provisions that a State fails to sub-                        nondiscrimination provisions. In addi-                            within the specific preemption provi-
stantially enforce. To date, HHS has had                         tion to the general discussions, committee                        sions of HIPAA, the Departments have
occasion to enforce the HIPAA nondis-                            meetings and task groups, the NAIC spon-                          attempted to balance the States’ interests
crimination provisions in only two States                        sors the standing CMS/DOL meeting on                              in regulating health insurance issuers, and
and currently enforces the nondiscrimina-                        HIPAA issues for members during the                               Congress’s intent to provide uniform min-
tion provisions in only one State in accor-                      quarterly conferences. This meeting pro-                          imum protections to consumers in every
dance with that State’s specific request to                      vides CMS and the Department of Labor                             State. By doing so, it is the Departments’
do so. When exercising its responsibil-                          with the opportunity to provide updates on                        view that they have complied with the
ity to enforce provisions of HIPAA, HHS                          regulations, bulletins, enforcement actions                       requirements of Executive Order 13132.
works cooperatively with the State for the                       and outreach efforts regarding HIPAA.                                 Pursuant to the requirements set forth
purpose of addressing the State’s concerns                           In addition, the Departments specifi-                         in section 8(a) of Executive Order 13132,
and avoiding conflicts with the exercise of                      cally consulted with the NAIC in devel-                           and by the signatures affixed to these reg-
State authority.8 HHS has developed pro-                         oping these final regulations. Through                            ulations, the Departments certify that the
cedures to implement its enforcement re-                         the NAIC, the Departments sought and                              Employee Benefits Security Administra-
sponsibilities, and to afford the States the                     received the input of State insurance de-                         tion and the Centers for Medicare & Med-
maximum opportunity to enforce HIPAA’s                           partments regarding certain insurance                             icaid Services have complied with the re-
requirements in the first instance. HHS’s                        rating practices and late enrollment issues.                      quirements of Executive Order 13132 for
procedures address the handling of reports                       The Departments employed the States’                              the attached final regulation, Final Rules
that States may not be enforcing HIPAA’s                         insights on insurance rating practices in                         for Nondiscrimination in Health Coverage
requirements, and the mechanism for allo-                        developing the provisions prohibiting                             in the Group Market (RIN 1210–AA77
cating enforcement responsibility between                        “list-billing,” and their experience with                         and RIN 0938–AI08), in a meaningful and
the States and HHS. In compliance with                           late enrollment in crafting the regulatory                        timely manner.
Executive Order 13132’s requirement that                         provision clarifying the relationship be-
agencies examine closely any policies that                       tween the nondiscrimination provisions                            Unified Analysis of Costs and Benefits
may have federalism implications or limit                        and late enrollment. Specifically, the reg-
the policy making discretion of the States,                      ulations clarify that while late enrollment,                      1. Introduction
DOL and HHS have engaged in numerous                             if offered by a plan, must be available to
efforts to consult with and work cooper-                         all similarly situated individuals regard-                           HIPAA’s nondiscrimination provisions
atively with affected State and local offi-                      less of any health factor, an individual’s                        generally prohibit group health plans and
cials.                                                           status as a late enrollee is not itself within                    group health insurance issuers from dis-
    For example, the Departments sought                          the scope of any health factor.                                   criminating against individuals on the ba-
and received input from State insurance                              The Departments have also cooperated                          sis of health factors. The primary effect
regulators and the National Association                          with the States in several ongoing outreach                       and intent of the provision is to increase
of Insurance Commissioners (NAIC). The                           initiatives, through which information on                         access to affordable group health cover-
NAIC is a non-profit corporation estab-                          HIPAA is shared among federal regula-                             age for individuals with health problems.
lished by the insurance commissioners                            tors, State regulators, and the regulated                         This effect, and the economic costs and
of the 50 States, the District of Columbia,                      community. In particular, the Department                          benefits attendant to it, primarily flows
8This authority applies to insurance issued with respect to group health plans generally, including plans covering employees of church organizations. Thus, this discussion of federalism
applies to all group health insurance coverage that is subject to the PHS Act, including those church plans that provide coverage through a health insurance issuer (but not to church plans that
do not provide coverage through a health insurance issuer).



2007–6 I.R.B.                                                                                446                                                              February 5, 2007
from the statutory provisions of HIPAA                            explain the applications of these provi-                          and to reliance on different types of infor-
that this regulation implements. However,                         sions to premiums, to describe similarly                          mation and assumptions in the analyses.
the statute alone leaves room for vary-                           situated individuals, to explain the applica-
ing interpretations of exactly which prac-                        tion of the provisions to actively-at-work                        2. Costs and Benefits of HIPAA’s
tices are prohibited or permitted at the mar-                     and nonconfinement clauses, to clarify that                       Nondiscrimination Provisions
gin. These regulations draw on the De-                            more favorable treatment of individuals
                                                                                                                                        The Departments have evaluated the
partments’ authority to clarify and inter-                        with medical needs generally is permit-
                                                                                                                                    impacts of HIPAA’s nondiscrimination
pret HIPAA’s statutory nondiscrimination                          ted, and to describe plans’ and issuers’
                                                                                                                                    provisions. The nondiscrimination provi-
provisions in order to secure the protec-                         obligations with respect to plan amend-
                                                                                                                                    sions of the 2001 interim final rules were
tions intended by Congress for plan partic-                       ments.9 These final regulations clarify the
                                                                                                                                    estimated to result in costs of about $20
ipants and beneficiaries. The Departments                         relationship between the source-of-injury
                                                                                                                                    million to amend plans, revise plan infor-
crafted them to satisfy this mandate in as                        rules and the timing of a diagnosis of a
                                                                                                                                    mational materials, and notify employees
economically efficient a manner as possi-                         medical condition and add an example to
                                                                                                                                    previously denied coverage on the basis
ble, and believe that the economic benefits                       illustrate how the benefits rules apply to
                                                                                                                                    of a health factor of enrollment opportuni-
of the regulations justify their costs. The                       the carryover feature of HRAs.
                                                                                                                                    ties. Because these costs were associated
analysis underlying this conclusion takes                             The proposed rules on wellness pro-
                                                                                                                                    with one-time activities that were required
into account both the effect of the statute                       grams were issued in order to ensure
                                                                                                                                    to be completed by the applicability date
and the impact of the discretion exercised                        that the exception for wellness programs
                                                                                                                                    of the 2001 interim rules, these costs have
in the regulations.                                               would not contravene HIPAA’s nondis-
                                                                                                                                    been fully defrayed.
    The nondiscrimination provisions of                           crimination provisions. With respect to
                                                                                                                                        The primary statutory economic ben-
the HIPAA statute and of these regulations                        wellness programs, these final regulations
                                                                                                                                    efits associated with the HIPAA nondis-
generally apply to both group health plans                        clarify some ambiguities in the proposed
                                                                                                                                    crimination provisions derive from in-
and group health insurance issuers. Eco-                          rules, make some changes in terminology
                                                                                                                                    creased access to affordable group health
nomic theory predicts that issuers will pass                      and organization, and add a description
                                                                                                                                    plan coverage for individuals whose health
their costs of compliance back to plans,                          of wellness programs not required to sat-
                                                                                                                                    factors had previously restricted their
and that plans may pass some or all of                            isfy additional standards. The final rules
                                                                                                                                    participation in such plans. Expanding
issuers’ and their own costs of compliance                        also set the maximum reward for wellness
                                                                                                                                    access entails both benefits and costs.
to participants. This analysis is carried out                     programs that require satisfaction of a
                                                                                                                                    Newly-covered individuals, who previ-
in light of this prediction.                                      standard at 20 percent of the cost of single
                                                                                                                                    ously had to purchase similar services
    These final regulations are needed to                         coverage (with additional provisions re-
                                                                                                                                    out-of-pocket, reap a simple and direct
clarify and interpret the HIPAA nondis-                           lated to rewards that apply also to classes
                                                                                                                                    financial gain. In addition, these individ-
crimination provisions under section 702                          of dependents), where the proposed rules
                                                                                                                                    uals may be induced to consume more
of ERISA, section 2702 of the PHS Act,                            had stated the limit in terms of a range of
                                                                                                                                    (or different) health care services, reap-
and section 9802 of the Code, and to en-                          percentages.
                                                                                                                                    ing a benefit which has financial value,
sure that group health plans and group                                Because the 2001 interim rules and
                                                                                                                                    and which in some cases will produce
health insurance issuers do not discrimi-                         proposed regulations on wellness pro-
                                                                                                                                    additional indirect benefits both to the
nate against individual participants or ben-                      grams were originally issued as separate
                                                                                                                                    individual (improved health) and possibly
eficiaries based on any health factors with                       rulemaking actions, the Departments esti-
                                                                                                                                    to the economy at large.10
respect to health care coverage and pre-                          mated their economic impacts separately.
                                                                                                                                        Inclusion of these newly-covered indi-
miums. The 2001 interim rules provided                            The costs and benefits of the statutory
                                                                                                                                    viduals, though, will increase both premi-
additional guidance to explain the applica-                       nondiscrimination provisions and the
                                                                                                                                    ums and claims costs incurred by group
tion of the statute to benefits, to clarify the                   2001 interim rules are again described
                                                                                                                                    health plans. Economic theory predicts
relationship between the HIPAA nondis-                            separately from the wellness program
                                                                                                                                    that these costs will ultimately be shifted
crimination provisions and the HIPAA pre-                         provisions here, due to both differing
                                                                                                                                    to all plan participants or employees,
existing condition exclusion limitations, to                      baselines for the measurement of impact,
                                                                                                                                    either through an increased share of insur-

9 The Departments’ estimate of the economic impact of the 2001 interim final regulations was published at 66 FR 1393 (January 8, 2001). These one-time costs were already absorbed by
plans and issuers and are not discussed in this analysis. In fact, the only notice requirement in the 2001 interim final regulations was deleted from the final regulations because the time period
for compliance has passed, with one small exception. Certain self-insured, nonfederal governmental plans that had opted out of the HIPAA nondiscrimination provisions under Section 2721
(b)(2) of the PHS Act and that have since decided to opt back in may be required to send a notice to individuals previously denied coverage due to a health factor. However, to date, only
approximately 550 such plans have notified CMS that they are opting-out of the HIPAA nondiscrimination provisions and CMS does not receive information regarding a plan’s decision to opt
back in. The Departments estimate that the number of plans having done this is very small and, therefore, estimate that the impact of the notice provision on such plans is too small to calculate.
10 Individuals without health insurance are less likely to get preventive care and less likely to have a regular source of care. A lack of health insurance generally increases the likelihood that
needed medical treatment will be forgone or delayed. Forgoing or delaying care increases the risk of adverse health outcomes. These adverse outcomes in turn generate higher medical costs,
which are often shifted to public funding sources (and therefore to taxpayers) or to other payers. They also erode productivity and the quality of life. Improved access to affordable group health
coverage for individuals with health problems under HIPAA’s nondiscrimination provisions will lead to more insurance coverage, timelier and fuller medical care, better health outcomes, and
improved productivity and quality of life. This is especially true for the individuals most affected by HIPAA’s nondiscrimination provisions — those with adverse health conditions. Denied
insurance, individuals in poorer health are more likely to suffer economic hardship, to forgo badly needed care for financial reasons, and to suffer adverse health outcomes as a result. For them,
gaining insurance is more likely to mean gaining economic security, receiving timely, quality care, and living healthier, more productive lives. For an extensive discussion of the consequences
of uninsurance, see: “The Uninsured and their Access to Health Care” (2004). The Kaiser Commission on Medicaid and the Uninsured, November; “Insuring America’s Health”, (2004).
Institute of Medicine; “Health Policy and the Uninsured” (2004) edited by Catherine G. McLaughlin. Washington, DC: Urban Institute Press; Miller, Wilhelmine et al (2004) “Covering the
Uninsured: What is it Worth,” Health Affairs, March: w157–w167.



February 5, 2007                                                                              447                                                                       2007–6 I.R.B.
ance costs, or lowered compensation.11 If                         3. Costs and Benefits of Finalizing the                            coverage provides economic benefits by
the number of newly-covered individuals                           2001 Interim Rules                                                 reducing the numbers of uninsured and
is small relative to the total number of                                                                                             thereby improving health outcomes. The
plan participants and costs are distributed                       Prohibiting Discrimination                                         regulations entail a shifting of costs from
evenly, then the increased burden for                                                                                                the employees whose rights are secured
                                                                      Many of the provisions of these reg-
each individual should be minimal. How-                                                                                              (and/or from other parties who would oth-
                                                                  ulations serve to specify more precisely
ever, it is unclear how previously-covered                                                                                           erwise pay for their health care) to plan
                                                                  than the statute alone exactly what prac-
individuals will respond to subsequent                                                                                               sponsors (or to other plan participants if
                                                                  tices are prohibited by HIPAA as unlawful
changes in their benefits package and if                                                                                             sponsors pass those costs back to them).
                                                                  discrimination in eligibility or employee
their response will have unforeseen eco-                                                                                                The Departments lack any basis on
                                                                  premiums among similarly situated em-
nomic costs.12 The HIPAA nondiscrimi-                                                                                                which to distinguish these benefits and
                                                                  ployees. For example, under the regula-
nation cost is estimated to be substantial.                                                                                          costs from those of the statute itself. It is
                                                                  tions, eligibility generally may not be re-
Annual group health plan costs average                                                                                               unclear how many plans were engaging
                                                                  stricted based on an individual’s partici-
approximately $7,100 per-participant,13                                                                                              in the discriminatory practices targeted
                                                                  pation in risky activities, confinement to
and it is likely that average costs would                                                                                            for prohibition by these regulatory provi-
                                                                  an institution, or absence from work on
be higher for individuals who had been                                                                                               sions. Because these provisions operate
                                                                  an individual’s enrollment date due to ill-
denied coverage due to health factors.                                                                                               largely at the margin of the statutory re-
                                                                  ness. The regulations provide that vari-
Prior to HIPAA’s enactment, less than                                                                                                quirements, it is likely that the effects of
                                                                  ous plan features including waiting peri-
one-tenth of one percent of employees, or                                                                                            these provisions were far smaller than the
                                                                  ods and eligibility for certain benefits con-
roughly 120,000 in today’s labor market,                                                                                             similar statutory effects. The Departments
                                                                  stitute rules for eligibility which may not
were denied employment-based coverage                                                                                                are confident, however, that by securing
                                                                  vary across similarly situated individuals
annually because of health factors.14 A                                                                                              employees’ access to affordable coverage
                                                                  based on health factors. They also pro-
simple assessment suggests that the total                                                                                            at the margin, the regulations, like the
                                                                  vide that plans may not reclassify employ-
cost of coverage for such employees could                                                                                            statute, have yielded benefits that justify
                                                                  ees based on health factors in order to cre-
be $850 million. However, this estimated                                                                                             costs.
                                                                  ate separate groups of similarly situated
statutory transfer is small relative to the
                                                                  individuals among which discrimination                             Clarifying Requirements
overall cost of employment-based health
                                                                  would be permitted.
coverage. Group health plans will spend
                                                                      All of these provisions have the effect                           Additional economic benefits derive di-
over $620 billion this year to cover ap-
                                                                  of clarifying and ensuring certain partici-                        rectly from the improved clarity provided
proximately 174 million employees and
                                                                  pants’ right to freedom from discrimina-                           by the regulations. The regulation pro-
their dependents.15 Estimated costs under
                                                                  tion in eligibility and premium amounts,                           vides clarity through both its provisions
HIPAA’s nondiscrimination provisions
                                                                  thereby securing their access to affordable                        and its examples of how those provisions
represent a very small fraction of one
                                                                  group health plan coverage. The costs and                          apply in various circumstances. By clari-
percent of total group health plan expen-
                                                                  benefits attributable to these provisions re-                      fying employees’ rights and plan sponsors’
ditures.
                                                                  semble those attendant to HIPAA’s statu-                           obligations under HIPAA’s nondiscrimina-
                                                                  tory nondiscrimination provisions. Secur-                          tion provisions, the regulations reduce un-
                                                                  ing participants’ access to affordable group                       certainty and costly disputes over these

11 The voluntary nature of the employment-based health benefit system in conjunction with the open and dynamic character of labor markets make explicit as well as implicit negotiations
on compensation a key determinant of the prevalence of employee benefits coverage. It is likely that 80% to 100% of the cost of employee benefits is borne by workers through reduced
wages (see for example Jonathan Gruber and Alan B. Krueger, “The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers Compensation Insurance,” Tax Policy and
Economy (1991); Jonathan Gruber, “The Incidence of Mandated Maternity Benefits,” American Economic Review, Vol. 84 (June 1994), pp. 622-641; Lawrence H. Summers, “Some Simple
Economics of Mandated Benefits,” American Economic Review, Vol. 79, No. 2 (May 1989); Louise Sheiner, “Health Care Costs, Wages, and Aging,” Federal Reserve Board of Governors
working paper, April 1999; and Edward Montgomery, Kathryn Shaw, and Mary Ellen Benedict, “Pensions and Wages: An Hedonic Price Theory Approach,” International Economic Review,
Vol. 33 No. 1, Feb. 1992.). The prevalence of benefits is therefore largely dependent on the efficacy of this exchange. If workers perceive that there is the potential for inappropriate denial of
benefits they will discount their value to adjust for this risk. This discount drives a wedge in the compensation negotiation, limiting its efficiency. With workers unwilling to bear the full cost
of the benefit, fewer benefits will be provided. The extent to which workers perceive a federal regulation supported by enforcement authority to improve the security and quality of benefits,
the differential between the employers costs and workers willingness top accept wage offsets is minimized.
12 Research shows that while the share of employers offering insurance is generally stable and eligibility rates have only declined slightly over time, the overall increase in uninsured workers is
due to the decline in worker take-up rates, which workers primarily attribute to cost. Research on elasticity of coverage, however, has focused on getting uninsured workers to adopt coverage
(which appears to require large subsidies) rather than covered workers opting out of coverage. This makes it difficult to ascertain the loss in coverage that would result from a marginal
increase in costs. (See, for example, David M. Cutler “Employee Costs and the Decline in Health Insurance Coverage” NBER Working Paper #9036. July 2002; Gruber, Jonathon and Ebonya
Washington. “Subsidies to Employee Health Insurance Premiums and the Health Insurance Market” NBER Working Paper #9567. March 2003; and Cooper, PF and J. Vistnes. “Workers’
Decisions to Take-up Offered Insurance Coverage: Assessing the Importance of Out-of-Pocket Costs” Med Care 2003, 41 (7 Suppl): III35–43.) Finally, economic discussions on elasticity of
insurance tend to view coverage as a discrete concept and does not consider that the value of coverage may have also changed.
13 Departments’ tabulations using the 2005 Kaiser Family Foundation’s Employer Health Benefits Annual Survey. Average employee premium is a weighted average of premiums for single,
family, and employee-plus-one health plans. The estimate for Employee-Plus-One health premiums was derived using the 2003 MEPS-IC, as was the share of employees in each type of plans.
Participants are defined as the workers or primary policy holders.
14Departments’ tabulations off the February 1997 Current Population Survey (CPS), Contingent Worker Supplement. The estimate was projected to reflect current labor market conditions
by assuming the same share of the employed, civilian force would be affected and using the 2004 CPS table, “Employment status of the civilian noninstitutional population, 1940 to date.”
15 The Departments’ estimate is based on the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) projected measure of total personal health expenditures by private
health insurance in 2005. This total ($707.0 billion) is then multiplied by the share of privately insured individuals covered by employer-sponsored health insurance in 2004 as estimated by
the 2005 March CPS (88 percent).



2007–6 I.R.B.                                                                                 448                                                                February 5, 2007
rights and obligations. Greater clarity pro-                    health factor. These requirements will,                         plans covering 460,000 participants. The
motes employers’ and employees’ com-                            therefore, apply to only a subset of all                        Departments considered the effect of each
mon understanding of the value of group                         wellness programs.                                              of the five requirements on these plans.
health plan benefits and confidence in the                          Available literature, together with                         For purposes of its estimates, the Depart-
security and predictability of those bene-                      comments received by the Departments,                           ments assumed that one-half of the plans
fits, thereby improving labor market effi-                      demonstrate that well-designed wellness                         in the latter group are also included in
ciency and fostering the establishment and                      programs can deliver benefits well in ex-                       the former, thereby estimating that 37,000
continuation of group health plans by em-                       cess of their costs. For example, the U.S.                      plans covering 1.3 million participants
ployers.                                                        Centers for Disease Control and Preven-                         will be subject to the five requirements for
                                                                tion estimate that implementing proven                          wellness programs.
Impact of the Final Rules                                       clinical smoking cessation interventions
                                                                can save one year of life for each $2,587                       Limit on Reward
   As noted earlier in this preamble, the                       invested.16 In addition to reduced mor-
Departments have not modified the 2001                          tality, benefits of effective wellness pro-                        Under the first requirement, any re-
interim rules in any way that would im-                         grams can include reduced absenteeism,                          ward, whether applicable to employee
pact the original cost estimates or the mag-                    improved productivity, and reduced med-                         premiums or benefit levels, must not ex-
nitude of the statutory transfers. Accord-                      ical costs.17 The requirements of the final                     ceed 20 percent of the total premium
ingly, no impact is attributable to these fi-                   regulation were crafted to accommodate                          for employee-only coverage under the
nal regulations when measured against the                       and not impair such beneficial programs,                        plan (with additional provisions related to
baseline of the interim final rules. The pro-                   while combating discrimination in eligi-                        rewards that apply also to classes of de-
visions of the 2001 interim rules offer the                     bility and premiums for similarly situated                      pendents). This percentage is the highest
appropriate baseline for this measurement                       individuals as intended by Congress.                            of the three alternative percentages sug-
because these rules were generally appli-                           Estimation of the economic impacts of                       gested in the proposed rule, and the award
cable for plan years beginning on or after                      the requirements is difficult because data                      limit used for purposes of the analysis of
July 1, 2001.                                                   on affected plans’ current practices are in-                    the proposed rule, which was 15 percent
                                                                complete, and because plans’ approaches                         — the midpoint of the three alternative
4. Costs and Benefits of the Rules                              to compliance with the requirements and                         percentages suggested in the proposal.
Applicable to Wellness Programs                                 the effects of those approaches will vary                       The estimates here also reflect increases in
                                                                and cannot be predicted. Nonetheless, the                       average annual premiums and the numbers
    By contrast with the nondiscrimination                      Departments endeavored to consider the                          of plans and participants since publication
regulatory provisions issued as interim fi-                     impacts fully and to develop estimates                          of the proposed rules.
nal rules, the provisions relating to well-                     based on reasonable assumptions.                                   The Departments lack representative
ness programs were issued as proposed                               The Departments estimate that 1.6                           data on the magnitude of the rewards
rules. This final regulation will not be-                       percent of large plans and 1.2 percent                          applied by affected plans today. One con-
come effective until its applicability date.                    of small plans currently vary employee                          sultant practicing in this area suggested
    Under the final regulation, health plans                    premium contributions across similarly                          that wellness incentive premium discounts
generally may vary employee premium                             situated individuals due to participation in                    ranged from about 3 percent to 23 percent,
contributions or benefit levels across simi-                    a wellness program that provides rewards                        with an average of about 11 percent.20 This
larly situated individuals based on a health                    based on satisfaction of a standard re-                         suggests that most affected plans, includ-
factor only in connection with wellness                         lated to a health factor.18 This amounts to                     ing some whose discounts are somewhat
programs. The final regulation establishes                      30,000 plans covering 1.1 million partici-                      larger than average, already comply with
five requirements for wellness programs                         pants. According to survey data reported                        the first requirement and will not need to
that vary premiums or benefits based on                         by Hewitt Associates,19 just less than                          reduce the size of the rewards they apply.
participation in the program and condition                      one-half as many plans vary benefit levels                      It appears likely, however, that perhaps
a reward involving premiums or benefits                         across similarly situated individuals as                        a few thousand plans covering approxi-
on satisfaction of a standard related to a                      vary premiums. This amounts to 13,000                           mately one hundred thousand participants
16 Cromwell, J., W. J. Bartosch, M. C. Fiore, V. Hasselblad and T. Baker . “Cost-Effectiveness of the Clinical Practice Recommendations in the AHCPR Guideline for Smoking Cessation.”
Journal of the American Medical Association, vol. 278 (December 3, 1997): 1759–66.
17 The benefits of employer wellness programs are well documented. One study found the annual per participant savings to be $613 while private companies have reported returns of as
much as $4.50 in lowered medical expenses for every dollar spent on health programs. (See for example, Gregg M. State et al, “Quantifiable Impact of the Contract for Health Wellness:
Health Behaviors, Health Care Costs, Disability and Workers’ Compensation,” Journal of Occupational and Environmental Medicine (2003), vol. 45 (2): 109–117; Morgan O’Rourke & Laura
Sullivan, “A Health Return on Employee Investment” Risk Management (2003), vol. 50 (11): 34–38; American Association of Health Plans and Health Insurance Association of America “The
Cost Savings of Disease Management Programs: Report on a Study of Health Plans,” November, 2003; Rachel Christensen, “Employment-Based Health Promotion and Wellness Programs”
EBRI Notes (2001), vol. 22 (7): 1–6; and Steven G. Aldana “Financial Impact of Wellness Programs: A Comprehensive Review of the Literature,” American Journal of Health Promotions
(2001), vol. 15 (5): 296–320.)
18   Estimates are based on a 1993 survey of employers by the Robert Wood Johnson Foundation. More recent estimates are unavailable.
19   Hewitt Associates, July 2003.
20 This estimate was made in 1998, shortly after the 1997 interim final rule was published. Since then, it appears that wellness programs advocates have been advising health plans to offer
premium discounts in the range of 5 to 11 percent, well below the proposed ceiling. For a full discussion, see Larry Chapman’s, “Increasing Participation in Wellness Programs,” National
Wellness Institute Members ‘Ask the Expert,’ July/August 2004.



February 5, 2007                                                                          449                                                                     2007–6 I.R.B.
will need to reduce the size of their re-                        results in an estimate of the aggregate cost                  isting wellness programs generally satisfy
wards in order to comply with the first                          at $6 million.                                                this requirement. As was stated in the anal-
requirement.                                                         New economic costs and benefits may                       ysis of the proposed rule, this requirement
    The Departments considered the po-                           arise if changes in the size of rewards                       therefore is not expected to compel plans
tential economic effects of requiring                            result in changes in participant behavior.                    to modify existing wellness programs or
these plans to reduce the size of their                          Net economic welfare might be lost if                         entail additional economic costs.
rewards. These effects are likely to in-                         some wellness programs’ effectiveness is
clude a shifting of costs between plan                           eroded, but the magnitude and incidence                       Annual Opportunity to Qualify
sponsors and participants, as well as new                        of such effects is expected to be negli-
                                                                                                                                  Although this requirement was in-
economic costs and benefits. Shifts in                           gible. Consider a wellness program that
                                                                                                                               cluded in the proposal within the require-
costs will arise as plans reduce rewards                         discounts premiums for participants who
                                                                                                                               ment for reasonable design, it has been re-
where necessary. Plan sponsors can exer-                         take part in an exercise program. It is plau-
                                                                                                                               organized as a separate provision in these
cise substantial control over the size and                       sible that, at the margin, a few participants
                                                                                                                               final regulations. At the time of the pro-
direction of these shifts. Limiting the size                     who would take part in order to obtain
                                                                                                                               posal, the Departments assumed that most
of rewards restricts only the differential                       an existing discount will not take part to
                                                                                                                               plans satisfied the requirements for rea-
treatment between participants who sat-                          obtain a somewhat lower discount. This
                                                                                                                               sonable design, such that they would not
isfy wellness program standards and those                        effect is expected to be negligible, how-
                                                                                                                               be required to modify existing programs.
who do not. It does not, for example,                            ever. Reductions in discounts are likely
                                                                                                                               Accordingly, no cost was attributed to
restrict plans sponsors’ flexibility to de-                      to average about $57 annually, which is
                                                                                                                               the reasonable design requirements when
termine the overall respective employer                          very small when spread over biweekly pay
                                                                                                                               taken together. The Departments did re-
and employee shares of base premiums.                            periods. Moreover, the final regulation
                                                                                                                               quest comments on this assumption, but
Possible outcomes include a shifting of                          limits only rewards applied to similarly
                                                                                                                               received no additional information in re-
costs to plan sponsors from participants                         situated individuals in the context of a
                                                                                                                               sponse. Accordingly, the Departments
who satisfy wellness program standards,                          group health plan. It does not restrict
                                                                                                                               have not attributed a cost to this provision
from plan sponsors to participants who do                        plan sponsors from encouraging healthy
                                                                                                                               of the final regulations.
not satisfy the standards, from participants                     lifestyles in other ways, such as by varying
who satisfy the standards to those who do                        life insurance premiums.                                      Uniform Availability
not, or some combination of these.                                   On the other hand, net economic wel-
    The Departments developed a very                             fare likely will be gained in instances                           The fourth requirement provides that
rough estimate of the total amount of costs                      where large premium differentials would                       where rewards are conditioned on satisfac-
that might derive from this requirement.                         otherwise have served to discourage en-                       tion of a standard related to a health fac-
The Departments’ estimate assumes that                           rollment in health plans by employees who                     tor, rewards must be available to all simi-
(1) all rewards take the form of employee                        did not satisfy wellness program require-                     larly situated individuals. A reward is not
premium discounts; (2) discounts are dis-                        ments.                                                        available to all similarly situated individu-
tributed evenly within both the low-to-av-                           The Departments believe that the net                      als unless the program allows for a reason-
erage range and the average-to-high range,                       economic gains from prohibiting rewards                       able alternative standard if the otherwise
and are distributed across these ranges                          so large that they could discourage enroll-                   applicable initial standard is unreasonably
such that their mean equals the assumed                          ment based on health factors justify any net                  difficult to achieve due to a medical con-
average; and (3) 70 percent of participants                      losses that might derive from the negligi-                    dition or medically inadvisable for the in-
qualify for the discount. The 4,000 af-                          ble reduction of some employees’ incen-                       dividual to meet. In particular, the pro-
fected plans could satisfy this requirement                      tive to participate in wellness programs.                     gram must offer any such individual the
by reducing the premium discount for                                                                                           opportunity to satisfy a reasonable alter-
the 100,000 participants who successfully                        Reasonable Design                                             native standard. Comments received by
complete a certified wellness program.                                                                                         the Departments and available literature on
When applied to the 2005 average annual                             Under the second requirement, the pro-                     employee wellness programs suggest that
employee-only premium of $4,024,21 dis-                          gram must be reasonably designed to pro-                      some wellness programs do not currently
counts range from $115 to $920, with an                          mote health or prevent disease. The De-                       satisfy this requirement and will have to
average of $460. The maximum allowable                           partments believe that a program that is                      be modified. The Departments estimate
discount based on 20 percent of current                          not so designed would not provide eco-                        that among employers that provide incen-
premium is $805. Reducing all discounts                          nomic benefits, but would serve merely                        tives for employees to participate in well-
greater than $805 to that amount will re-                        to shift costs from plan sponsors to tar-                     ness programs, nine percent require em-
sult in an average annual reduction of                           geted individuals based on health factors.                    ployees to achieve a low risk behavior to
about $57. Applying this reduction to the                        Comments received by the Departments                          qualify for the incentive, 53 percent re-
100,000 participants assumed to be cov-                          and available literature on employee well-                    quire a pledge of compliance, and 55 per-
ered by 4,000 plans affected by the limit                        ness programs, however, suggest that ex-                      cent require participation in a program.22

21   Average based on the Kaiser Family Foundation/Health Research and Education Trust Survey of Employer-Sponsored Health Benefits, 2005.
22   Hewitt Associates, July, 2003. The sum of these shares exceeds 100 percent due to some employers using multiple criteria to determine compliance.



2007–6 I.R.B.                                                                              450                                                           February 5, 2007
Depending on the nature of the wellness                           ticipant would ever find them unreason-                           ever, the regulation does not prescribe a
program, it might be unreasonably difficult                       ably difficult to satisfy due to a medi-                          particular type of alternative standard that
due to a medical condition or medically                           cal condition or medically inadvisable to                         must be provided. Instead, it permits plan
inadvisable for at least some plan partici-                       attempt. The Departments estimate that                            sponsors flexibility to provide any reason-
pants to achieve the behavior or to comply                        3,000 potentially affected plans have ini-                        able alternative, or to waive the standard,
with or participate in the program.                               tial wellness program standards that might                        for individuals for whom the initial stan-
    The Departments identified three broad                        be unreasonably difficult for some partic-                        dard is unreasonably difficult due to a med-
types of economic impact that might arise                         ipants to satisfy due to a medical condi-                         ical condition or medically inadvisable to
from this requirement. First, affected plans                      tion or medically inadvisable to attempt.23                       meet. The Departments expect that plan
will incur some economic cost to make                             Moreover, because alternatives need not                           sponsors will select alternatives that en-
available reasonable alternative standards.                       be made available until they are sought by                        tail the minimum net costs possible. Plan
Second, additional economic costs and                             qualified plan participants, it might be pos-                     sponsors may select low-cost alternatives,
benefits may arise depending on the na-                           sible for some plans to go for years with-                        such as requiring an individual for whom
ture of alternatives provided, individuals’                       out needing to make available an alterna-                         it would be unreasonably difficult to quit
use of these alternatives, and any changes                        tive standard. This could be particularly                         smoking (and thereby qualify for a non-
in the affected individuals’ behavioral and                       likely for small plans.24                                         smoker discount) to attend a smoking ces-
health outcomes. Third, some costs may                                The Departments estimate that as many                         sation program that is available at little or
be shifted from individuals who would                             as 27 percent of participants in plans with                       no cost in the community, or to watch ed-
fail to satisfy programs’ initial standards,                      rewards that are based on meeting a stan-                         ucational videos or review educational lit-
but who will satisfy reasonable alterna-                          dard related to a health factor, or 344,000                       erature. Plan sponsors presumably will se-
tive standards once available (and thereby                        individuals, might fail to satisfy wellness                       lect higher-cost alternatives only if they
qualify for associated rewards), to plan                          programs’ initial standards because they                          thereby derive offsetting benefits, such as
sponsors (or to other participants in their                       are unreasonably difficult due to a medi-                         a higher smoking cessation success rate.
plans if plan sponsors elect to pass these                        cal condition or medically inadvisable to                             Although there is considerable uncer-
costs back to all participants).                                  meet.25 Of these, only about 30,000 are in                        tainty in these estimates, it seems reason-
    The Departments note that some plans                          the 3,000 plans assumed to apply standards                        able to assume that the net cost sponsors
that offer rewards to similarly situated in-                      that might be unreasonably difficult due to                       will incur in the provision of alternatives,
dividuals based on their ability to meet                          a medical condition or medically inadvis-                         including new economic costs and bene-
a standard related to a health factor (and                        able for some plan participants to satisfy.                       fits, will not exceed the cost of provid-
are therefore subject to the requirement)                         The standards would in fact be unreason-                          ing discounts (or waiving surcharges) for
may not need to provide alternative stan-                         ably difficult or medically inadvisable to                        all plan participants who qualify for alter-
dards. The requirement provides that al-                          satisfy for some subset of these individu-                        natives, which is estimated at between $2
ternative standards need not be specified                         als — roughly two-thirds, or 19,000 by the                        million and $9 million.28 Other economic
or provided until a participant for whom it                       Departments’ estimate.26 Of these, it is as-                      costs and benefits might arise where alter-
is unreasonably difficult due to a medical                        sumed that between 5,000 and 19,000 of                            native standards are made available. For
condition or medically inadvisable to sat-                        those individuals that seek alternative stan-                     example, some individuals might receive
isfy the initial standard seeks such an al-                       dards are able to satisfy them.27                                 a discount for satisfying alternative stan-
ternative. Some wellness programs’ ini-                               The cost associated with establishing                         dards that turn out to be less beneficial
tial standards may be such that no par-                           alternative standards is unknown. How-                            to overall health than the initial standard

23 Estimate is based on both the share of plans in the 2003–04 Hewitt survey stating that certain health factors or lifestyle choices affect employees’ benefit coverage and the share of employers
requiring employees to achieve a lower-risk behavior to earn incentives. These measures are then combined with the number of workers in the civilian labor force (from 2003 estimates of
the Bureau of Labor Statistics (BLS) suffering from these maladies (as provided by the Centers for Disease Control (CDC) 2004 Health and the National Center for Statistics and Analysis
(NCSA) 2004 estimates of seatbelt use), by demographic group.
24 The most common standards that would be implemented by this provision of the wellness program rules pertain to smoking, blood pressure, and cholesterol levels, according to the Hewitt
survey. Based on data from the CDC, NCSA and BLS, the Departments estimate that among plans with five participants, about one-fourth will not contain any smokers, one-third will not
contain participants with high blood pressure and two-fifths will not contain any with high cholesterol. Approximately 97 percent of all plans with potentially difficult initial wellness program
standards have fewer than 100 participants.
25 This estimate is considerably lower than that offered in the proposal due to a difference in the format of the data reported in the 2001 and 2003 Hewitt surveys, and the Departments’ original
adjustment for data reported in the 2001 survey as, “not provided.” The Departments believe in light of the 2003 data that the adjustments thought to be appropriate at the time overestimated
the number of plans with standards that might be unreasonably difficult or medically inadvisable to meet, resulting in more instances in which alternative standards might be established and
met, and greater magnitudes of transfers for individuals who would newly attain rewards. The Departments have revised their assumptions to account for a smaller number of plans with
standards unreasonably difficult or medically inadvisable to meet, and a correspondingly larger number of participants who will already have been satisfying these standards. Accordingly,
this results in a reduction of the estimates of transfers in connection with establishing reasonable alternative standards.
26 Having previously determined the share of the working class population suffering from various maladies using CDC, NCSA and BLS estimates and how, according to the Hewitt survey,
these conditions are factored into wellness programs, the Departments were able to estimate that 26.8 percent of plan participants may initially fail to satisfy program standards. Since the
Hewitt study went on to state that 9 percent of employers surveyed required participants to meet the standard in order to receive premium discounts, it was then concluded that 2.3 percent
may have difficulty meeting the standards and 1.5 percent will have difficulty meeting the standards.
27 No independent estimates of those satisfying alternative standards were available, so the Departments created an upper bound which assumes all individuals for whom the standards are
unreasonably difficult seek and satisfy an alternative standard, and a lower bound which assumes half of those for whom the standards are unreasonably difficult seek an alternative, and half
of those are able to satisfy it.
28These estimates are the product of the range of numbers of individuals who might newly attain rewards and the average premium reward. It is likely that many plan sponsors will find more
cost effective ways to satisfy this requirement, and that the true net cost to them will therefore be smaller than this.



February 5, 2007                                                                              451                                                                       2007–6 I.R.B.
might have been, resulting in a net loss of      required. The Departments generally ac-        §54.9802–1T [Removed]
economic welfare. In other cases, the sat-       count elsewhere for plans’ cost of updating
isfaction of an alternative standard might       such materials to reflect changes in plan         Par. 2. Section 54.9802–1T is removed.
produce the desired health improvement,          provisions as required under various dis-         Par. 3. Section 54.9802–1 is revised to
which would represent a net gain in eco-         closure requirements and as is part of usual   read as follows:
nomic welfare.                                   business practice. This particular require-
   Although outcomes are uncertain, the          ment is expected to represent a negligible     §54.9802–1 Prohibiting discrimination
Departments note that plan sponsors have         fraction of the ongoing cost of updating       against participants and beneficiaries
strong motivation to identify and provide        plans’ materials, and is not separately ac-    based on a health factor.
alternative standards that have positive net     counted for here.
economic effects. They will be disinclined                                                          (a) Health factors. (1) The term health
to provide alternatives that worsen behav-       Statutory Authority                            factor means, in relation to an individual,
ioral and health outcomes, or that make                                                         any of the following health status-related
                                                    The Department of the Treasury final        factors:
financial rewards available absent mean-
                                                 rule is adopted pursuant to the authority          (i) Health status;
ingful efforts by participants to improve
                                                 contained in sections 7805 and 9833 of the         (ii) Medical condition (including both
their health habits and health. Instead they
                                                 Code (26 U.S.C. 7805, 9833).                   physical and mental illnesses), as defined
will be inclined to provide alternatives
                                                    The Department of Labor final rule          in §54.9801–2;
that sustain or reinforce plan participants’
                                                 is adopted pursuant to the authority con-          (iii) Claims experience;
incentive to improve their health habits
                                                 tained in sections 29 U.S.C. 1027, 1059,           (iv) Receipt of health care;
and health, and/or that help participants
                                                 1135, 1161–1168, 1169, 1181–1183, 1181             (v) Medical history;
make such improvements. It therefore
                                                 note, 1185, 1185a, 1185b, 1191, 1191a,             (vi) Genetic information, as defined in
seems likely that gains in economic wel-
                                                 1191b, and 1191c, sec. 101(g), Pub-            §54.9801–2 of this chapter;
fare from this requirement will equal or
                                                 lic Law 104–191, 110 Stat. 1936; sec.              (vii) Evidence of insurability; or
justify losses. The Departments anticipate
                                                 401(b), Public Law 105–200, 112 Stat.              (viii) Disability.
that the requirement to provide reasonable
                                                 645 (42 U.S.C. 651 note); Secretary of             (2) Evidence of insurability includes —
alternative standards will reduce instances
                                                 Labor’s Order 1–2003, 68 FR 5374 (Feb.             (i) Conditions arising out of acts of do-
where wellness programs serve only to
                                                 3, 2003).                                      mestic violence; and
shift costs to higher risk individuals and
                                                    The Department of Health and Human              (ii) Participation in activities such as
increase instances where programs suc-
                                                 Services final rule is adopted pursuant        motorcycling, snowmobiling, all-terrain
ceed at helping individuals with higher
                                                 to the authority contained in sections         vehicle riding, horseback riding, skiing,
health risks improve their health habits
                                                 2701 through 2763, 2791, and 2792 of           and other similar activities.
and health.
                                                 the PHS Act (42 U.S.C. 300gg through               (3) The decision whether health cover-
                                                 300gg–63, 300gg–91, and 300gg–92), as          age is elected for an individual (including
Disclosure Regarding Reasonable
                                                 added by HIPAA (Public Law 104–191,            the time chosen to enroll, such as under
Alternative Standards
                                                 110 Stat. 1936), and amended by the            special enrollment or late enrollment) is
   The fifth requirement provides that           Mental Health Parity Act (MHPA) and the        not, itself, within the scope of any health
plan materials describing wellness pro-          Newborns’ and Mothers’ Health Protec-          factor. (However, under §54.9801–6, a
gram standards that are related to a health      tion Act (NMHPA) (Public Law 104–204,          plan must treat special enrollees the same
factor must disclose the availability of         110 Stat. 2935), and the Women’s Health        as similarly situated individuals who are
reasonable alternative standards. Under          and Cancer Rights Act (WHCRA) (Public          enrolled when first eligible.)
some wellness programs, an individual            Law 105–277, 112 Stat. 2681–436).                  (b) Prohibited discrimination in rules
must satisfy a standard related to a health                        *****                        for eligibility — (1) In general. (i) A group
factor in order to qualify for the reward.                                                      health plan may not establish any rule for
   Plans offering wellness programs under        Adoption of Amendments to the                  eligibility (including continued eligibility)
which an individual must satisfy a standard      Regulations                                    of any individual to enroll for benefits un-
related to a health factor in order to qual-                                                    der the terms of the plan that discriminates
                                                   Internal Revenue Service
ify for the reward must disclose in all plan                                                    based on any health factor that relates to
                                                   26 CFR Chapter I
materials describing the terms of the pro-                                                      that individual or a dependent of that in-
                                                   Accordingly, 26 CFR Part 54 is
gram the availability of a reasonable alter-                                                    dividual. This rule is subject to the pro-
                                                 amended as follows:
native standard. The regulations provide                                                        visions of paragraph (b)(2) of this section
sample language for this disclosure. An          PART 54 — PENSION EXCISE TAXES                 (explaining how this rule applies to bene-
actual description of the alternative stan-                                                     fits), paragraph (b)(3) of this section (al-
dard is not required in such materials. In          Paragraph 1. The authority citation for     lowing plans to impose certain preexist-
plan materials that merely mention that a        part 54 is amended by removing the cita-       ing condition exclusions), paragraph (d) of
wellness program is available but do not         tion for §54.9802–1T to read, in part, as      this section (containing rules for establish-
describe its terms, this disclosure of the       follows:                                       ing groups of similarly situated individu-
availability of an alternative standard is not      Authority: 26 U.S.C. 7805. * * *            als), paragraph (e) of this section (relating


2007–6 I.R.B.                                                       452                                            February 5, 2007
to nonconfinement, actively-at-work, and                   activities, including motorcycling, are excluded from     ficiaries. In addition, a plan may impose
other service requirements), paragraph (f)                 coverage.                                                 annual, lifetime, or other limits on ben-
of this section (relating to wellness pro-                     (ii) Conclusion. In this Example 3, excluding         efits and may require the satisfaction of
                                                           from the plan individuals who participate in recre-
grams), and paragraph (g) of this section                  ational activities, such as motorcycling, is a rule
                                                                                                                     a deductible, copayment, coinsurance, or
(permitting favorable treatment of individ-                for eligibility that discriminates based on one more      other cost-sharing requirement in order to
uals with adverse health factors).                         health factors and thus violates this paragraph (b)(1).   obtain a benefit if the limit or cost-shar-
    (ii) For purposes of this section, rules                   Example 4. (i) Facts. A group health plan applies     ing requirement applies uniformly to all
for eligibility include, but are not limited               for a group health policy offered by an issuer. As part   similarly situated individuals and is not di-
                                                           of the application, the issuer receives health informa-
to, rules relating to —                                    tion about individuals to be covered under the plan.
                                                                                                                     rected at individual participants or bene-
    (A) Enrollment;                                        Individual A is an employee of the employer main-         ficiaries based on any health factor of the
    (B) The effective date of coverage;                    taining the plan. A and A’s dependents have a history     participants or beneficiaries. In the case of
    (C) Waiting (or affiliation) periods;                  of high health claims. Based on the information about     a cost-sharing requirement, see also para-
    (D) Late and special enrollment;                       A and A’s dependents, the issuer excludes A and A’s       graph (b)(2)(ii) of this section, which per-
                                                           dependents from the group policy it offers to the em-
    (E) Eligibility for benefit packages (in-              ployer.
                                                                                                                     mits variances in the application of a cost-
cluding rules for individuals to change                        (ii) Conclusion. See Example 4 in 29 CFR              sharing mechanism made available under a
their selection among benefit packages);                   2590.702(b)(1) and 45 CFR 146.121(b)(1) for a con-        wellness program. (Whether any plan pro-
    (F) Benefits (including rules relating to              clusion that the exclusion by the issuer of A and A’s     vision or practice with respect to benefits
covered benefits, benefit restrictions, and                dependents from coverage is a rule for eligibility that   complies with this paragraph (b)(2)(i) does
                                                           discriminates based on one or more health factors
cost-sharing mechanisms such as coinsur-                   and violates rules under 29 CFR 2590.702(b)(1) and
                                                                                                                     not affect whether the provision or prac-
ance, copayments, and deductibles), as de-                 45 CFR 146.121(b)(1) similar to the rules under           tice is permitted under ERISA, the Amer-
scribed in paragraphs (b)(2) and (3) of this               this paragraph (b)(1). (If the employer is a small        icans with Disabilities Act, or any other
section;                                                   employer under 45 CFR 144.103 (generally, an em-          law, whether State or Federal.)
    (G) Continued eligibility; and                         ployer with 50 or fewer employees), the issuer also           (C) For purposes of this paragraph
                                                           may violate 45 CFR 146.150, which requires issuers
    (H) Terminating coverage (including                    to offer all the policies they sell in the small group
                                                                                                                     (b)(2)(i), a plan amendment applicable to
disenrollment) of any individual under the                 market on a guaranteed available basis to all small       all individuals in one or more groups of
plan.                                                      employers and to accept every eligible individual in      similarly situated individuals under the
    (iii) The rules of this paragraph (b)(1)               every small employer group.) If the plan provides         plan and made effective no earlier than
are illustrated by the following examples:                 coverage through this policy and does not pro-            the first day of the first plan year after the
                                                           vide equivalent coverage for A and A’s dependents
    Example 1. (i) Facts. An employer sponsors a                                                                     amendment is adopted is not considered to
                                                           through other means, the plan violates this paragraph
group health plan that is available to all employees                                                                 be directed at any individual participants
who enroll within the first 30 days of their employ-       (b)(1).
ment. However, employees who do not enroll within              (2) Application to benefits — (i) Gen-                or beneficiaries.
the first 30 days cannot enroll later unless they pass a   eral rule. (A) Under this section, a group                    (D) The rules of this paragraph (b)(2)(i)
physical examination.                                      health plan is not required to provide cov-               are illustrated by the following examples:
    (ii) Conclusion. In this Example 1, the require-                                                                     Example 1. (i) Facts. A group health plan applies
                                                           erage for any particular benefit to any
ment to pass a physical examination in order to enroll                                                               a $500,000 lifetime limit on all benefits to each par-
in the plan is a rule for eligibility that discriminates
                                                           group of similarly situated individuals.                  ticipant or beneficiary covered under the plan. The
based on one or more health factors and thus violates          (B) However, benefits provided under                  limit is not directed at individual participants or ben-
this paragraph (b)(1).                                     a plan must be uniformly available to all                 eficiaries.
    Example 2. (i) Facts. Under an employer’s group        similarly situated individuals (as described                  (ii) Conclusion. In this Example 1, the limit does
health plan, employees who enroll during the first 30                                                                not violate this paragraph (b)(2)(i) because $500,000
                                                           in paragraph (d) of this section). Likewise,
days of employment (and during special enrollment                                                                    of benefits are available uniformly to each participant
periods) may choose between two benefit packages:
                                                           any restriction on a benefit or benefits must             and beneficiary under the plan and because the limit
an indemnity option and an HMO option. However,            apply uniformly to all similarly situated in-             is applied uniformly to all participants and beneficia-
employees who enroll during late enrollment are per-       dividuals and must not be directed at indi-               ries and is not directed at individual participants or
mitted to enroll only in the HMO option and only if        vidual participants or beneficiaries based                beneficiaries.
they provide evidence of good health.                                                                                    Example 2. (i) Facts. A group health plan has a $2
                                                           on any health factor of the participants or
    (ii) Conclusion. In this Example 2, the require-                                                                 million lifetime limit on all benefits (and no other life-
ment to provide evidence of good health in order to
                                                           beneficiaries (determined based on all the                time limits) for participants covered under the plan.
be eligible for late enrollment in the HMO option is a     relevant facts and circumstances). Thus,                  Participant B files a claim for the treatment of AIDS.
rule for eligibility that discriminates based on one or    for example, a plan may limit or exclude                  At the next corporate board meeting of the plan spon-
more health factors and thus violates this paragraph       benefits in relation to a specific disease or             sor, the claim is discussed. Shortly thereafter, the plan
(b)(1). However, if the plan did not require evidence                                                                is modified to impose a $10,000 lifetime limit on ben-
                                                           condition, limit or exclude benefits for cer-
of good health but limited late enrollees to the HMO                                                                 efits for the treatment of AIDS, effective before the
option, the plan’s rules for eligibility would not dis-
                                                           tain types of treatments or drugs, or limit               beginning of the next plan year.
criminate based on any health factor, and thus would       or exclude benefits based on a determina-                     (ii) Conclusion. The facts of this Example 2
not violate this paragraph (b)(1), because the time an     tion of whether the benefits are experimen-               strongly suggest that the plan modification is di-
individual chooses to enroll is not, itself, within the    tal or not medically necessary, but only                  rected at B based on B’s claim. Absent outweighing
scope of any health factor.                                                                                          evidence to the contrary, the plan violates this para-
                                                           if the benefit limitation or exclusion ap-
    Example 3. (i) Facts. Under an employer’s group                                                                  graph (b)(2)(i).
health plan, all employees generally may enroll
                                                           plies uniformly to all similarly situated in-                 Example 3. (i) A group health plan applies for
within the first 30 days of employment. However,           dividuals and is not directed at individual               a group health policy offered by an issuer. Individ-
individuals who participate in certain recreational        participants or beneficiaries based on any                ual C is covered under the plan and has an adverse
                                                           health factor of the participants or bene-                health condition. As part of the application, the issuer



February 5, 2007                                                                   453                                                                2007–6 I.R.B.
receives health information about the individuals to        uated individuals and is not directed at individual par-   sary. However, the plan excludes benefits for self-
be covered, including information about C’s adverse         ticipants or beneficiaries.                                inflicted injuries or injuries sustained in connection
health condition. The policy form offered by the is-            Example 7. (i) Facts. Under a group health plan,       with attempted suicide. Because of depression, Indi-
suer generally provides benefits for the adverse health     doctor visits are generally subject to a $250 annual       vidual D attempts suicide. As a result, D sustains in-
condition that C has, but in this case the issuer offers    deductible and 20 percent coinsurance requirement.         juries and is hospitalized for treatment of the injuries.
the plan a policy modified by a rider that excludes         However, prenatal doctor visits are not subject to any     Under the exclusion, the plan denies D benefits for
benefits for C for that condition. The exclusionary         deductible or coinsurance requirement. These rules         treatment of the injuries.
rider is made effective the first day of the next plan      are applied uniformly to all similarly situated indi-          (ii) Conclusion. In this Example 1, the suicide
year.                                                       viduals and are not directed at individual participants    attempt is the result of a medical condition (depres-
     (ii) Conclusion. See Example 3 in 29 CFR               or beneficiaries.                                          sion). Accordingly, the denial of benefits for the treat-
2590.702(b)(2)(i) and 45 CFR 146.121(b)(2)(i) for               (ii) Conclusion. In this Example 7, imposing dif-      ments of D’s injuries violates the requirements of this
a conclusion that the issuer violates rules under 29        ferent deductible and coinsurance requirements for         paragraph (b)(2)(iii) because the plan provision ex-
CFR 2590.702(b)(2)(i) and 45 CFR 146.121(b)(2)(i)           prenatal doctor visits and other visits does not violate   cludes benefits for treatment of an injury resulting
similar to the rules under this paragraph (b)(2)(i)         this paragraph (b)(2)(i) because a plan may establish      from a medical condition.
because benefits for C’s condition are available to         different deductibles or coinsurance requirements for          Example 2. (i) Facts. A group health plan pro-
other individuals in the group of similarly situated        different services if the deductible or coinsurance re-    vides benefits for head injuries generally. The plan
individuals that includes C but are not available to        quirement is applied uniformly to all similarly situ-      also has a general exclusion for any injury sustained
C. Thus, the benefits are not uniformly available to        ated individuals and is not directed at individual par-    while participating in any of a number of recreational
all similarly situated individuals. Even though the         ticipants or beneficiaries.                                activities, including bungee jumping. However, this
exclusionary rider is made effective the first day of           Example 8. (i) Facts. An employer sponsors a           exclusion does not apply to any injury that results
the next plan year, because the rider does not apply to     group health plan that is available to all current em-     from a medical condition (nor from domestic vio-
all similarly situated individuals, the issuer violates     ployees. Under the plan, the medical care expenses of      lence). Participant E sustains a head injury while
the rules under 29 CFR 2590.702(b)(2)(i) and 45             each employee (and the employee’s dependents) are          bungee jumping. The injury did not result from a
CFR 146.121(b)(2)(i). If the plan provides coverage         reimbursed up to an annual maximum amount. The             medical condition (nor from domestic violence). Ac-
through this policy and does not provide equivalent         maximum reimbursement amount with respect to an            cordingly, the plan denies benefits for E’s head injury.
coverage for C through other means, the plan violates       employee for a year is $1500 multiplied by the num-            (ii) Conclusion. In this Example 2, the plan pro-
this paragraph (b)(2)(i).                                   ber of years the employee has participated in the plan,    vision that denies benefits based on the source of an
     Example 4. (i) Facts. A group health plan has          reduced by the total reimbursements for prior years.       injury does not restrict benefits based on an act of
a $2,000 lifetime limit for the treatment of temporo-           (ii) Conclusion. In this Example 8, the variable       domestic violence or any medical condition. There-
mandibular joint syndrome (TMJ). The limit is ap-           annual limit does not violate this paragraph (b)(2)(i).    fore, the provision is permissible under this paragraph
plied uniformly to all similarly situated individuals       Although the maximum reimbursement amount for a            (b)(2)(iii) and does not violate this section. (How-
and is not directed at individual participants or bene-     year varies among employees within the same group          ever, if the plan did not allow E to enroll in the plan
ficiaries.                                                  of similarly situated individuals based on prior claims    (or applied different rules for eligibility to E) because
     (ii) Conclusion. In this Example 4, the limit does     experience, employees who have participated in the         E frequently participates in bungee jumping, the plan
not violate this paragraph (b)(2)(i) because $2,000 of      plan for the same length of time are eligible for the      would violate paragraph (b)(1) of this section.)
benefits for the treatment of TMJ are available uni-        same total benefit over that length of time (and the           (3) Relationship to §54.9801–3. (i) A
formly to all similarly situated individuals and a plan     restriction on the maximum reimbursement amount
                                                                                                                       preexisting condition exclusion is permit-
may limit benefits covered in relation to a specific        is not directed at any individual participants or bene-
disease or condition if the limit applies uniformly to      ficiaries based on any health factor).
                                                                                                                       ted under this section if it —
all similarly situated individuals and is not directed          (ii) Exception for wellness programs. A                    (A) Complies with §54.9801–3;
at individual participants or beneficiaries. (This ex-
                                                            group health plan may vary benefits, in-                       (B) Applies uniformly to all similarly
ample does not address whether the plan provision                                                                      situated individuals (as described in para-
is permissible under the Americans with Disabilities
                                                            cluding cost-sharing mechanisms (such as
                                                            a deductible, copayment, or coinsurance),                  graph (d) of this section); and
Act or any other applicable law.)
     Example 5. (i) Facts. A group health plan applies      based on whether an individual has met the                     (C) Is not directed at individual par-
a $2 million lifetime limit on all benefits. However,       standards of a wellness program that sat-                  ticipants or beneficiaries based on any
the $2 million lifetime limit is reduced to $10,000 for
                                                            isfies the requirements of paragraph (f) of                health factor of the participants or bene-
any participant or beneficiary covered under the plan                                                                  ficiaries. For purposes of this paragraph
who has a congenital heart defect.
                                                            this section.
                                                                (iii) Specific rule relating to source-of-             (b)(3)(i)(C), a plan amendment relating to
     (ii) Conclusion. In this Example 5, the lower
lifetime limit for participants and beneficiaries with      injury exclusions. (A) If a group health                   a preexisting condition exclusion applica-
a congenital heart defect violates this paragraph           plan generally provides benefits for a type                ble to all individuals in one or more groups
(b)(2)(i) because benefits under the plan are not uni-
                                                            of injury, the plan may not deny benefits                  of similarly situated individuals under the
formly available to all similarly situated individuals                                                                 plan and made effective no earlier than
and the plan’s lifetime limit on benefits does not
                                                            otherwise provided for treatment of the in-
                                                            jury if the injury results from an act of do-              the first day of the first plan year after the
apply uniformly to all similarly situated individuals.
     Example 6. (i) Facts. A group health plan lim-         mestic violence or a medical condition (in-                amendment is adopted is not considered to
its benefits for prescription drugs to those listed on a    cluding both physical and mental health                    be directed at any individual participants
drug formulary. The limit is applied uniformly to all
                                                            conditions). This rule applies in the case of              or beneficiaries.
similarly situated individuals and is not directed at in-                                                                  (ii) The rules of this paragraph (b)(3)
dividual participants or beneficiaries.
                                                            an injury resulting from a medical condi-
                                                            tion even if the condition is not diagnosed                are illustrated by the following examples:
     (ii) Conclusion. In this Example 6, the exclusion
                                                                                                                            Example 1. (i) Facts. A group health plan im-
from coverage of drugs not listed on the drug formu-        before the injury.                                         poses a preexisting condition exclusion on all indi-
lary does not violate this paragraph (b)(2)(i) because          (B) The rules of this paragraph                        viduals enrolled in the plan. The exclusion applies to
benefits for prescription drugs listed on the formulary
                                                            (b)(2)(iii) are illustrated by the follow-                 conditions for which medical advice, diagnosis, care,
are uniformly available to all similarly situated indi-                                                                or treatment was recommended or received within the
viduals and because the exclusion of drugs not listed
                                                            ing examples:
                                                                Example 1. (i) Facts. A group health plan gen-         six-month period ending on an individual’s enroll-
on the formulary applies uniformly to all similarly sit-
                                                            erally provides medical/surgical benefits, including       ment date. In addition, the exclusion generally ex-
                                                            benefits for hospital stays, that are medically neces-     tends for 12 months after an individual’s enrollment



2007–6 I.R.B.                                                                       454                                                         February 5, 2007
date, but this 12-month period is offset by the num-       amount that an employer may be charged                    of similarly situated individuals separate
ber of days of an individual’s creditable coverage in      for coverage under a group health plan.                   from beneficiaries. In addition, partic-
accordance with §54.9801–3. There is nothing to in-           (ii) List billing based on a health factor             ipants may be treated as two or more
dicate that the exclusion is directed at individual par-
ticipants or beneficiaries.
                                                           prohibited. However, a group health plan                  distinct groups of similarly situated indi-
     (ii) Conclusion. In this Example 1, even though       may not quote or charge an employer (or                   viduals and beneficiaries may be treated
the plan’s preexisting condition exclusion discrimi-       an individual) a different premium for an                 as two or more distinct groups of similarly
nates against individuals based on one or more health      individual in a group of similarly situated               situated individuals in accordance with the
factors, the preexisting condition exclusion does not      individuals based on a health factor. (But                rules of this paragraph (d). Moreover, if
violate this section because it applies uniformly to all
similarly situated individuals, is not directed at in-
                                                           see paragraph (g) of this section permitting              individuals have a choice of two or more
dividual participants or beneficiaries, and complies       favorable treatment of individuals with ad-               benefit packages, individuals choosing
with §54.9801–3 (that is, the requirements relating        verse health factors.)                                    one benefit package may be treated as one
to the six-month look-back period, the 12-month (or           (iii) Examples. The rules of this para-                or more groups of similarly situated indi-
18-month) maximum exclusion period, and the cred-          graph (c)(2) are illustrated by the follow-               viduals distinct from individuals choosing
itable coverage offset).
     Example 2. (i) Facts. A group health plan ex-
                                                           ing examples:                                             another benefit package.
                                                               Example 1. (i) Facts. An employer sponsors                (1) Participants. Subject to paragraph
cludes coverage for conditions with respect to which
                                                           a group health plan and purchases coverage from a         (d)(3) of this section, a plan may treat
medical advice, diagnosis, care, or treatment was rec-
                                                           health insurance issuer. In order to determine the pre-
ommended or received within the six-month period                                                                     participants as two or more distinct groups
                                                           mium rate for the upcoming plan year, the issuer re-
ending on an individual’s enrollment date. Under                                                                     of similarly situated individuals if the
                                                           views the claims experience of individuals covered
the plan, the preexisting condition exclusion gener-
ally extends for 12 months, offset by creditable cov-
                                                           under the plan. The issuer finds that Individual F had    distinction between or among the groups
                                                           significantly higher claims experience than similarly     of participants is based on a bona fide
erage. However, if an individual has no claims in the
                                                           situated individuals in the plan. The issuer quotes       employment-based classification consis-
first six months following enrollment, the remainder
                                                           the plan a higher per-participant rate because of F’s
of the exclusion period is waived.                                                                                   tent with the employer’s usual business
                                                           claims experience.
     (ii) Conclusion. In this Example 2, the plan’s                                                                  practice. Whether an employment-based
                                                               (ii) Conclusion. See Example 1 in 29 CFR
preexisting condition exclusions violate this section
because they do not meet the requirements of this
                                                           2590.702(c)(2) and 45 CFR 146.121(c)(2) for a con-        classification is bona fide is determined
                                                           clusion that the issuer does not violate the provisions   on the basis of all the relevant facts and
paragraph (b)(3); specifically, they do not apply uni-
                                                           of 29 CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2)         circumstances. Relevant facts and circum-
formly to all similarly situated individuals. The plan
                                                           similar to the provisions of this paragraph (c)(2) be-
provisions do not apply uniformly to all similarly sit-                                                              stances include whether the employer uses
                                                           cause the issuer blends the rate so that the employer
uated individuals because individuals who have med-                                                                  the classification for purposes independent
                                                           is not quoted a higher rate for F than for a similarly
ical claims during the first six months following en-
rollment are not treated the same as similarly situated
                                                           situated individual based on F’s claims experience.       of qualification for health coverage (for
                                                               Example 2. (i) Facts. Same facts as Example 1,        example, determining eligibility for other
individuals with no claims during that period. (Un-
                                                           except that the issuer quotes the employer a higher       employee benefits or determining other
der paragraph (d) of this section, the groups cannot
                                                           premium rate for F, because of F’s claims experience,
be treated as two separate groups of similarly situ-                                                                 terms of employment). Subject to para-
                                                           than for a similarly situated individual.
ated individuals because the distinction is based on a                                                               graph (d)(3) of this section, examples of
                                                               (ii) Conclusion. See Example 2 in 29 CFR
health factor.)
                                                           2590.702(c)(2) and 45 CFR 146.121(c)(2) for a con-        classifications that, based on all the rele-
    (c) Prohibited discrimination in premi-                clusion that the issuer violates provisions of 29 CFR     vant facts and circumstances, may be bona
ums or contributions — (1) In general.                     2590.702(c)(2) and 45 CFR 146.121(c)(2) similar to        fide include full-time versus part-time sta-
(i) A group health plan may not require                    the provisions of this paragraph (c)(2). Moreover,
                                                           even if the plan purchased the policy based on the
                                                                                                                     tus, different geographic location, mem-
an individual, as a condition of enroll-
                                                           quote but did not require a higher participant contri-    bership in a collective bargaining unit,
ment or continued enrollment under the
                                                           bution for F than for a similarly situated individual,    date of hire, length of service, current em-
plan, to pay a premium or contribution that                see Example 2 in 29 CFR 2590.702(c)(2) and 45             ployee versus former employee status, and
is greater than the premium or contribu-                   CFR 146.121(c)(2) for a conclusion that the issuer        different occupations. However, a classi-
tion for a similarly situated individual (de-              would still violate 29 CFR 2590.702(c)(2) and 45
                                                           CFR 146.121(c)(2) (but in such a case the plan would
                                                                                                                     fication based on any health factor is not
scribed in paragraph (d) of this section) en-
                                                           not violate this paragraph (c)(2)).                       a bona fide employment-based classifica-
rolled in the plan based on any health fac-
                                                               (3) Exception for wellness programs.                  tion, unless the requirements of paragraph
tor that relates to the individual or a depen-
                                                           Notwithstanding paragraphs (c)(1) and (2)                 (g) of this section are satisfied (permitting
dent of the individual.
                                                           of this section, a plan may vary the amount               favorable treatment of individuals with
    (ii) Discounts, rebates, payments in
                                                           of premium or contribution it requires sim-               adverse health factors).
kind, and any other premium differen-
                                                           ilarly situated individuals to pay based on                   (2) Beneficiaries. (i) Subject to para-
tial mechanisms are taken into account in
                                                           whether an individual has met the stan-                   graph (d)(3) of this section, a plan may
determining an individual’s premium or
                                                           dards of a wellness program that satisfies                treat beneficiaries as two or more distinct
contribution rate. (For rules relating to
                                                           the requirements of paragraph (f) of this                 groups of similarly situated individuals
cost-sharing mechanisms, see paragraph
                                                           section.                                                  if the distinction between or among the
(b)(2) of this section (addressing bene-
                                                               (d) Similarly situated individuals. The               groups of beneficiaries is based on any of
fits).)
                                                           requirements of this section apply only                   the following factors:
    (2) Rules relating to premium rates —
                                                           within a group of individuals who are                         (A) A bona fide employment-based
(i) Group rating based on health factors
                                                           treated as similarly situated individuals.                classification of the participant through
not restricted under this section. Noth-
                                                           A plan may treat participants as a group                  whom the beneficiary is receiving cover-
ing in this section restricts the aggregate
                                                                                                                     age;


February 5, 2007                                                                   455                                                        2007–6 I.R.B.
    (B) Relationship to the participant (for                (d). Specifically, the distinction between spouses             (e) Nonconfinement and actively-at-
example, as a spouse or as a dependent                      and dependent children is permitted under paragraph         work provisions — (1) Nonconfinement
child);                                                     (d)(2) of this section and is not prohibited under          provisions — (i) General rule. Under
                                                            paragraph (d)(3) of this section because it is not
    (C) Marital status;                                     directed at individual participants or beneficiaries. It
                                                                                                                        the rules of paragraphs (b) and (c) of this
    (D) With respect to children of a partic-               is also permissible to treat dependent children who         section, a plan may not establish a rule
ipant, age or student status; or                            are under age 19 (or full-time students under age 25)       for eligibility (as described in paragraph
    (E) Any other factor if the factor is not               as a group of similarly situated individuals separate       (b)(1)(ii) of this section) or set any individ-
a health factor.                                            from those who are age 25 or older (or age 19 or            ual’s premium or contribution rate based
                                                            older if they are not full-time students) because the
    (ii) Paragraph (d)(2)(i) of this section                classification is permitted under paragraph (d)(2) of
                                                                                                                        on whether an individual is confined to a
does not prevent more favorable treatment                   this section and is not directed at individual partici-     hospital or other health care institution.
of individuals with adverse health factors                  pants or beneficiaries.                                     In addition, under the rules of paragraphs
in accordance with paragraph (g) of this                         Example 3. (i) Facts. A university sponsors a          (b) and (c) of this section, a plan may
section.                                                    group health plan that provides one health benefit          not establish a rule for eligibility or set
                                                            package to faculty and another health benefit pack-
    (3) Discrimination directed at individ-                 age to other staff. Faculty and staff are treated differ-
                                                                                                                        any individual’s premium or contribution
uals. Notwithstanding paragraphs (d)(1)                     ently with respect to other employee benefits such as       rate based on an individual’s ability to
and (2) of this section, if the creation or                 retirement benefits and leaves of absence. There is         engage in normal life activities, except
modification of an employment or cover-                     no evidence to suggest that the distinction is directed     to the extent permitted under paragraphs
age classification is directed at individual                at individual participants or beneficiaries.                (e)(2)(ii) and (3) of this section (permit-
                                                                 (ii) Conclusion. In this Example 3, the clas-
participants or beneficiaries based on any                  sification is permitted under this paragraph (d)
                                                                                                                        ting plans, under certain circumstances,
health factor of the participants or benefi-                because there is a distinction based on a bona fide         to distinguish among employees based on
ciaries, the classification is not permitted                employment-based classification consistent with the         the performance of services).
under this paragraph (d), unless it is per-                 employer’s usual business practice and the distinc-            (ii) Examples. The rules of this para-
mitted under paragraph (g) of this section                  tion is not directed at individual participants and         graph (e)(1) are illustrated by the follow-
                                                            beneficiaries.
(permitting favorable treatment of individ-                      Example 4. (i) Facts. An employer sponsors a
                                                                                                                        ing examples:
uals with adverse health factors). Thus,                                                                                     Example 1. (i) Facts. Under a group health plan,
                                                            group health plan that is available to all current em-
if an employer modified an employment-                                                                                  coverage for employees and their dependents gener-
                                                            ployees. Former employees may also be eligible, but
                                                                                                                        ally becomes effective on the first day of employ-
based classification to single out, based on                only if they complete a specified number of years of
                                                                                                                        ment. However, coverage for a dependent who is
a health factor, individual participants and                service, are enrolled under the plan at the time of ter-
                                                                                                                        confined to a hospital or other health care institution
                                                            mination of employment, and are continuously en-
beneficiaries and deny them health cover-                   rolled from that date. There is no evidence to suggest
                                                                                                                        does not become effective until the confinement ends.
age, the new classification would not be                                                                                     (ii) Conclusion. In this Example 1, the plan vi-
                                                            that these distinctions are directed at individual par-
permitted under this section.                                                                                           olates this paragraph (e)(1) because the plan delays
                                                            ticipants or beneficiaries.
                                                                                                                        the effective date of coverage for dependents based
    (4) Examples. The rules of this para-                        (ii) Conclusion. In this Example 4, imposing
                                                                                                                        on confinement to a hospital or other health care in-
graph (d) are illustrated by the following                  additional eligibility requirements on former em-
                                                                                                                        stitution.
                                                            ployees is permitted because a classification that
examples:                                                   distinguishes between current and former employees
                                                                                                                             Example 2. (i) Facts. In previous years, a group
     Example 1. (i) Facts. An employer sponsors a                                                                       health plan has provided coverage through a group
                                                            is a bona fide employment-based classification that
group health plan for full-time employees only. Un-                                                                     health insurance policy offered by Issuer M. How-
                                                            is permitted under this paragraph (d), provided that
der the plan (consistent with the employer’s usual                                                                      ever, for the current year, the plan provides coverage
                                                            it is not directed at individual participants or bene-
business practice), employees who normally work at                                                                      through a group health insurance policy offered by
                                                            ficiaries. In addition, it is permissible to distinguish
least 30 hours per week are considered to be work-                                                                      Issuer N. Under Issuer N’s policy, items and services
                                                            between former employees who satisfy the service
ing full-time. Other employees are considered to be                                                                     provided in connection with the confinement of a de-
                                                            requirement and those who do not, provided that the
working part-time. There is no evidence to suggest                                                                      pendent to a hospital or other health care institution
                                                            distinction is not directed at individual participants
that the classification is directed at individual partic-                                                               are not covered if the confinement is covered under
                                                            or beneficiaries. (However, former employees who
ipants or beneficiaries.                                                                                                an extension of benefits clause from a previous health
                                                            do not satisfy the eligibility criteria may, nonethe-
     (ii) Conclusion. In this Example 1, treating the                                                                   insurance issuer.
                                                            less, be eligible for continued coverage pursuant to a
full-time and part-time employees as two separate                                                                            (ii) Conclusion. See Example 2 in 29 CFR
                                                            COBRA continuation provision or similar State law.)
groups of similarly situated individuals is permitted                                                                   2590.702(e)(1) and 45 CFR 146.121(e)(1) for a con-
                                                                 Example 5. (i) Facts. An employer sponsors a
under this paragraph (d) because the classification is                                                                  clusion that Issuer N violates provisions of 29 CFR
                                                            group health plan that provides the same benefit pack-
bona fide and is not directed at individual participants    age to all seven employees of the employer. Six of the      2590.702(e)(1) and 45 CFR 146.121(e)(1) similar to
or beneficiaries.                                                                                                       the provisions of this paragraph (e)(1) because the
                                                            seven employees have the same job title and respon-
     Example 2. (i) Facts. Under a group health                                                                         group health insurance coverage restricts benefits
                                                            sibilities, but Employee G has a different job title and
plan, coverage is made available to employees, their        different responsibilities. After G files an expensive      based on whether a dependent is confined to a hos-
spouses, and their dependent children. However,                                                                         pital or other health care institution that is covered
                                                            claim for benefits under the plan, coverage under the
coverage is made available to a dependent child only                                                                    under an extension of benefits from a previous issuer.
                                                            plan is modified so that employees with G’s job ti-
if the dependent child is under age 19 (or under age        tle receive a different benefit package that includes a     See Example 2 in 29 CFR 2590.702(e)(1) and 45
25 if the child is continuously enrolled full-time in                                                                   CFR 146.121(e)(1) for the additional conclusions
                                                            lower lifetime dollar limit than in the benefit package
an institution of higher learning (full-time students)).                                                                that under State law Issuer M may also be responsible
                                                            made available to the other six employees.
There is no evidence to suggest that these classi-               (ii) Conclusion. Under the facts of this Example       for providing benefits to such a dependent; and that
fications are directed at individual participants or                                                                    in a case in which Issuer N has an obligation under
                                                            5, changing the coverage classification for G based
beneficiaries.                                                                                                          29 CFR 2590.702(e)(1) or 45 CFR 146.121(e)(1)
                                                            on the existing employment classification for G is not
     (ii) Conclusion. In this Example 2, treating           permitted under this paragraph (d) because the cre-         to provide benefits and Issuer M has an obligation
spouses and dependent children differently by im-                                                                       under State law to provide benefits, any State laws
                                                            ation of the new coverage classification for G is di-
posing an age limitation on dependent children, but                                                                     designed to prevent more than 100% reimbursement,
                                                            rected at G based on one or more health factors.
not on spouses, is permitted under this paragraph



2007–6 I.R.B.                                                                        456                                                        February 5, 2007
such as State coordination-of-benefits laws, continue         (B) The rules of this paragraph (e)(2)(ii)             services for the employer for 30 or more hours per
to apply.                                                  are illustrated by the following examples:                week or if they are on paid leave (such as vacation,
   (2) Actively-at-work and continuous                          Example 1. (i) Facts. Under the eligibility pro-     sick, or bereavement leave). Employees on unpaid
                                                           vision of a group health plan, coverage for new em-       leave are treated as a separate group of similarly situ-
service provisions — (i) General rule. (A)
                                                           ployees becomes effective on the first day that the em-   ated individuals in accordance with the rules of para-
Under the rules of paragraphs (b) and (c)                                                                            graph (d) of this section.
                                                           ployee reports to work. Individual H is scheduled to
of this section and subject to the excep-                  begin work on August 3. However, H is unable to               (ii) Conclusion. In this Example 1, the plan pro-
tion for the first day of work described in                begin work on that day because of illness. H begins       visions do not violate this section. However, if the
paragraph (e)(2)(ii) of this section, a plan               working on August 4, and H’s coverage is effective        plan treated individuals performing services for the
                                                           on August 4.                                              employer for 30 or more hours per week, individu-
may not establish a rule for eligibility (as
                                                                (ii) Conclusion. In this Example 1, the plan pro-    als on vacation leave, and individuals on bereavement
described in paragraph (b)(1)(ii) of this                                                                            leave as a group of similarly situated individuals sep-
                                                           vision does not violate this section. However, if cov-
section) or set any individual’s premium                   erage for individuals who do not report to work on        arate from individuals on sick leave, the plan would
or contribution rate based on whether an                   the first day they were scheduled to work for a rea-      violate this paragraph (e) (and thus also would violate
individual is actively at work (including                  son unrelated to a health factor (such as vacation or     paragraph (b) of this section) because groups of simi-
                                                           bereavement) becomes effective on the first day they      larly situated individuals cannot be established based
whether an individual is continuously em-
                                                           were scheduled to work, then the plan would violate       on a health factor (including the taking of sick leave)
ployed), unless absence from work due                                                                                under paragraph (d) of this section.
                                                           this section.
to any health factor (such as being absent                      Example 2. (i) Facts. Under a group health plan,         Example 2. (i) Facts. To be eligible for cover-
from work on sick leave) is treated, for                   coverage for new employees becomes effective on the       age under a bona fide collectively bargained group
purposes of the plan, as being actively at                 first day of the month following the employee’s first     health plan in the current calendar quarter, the plan
                                                           day of work, regardless of whether the employee is        requires an individual to have worked 250 hours in
work.
                                                           actively at work on the first day of the month. In-       covered employment during the three-month period
   (B) The rules of this paragraph (e)(2)(i)                                                                         that ends one month before the beginning of the cur-
                                                           dividual J is scheduled to begin work on March 24.
are illustrated by the following examples:                 However, J is unable to begin work on March 24 be-        rent calendar quarter. The distinction between em-
    Example 1. (i) Facts. Under a group health plan,                                                                 ployees working at least 250 hours and those working
                                                           cause of illness. J begins working on April 7 and J’s
an employee generally becomes eligible to enroll 30                                                                  less than 250 hours in the earlier three-month period
                                                           coverage is effective May 1.
days after the first day of employment. However, if                                                                  is not directed at individual participants or beneficia-
                                                                (ii) Conclusion. In this Example 2, the plan pro-
the employee is not actively at work on the first day                                                                ries based on any health factor of the participants or
                                                           vision does not violate this section. However, as in
after the end of the 30-day period, then eligibility for                                                             beneficiaries.
                                                           Example 1, if coverage for individuals absent from
enrollment is delayed until the first day the employee                                                                   (ii) Conclusion. In this Example 2, the plan pro-
                                                           work for reasons unrelated to a health factor became
is actively at work.                                                                                                 vision does not violate this section because, under the
                                                           effective despite their absence, then the plan would
    (ii) Conclusion. In this Example 1, the plan vi-                                                                 rules for similarly situated individuals allowing full-
                                                           violate this section.
olates this paragraph (e)(2) (and thus also violates                                                                 time employees to be treated differently than part-
paragraph (b) of this section). However, the plan
                                                               (3) Relationship to plan provisions
                                                                                                                     time employees, employees who work at least 250
would not violate paragraph (e)(2) or (b) of this sec-     defining similarly situated individuals. (i)              hours in a three-month period can be treated differ-
tion if, under the plan, an absence due to any health      Notwithstanding the rules of paragraphs                   ently than employees who fail to work 250 hours in
factor is considered being actively at work.               (e)(1) and (2) of this section, a plan may                that period. The result would be the same if the plan
    Example 2. (i) Facts. Under a group health plan,                                                                 permitted individuals to apply excess hours from pre-
                                                           establish rules for eligibility or set any in-
coverage for an employee becomes effective after 90                                                                  vious periods to satisfy the requirement for the cur-
days of continuous service; that is, if an employee is
                                                           dividual’s premium or contribution rate in
                                                                                                                     rent quarter.
absent from work (for any reason) before completing        accordance with the rules relating to simi-                   Example 3. (i) Facts. Under a group health plan,
90 days of service, the beginning of the 90-day pe-        larly situated individuals in paragraph (d)               coverage of an employee is terminated when the in-
riod is measured from the day the employee returns         of this section. Accordingly, a plan may                  dividual’s employment is terminated, in accordance
to work (without any credit for service before the ab-                                                               with the rules of paragraph (d) of this section. Em-
                                                           distinguish in rules for eligibility under
sence).                                                                                                              ployee B has been covered under the plan. B experi-
    (ii) Conclusion. In this Example 2, the plan vio-
                                                           the plan between full-time and part-time
                                                                                                                     ences a disabling illness that prevents B from work-
lates this paragraph (e)(2) (and thus also paragraph       employees, between permanent and tem-                     ing. B takes a leave of absence under the Family
(b) of this section) because the 90-day continuous         porary or seasonal employees, between                     and Medical Leave Act of 1993. At the end of such
service requirement is a rule for eligibility based on     current and former employees, and be-                     leave, B terminates employment and consequently
whether an individual is actively at work. However,                                                                  loses coverage under the plan. (This termination of
                                                           tween employees currently performing
the plan would not violate this paragraph (e)(2) or                                                                  coverage is without regard to whatever rights the em-
paragraph (b) of this section if, under the plan, an ab-
                                                           services and employees no longer per-
                                                                                                                     ployee (or members of the employee’s family) may
sence due to any health factor is not considered an        forming services for the employer, subject                have for COBRA continuation coverage.)
absence for purposes of measuring 90 days of contin-       to paragraph (d) of this section. However,                    (ii) Conclusion. In this Example 3, the plan pro-
uous service.                                              other Federal or State laws (including                    vision terminating B’s coverage upon B’s termination
   (ii) Exception for the first day of work.               the COBRA continuation provisions and                     of employment does not violate this section.
(A) Notwithstanding the general rule in                                                                                  Example 4. (i) Facts. Under a group health plan,
                                                           the Family and Medical Leave Act of
                                                                                                                     coverage of an employee is terminated when the em-
paragraph (e)(2)(i) of this section, a plan                1993) may require an employee or the                      ployee ceases to perform services for the employer
may establish a rule for eligibility that re-              employee’s dependents to be offered cov-                  sponsoring the plan, in accordance with the rules of
quires an individual to begin work for the                 erage and set limits on the premium or                    paragraph (d) of this section. Employee C is laid off
employer sponsoring the plan (or, in the                   contribution rate even though the em-                     for three months. When the layoff begins, C’s cover-
case of a multiemployer plan, to begin a                                                                             age under the plan is terminated. (This termination of
                                                           ployee is not performing services.
                                                                                                                     coverage is without regard to whatever rights the em-
job in covered employment) before cover-                       (ii) The rules of this paragraph (e)(3) are           ployee (or members of the employee’s family) may
age becomes effective, provided that such                  illustrated by the following examples:                    have for COBRA continuation coverage.)
a rule for eligibility applies regardless of                  Example 1. (i) Facts. Under a group health plan,           (ii) Conclusion. In this Example 4, the plan provi-
the reason for the absence.                                employees are eligible for coverage if they perform       sion terminating C’s coverage upon the cessation of



February 5, 2007                                                                   457                                                               2007–6 I.R.B.
C’s performance of services does not violate this sec-   grams without regard to whether the em-              (A) A reward is not available to all sim-
tion.                                                    ployee quits smoking.                            ilarly situated individuals for a period un-
    (f) Wellness programs. A wellness pro-                   (v) A program that provides a reward to      less the program allows —
gram is any program designed to promote                  employees for attending a monthly health             (1) A reasonable alternative standard
health or prevent disease. Paragraphs                    education seminar.                               (or waiver of the otherwise applicable
(b)(2)(ii) and (c)(3) of this section pro-                   (2) Wellness programs subject to re-         standard) for obtaining the reward for any
vide exceptions to the general prohibitions              quirements. If any of the conditions for         individual for whom, for that period, it is
against discrimination based on a health                 obtaining a reward under a wellness pro-         unreasonably difficult due to a medical
factor for plan provisions that vary bene-               gram are based on an individual satisfying       condition to satisfy the otherwise applica-
fits (including cost-sharing mechanisms)                 a standard that is related to a health fac-      ble standard; and
or the premium or contribution for sim-                  tor, the wellness program does not violate           (2) A reasonable alternative standard
ilarly situated individuals in connection                this section if the requirements of this para-   (or waiver of the otherwise applicable
with a wellness program that satisfies the               graph (f)(2) are met.                            standard) for obtaining the reward for any
requirements of this paragraph (f). If none                  (i) The reward for the wellness pro-         individual for whom, for that period, it is
of the conditions for obtaining a reward                 gram, coupled with the reward for other          medically inadvisable to attempt to satisfy
under a wellness program is based on an                  wellness programs with respect to the plan       the otherwise applicable standard.
individual satisfying a standard that is re-             that require satisfaction of a standard re-          (B) A plan or issuer may seek verifica-
lated to a health factor, paragraph (f)(1)               lated to a health factor, must not exceed 20     tion, such as a statement from an individ-
of this section clarifies that the wellness              percent of the cost of employee-only cov-        ual’s physician, that a health factor makes
program does not violate this section if                 erage under the plan. However, if, in ad-        it unreasonably difficult or medically inad-
participation in the program is made avail-              dition to employees, any class of depen-         visable for the individual to satisfy or at-
able to all similarly situated individuals.              dents (such as spouses or spouses and de-        tempt to satisfy the otherwise applicable
If any of the conditions for obtaining a                 pendent children) may participate in the         standard.
reward under a wellness program is based                 wellness program, the reward must not ex-            (v) (A) The plan must disclose in all
on an individual satisfying a standard that              ceed 20 percent of the cost of the cover-        plan materials describing the terms of the
is related to a health factor, the wellness              age in which an employee and any depen-          program the availability of a reasonable
program does not violate this section if the             dents are enrolled. For purposes of this         alternative standard (or the possibility of
requirements of paragraph (f)(2) of this                 paragraph (f)(2), the cost of coverage is de-    waiver of the otherwise applicable stan-
section are met.                                         termined based on the total amount of em-        dard) required under paragraph (f)(2)(iv)
    (1) Wellness programs not subject to re-             ployer and employee contributions for the        of this section. However, if plan materi-
quirements. If none of the conditions for                benefit package under which the employee         als merely mention that a program is avail-
obtaining a reward under a wellness pro-                 is (or the employee and any dependents           able, without describing its terms, this dis-
gram is based on an individual satisfying                are) receiving coverage. A reward can be         closure is not required.
a standard that are related to a health fac-             in the form of a discount or rebate of a pre-        (B) The following language, or sub-
tor (or if a wellness program does not pro-              mium or contribution, a waiver of all or         stantially similar language, can be used to
vide a reward), the wellness program does                part of a cost-sharing mechanism (such as        satisfy the requirement of this paragraph
not violate this section, if participation in            deductibles, copayments, or coinsurance),        (f)(2)(v): “If it is unreasonably difficult
the program is made available to all simi-               the absence of a surcharge, or the value of      due to a medical condition for you to
larly situated individuals. Thus, for exam-              a benefit that would otherwise not be pro-       achieve the standards for the reward under
ple, the following programs need not sat-                vided under the plan.                            this program, or if it is medically inad-
isfy the requirements of paragraph (f)(2) of                 (ii) The program must be reasonably de-      visable for you to attempt to achieve the
this section, if participation in the program            signed to promote health or prevent dis-         standards for the reward under this pro-
is made available to all similarly situated              ease. A program satisfies this standard if       gram, call us at [insert telephone number]
individuals:                                             it has a reasonable chance of improving          and we will work with you to develop
    (i) A program that reimburses all or part            the health of or preventing disease in par-      another way to qualify for the reward.”
of the cost for memberships in a fitness                 ticipating individuals and it is not overly      In addition, other examples of language
center.                                                  burdensome, is not a subterfuge for dis-         that would satisfy this requirement are set
    (ii) A diagnostic testing program that               criminating based on a health factor, and        forth in Examples 3, 4, and 5 of paragraph
provides a reward for participation and                  is not highly suspect in the method chosen       (f)(3) of this section.
does not base any part of the reward on out-             to promote health or prevent disease.                (3) Examples. The rules of paragraph
comes.                                                       (iii) The program must give individuals      (f)(2) of this section are illustrated by the
    (iii) A program that encourages preven-              eligible for the program the opportunity to      following examples:
tive care through the waiver of the copay-               qualify for the reward under the program             Example 1. (i) Facts. An employer sponsors
ment or deductible requirement under a                   at least once per year.                          a group health plan. The annual premium for em-
                                                                                                          ployee-only coverage is $3,600 (of which the em-
group health plan for the costs of, for ex-                  (iv) The reward under the program must       ployer pays $2,700 per year and the employee pays
ample, prenatal care or well-baby visits.                be available to all similarly situated indi-     $900 per year). The annual premium for family cov-
    (iv) A program that reimburses employ-               viduals.                                         erage is $9,000 (of which the employer pays $4,500
ees for the costs of smoking cessation pro-                                                               per year and the employee pays $4,500 per year). The



2007–6 I.R.B.                                                                458                                                 February 5, 2007
plan offers a wellness program with an annual pre-          eligible for the program are given the opportunity to       terials describing the terms of the program the avail-
mium rebate of $360. The program is available only          qualify for the reward at least once per year. Fourth,      ability of a reasonable alternative standard for every
to employees.                                               the reward under the program is available to all sim-       individual. Thus, the waiver of the deductible does
     (ii) Conclusion. In this Example 1, the program        ilarly situated individuals because it accommodates         not violate this section.
satisfies the requirements of paragraph (f)(2)(i) of this   individuals for whom it is unreasonably difficult due            Example 5. (i) Facts. In conjunction with an an-
section because the reward for the wellness program,        to a medical condition to achieve the targeted count        nual open enrollment period, a group health plan pro-
$360, does not exceed 20 percent of the total annual        (or for whom it is medically inadvisable to attempt to      vides a form for participants to certify that they have
cost of employee-only coverage, $720. ($3,600 x             achieve the targeted count) in the prescribed period        not used tobacco products in the preceding twelve
20% = $720.) If any class of dependents is allowed          by providing a reasonable alternative standard. Fifth,      months. Participants who do not provide the certi-
to participate in the program and the employee is en-       the plan discloses in all materials describing the terms    fication are assessed a surcharge that is 20 percent
rolled in family coverage, the plan could offer the em-     of the program the availability of a reasonable alter-      of the cost of employee-only coverage. However, all
ployee a reward of up to 20 percent of the cost of fam-     native standard. Thus, the premium discount does not        plan materials describing the terms of the wellness
ily coverage, $1,800. ($9,000 x 20% = $1,800.)              violate this section.                                       program include the following statement: “If it is un-
     Example 2. (i) Facts. A group health plan gives             Example 4. (i) Facts. A group health plan will         reasonably difficult due to a health factor for you to
an annual premium discount of 20 percent of the cost        waive the $250 annual deductible (which is less than        meet the requirements under this program (or if it is
of employee-only coverage to participants who ad-           20 percent of the annual cost of employee-only cover-       medically inadvisable for you to attempt to meet the
here to a wellness program. The wellness program            age under the plan) for the following year for partici-     requirements of this program), we will make avail-
consists solely of giving an annual cholesterol test to     pants who have a body mass index between 19 and 26,         able a reasonable alternative standard for you to avoid
participants. Those participants who achieve a count        determined shortly before the beginning of the year.        this surcharge.” It is unreasonably difficult for In-
under 200 receive the premium discount for the year.        However, any participant for whom it is unreasonably        dividual F to stop smoking cigarettes due to an ad-
     (ii) Conclusion. In this Example 2, the program        difficult due to a medical condition to attain this stan-   diction to nicotine (a medical condition). The plan
fails to satisfy the requirement of being available to      dard (and any participant for whom it is medically in-      accommodates F by requiring F to participate in a
all similarly situated individuals because some partic-     advisable to attempt to achieve this standard) during       smoking cessation program to avoid the surcharge. F
ipants may be unable to achieve a cholesterol count         the plan year is given the same discount if the partic-     can avoid the surcharge for as long as F participates
of under 200 and the plan does not make available a         ipant walks for 20 minutes three days a week. Any           in the program, regardless of whether F stops smok-
reasonable alternative standard or waive the choles-        participant for whom it is unreasonably difficult due       ing (as long as F continues to be addicted to nicotine).
terol standard. (In addition, plan materials describing     to a medical condition to attain either standard (and            (ii) Conclusion. In this Example 5, the premium
the program are required to disclose the availability       any participant for whom it is medically inadvisable        surcharge is permissible as a wellness program be-
of a reasonable alternative standard (or the possibil-      to attempt to achieve either standard) during the year      cause it satisfies the five requirements of paragraph
ity of waiver of the otherwise applicable standard)         is given the same discount if the individual satisfies      (f)(2) of this section. First, the program complies
for obtaining the premium discount. Thus, the pre-          an alternative standard that is reasonable in the bur-      with the limits on rewards under a program. Second,
mium discount violates paragraph (c) of this section        den it imposes and is reasonable taking into consider-      it is reasonably designed to promote health or prevent
because it may require an individual to pay a higher        ation the individual’s medical situation. All plan ma-      disease. Third, individuals eligible for the program
premium based on a health factor of the individual          terials describing the terms of the wellness program        are given the opportunity to qualify for the reward
than is required of a similarly situated individual un-     include the following statement: “If it is unreason-        at least once per year. Fourth, the reward under the
der the plan.                                               ably difficult due to a medical condition for you to        program is available to all similarly situated individ-
     Example 3. (i) Facts. Same facts as Example 2,         achieve a body mass index between 19 and 26 (or if it       uals because it accommodates individuals for whom
except that the plan provides that if it is unreasonably    is medically inadvisable for you to attempt to achieve      it is unreasonably difficult due to a medical condi-
difficult due to a medical condition for a participant      this body mass index) this year, your deductible will       tion (or for whom it is medically inadvisable to at-
to achieve the targeted cholesterol count (or if it is      be waived if you walk for 20 minutes three days a           tempt) to quit using tobacco products by providing a
medically inadvisable for a participant to attempt          week. If you cannot follow the walking program,             reasonable alternative standard. Fifth, the plan dis-
to achieve the targeted cholesterol count) within a         call us at the number above and we will work with           closes in all materials describing the terms of the pro-
60-day period, the plan will make available a rea-          you to develop another way to have your deductible          gram the availability of a reasonable alternative stan-
sonable alternative standard that takes the relevant        waived.” Due to a medical condition, Individual E is        dard. Thus, the premium surcharge does not violate
medical condition into account. In addition, all plan       unable to achieve a BMI of between 19 and 26 and            this section.
materials describing the terms of the program include       is also unable to follow the walking program. E pro-             Example 6. (i) Facts. Same facts as Example 5,
the following statement: “If it is unreasonably diffi-      poses a program based on the recommendations of             except the plan accommodates F by requiring F to
cult due to a medical condition for you to achieve a        E’s physician. The plan agrees to make the discount         view, over a period of 12 months, a 12-hour video se-
cholesterol count under 200, or if it is medically in-      available to E if E follows the physician’s recommen-       ries on health problems associated with tobacco use.
advisable for you to attempt to achieve a count under       dations.                                                    F can avoid the surcharge by complying with this re-
200, call us at the number below and we will work                (ii) Conclusion. In this Example 4, the program        quirement.
with you to develop another way to get the discount.”       satisfies the five requirements of paragraph (f)(2) of           (ii) Conclusion. In this Example 6, the require-
Individual D begins a diet and exercise program but         this section. First, the program complies with the lim-     ment to watch the series of video tapes is a reasonable
is unable to achieve a cholesterol count under 200          its on rewards under a program. Second, it is reason-       alternative method for avoiding the surcharge.
within the prescribed period. D’s doctor determines         ably designed to promote health or prevent disease.             (g) More favorable treatment of individ-
D requires prescription medication to achieve a med-        Third, individuals eligible for the program are given
                                                                                                                        uals with adverse health factors permitted
ically advisable cholesterol count. In addition, the        the opportunity to qualify for the reward at least once
doctor determines that D must be monitored through          per year. Fourth, the reward under the program is
                                                                                                                        — (1) In rules for eligibility. (i) Nothing
periodic blood tests to continually reevaluate D’s          available to all similarly situated individuals because     in this section prevents a group health plan
health status. The plan accommodates D by making            it generally accommodates individuals for whom it is        from establishing more favorable rules for
the discount available to D, but only if D follows          unreasonably difficult due to a medical condition to        eligibility (described in paragraph (b)(1)
the advice of D’s doctor’s regarding medication and         achieve (or for whom it is medically inadvisable to
                                                                                                                        of this section) for individuals with an ad-
blood tests.                                                attempt to achieve) the targeted body mass index by
     (ii) Conclusion. In this Example 3, the program        providing a reasonable alternative standard (walking)
                                                                                                                        verse health factor, such as disability, than
is a wellness program because it satisfies the five re-     and it accommodates individuals for whom it is un-          for individuals without the adverse health
quirements of paragraph (f)(2) of this section. First,      reasonably difficult due to a medical condition (or for     factor. Moreover, nothing in this section
the program complies with the limits on rewards un-         whom it is medically inadvisable to attempt) to walk        prevents a plan from charging a higher pre-
der a program. Second, it is reasonably designed to         by providing an alternative standard that is reasonable
                                                                                                                        mium or contribution with respect to in-
promote health or prevent disease. Third, individuals       for the individual. Fifth, the plan discloses in all ma-



February 5, 2007                                                                     459                                                                2007–6 I.R.B.
dividuals with an adverse health factor if                 would not be eligible for COBRA continuation cov-          Approved June 22, 2006.
they would not be eligible for the cover-                  erage were it not for the disability. (Similarly, if the
age were it not for the adverse health fac-                plan provided an extended period of coverage for dis-                                  Eric Solomon,
                                                           abled individuals pursuant to State law or plan provi-
tor. (However, other laws, including State                                                                                      Acting Deputy Assistant Secretary
                                                           sion rather than pursuant to a COBRA continuation
insurance laws, may set or limit premium                   coverage provision, the plan could likewise charge                        of the Treasury (Tax Policy).
rates; these laws are not affected by this                 the disabled individuals a higher premium for the ex-
                                                                                                                      (Filed by the Office of the Federal Register on December 12,
section.)                                                  tended coverage.)                                          2006, 8:45 a.m., and published in the issue of the Federal
    (ii) The rules of this paragraph (g)(1)                    (2) In premiums or contributions. (i)                  Register for December 13, 2006, 71 F.R. 75013)

are illustrated by the following examples:                 Nothing in this section prevents a group
     Example 1. (i) Facts. An employer sponsors a          health plan from charging individuals a
group health plan that generally is available to em-       premium or contribution that is less than                  26 CFR 54.9802–2: Special rules for certain church
ployees, spouses of employees, and dependent chil-                                                                    plans.
                                                           the premium (or contribution) for similarly
dren until age 23. However, dependent children who
                                                           situated individuals if the lower charge is
are disabled are eligible for coverage beyond age 23.
                                                           based on an adverse health factor, such as                 T.D. 9299
     (ii) Conclusion. In this Example 1, the plan provi-
sion allowing coverage for disabled dependent chil-        disability.
dren beyond age 23 satisfies this paragraph (g)(1)             (ii) The rules of this paragraph (g)(2)                DEPARTMENT OF
(and thus does not violate this section).
                                                           are illustrated by the following example:                  THE TREASURY
     Example 2. (i) Facts. An employer sponsors a
group health plan, which is generally available to em-
                                                               Example. (i) Facts. Under a group health plan,         Internal Revenue Service
                                                           employees are generally required to pay $50 per
ployees (and members of the employee’s family) un-
                                                           month for employee-only coverage and $125 per              26 CFR Part 54
til the last day of the month in which the employee
                                                           month for family coverage under the plan. How-
ceases to perform services for the employer. The plan
generally charges employees $50 per month for em-
                                                           ever, employees who are disabled receive coverage          Exception to the HIPAA
                                                           (whether employee-only or family coverage) under
ployee-only coverage and $125 per month for family
                                                           the plan free of charge.                                   Nondiscrimination
coverage. However, an employee who ceases to per-
form services for the employer by reason of disabil-
                                                               (ii) Conclusion. In this Example, the plan provi-      Requirements for Certain
                                                           sion waiving premium payment for disabled employ-
ity may remain covered under the plan until the last
                                                           ees is permitted under this paragraph (g)(2) (and thus
                                                                                                                      Grandfathered Church Plans
day of the month that is 12 months after the month
                                                           does not violate this section).
in which the employee ceased to perform services for                                                                  AGENCY: Internal Revenue Service
the employer. During this extended period of cover-
                                                               (h) No effect on other laws. Compli-
                                                           ance with this section is not determina-                   (IRS), Treasury.
age, the plan charges the employee $100 per month
for employee-only coverage and $250 per month for          tive of compliance with any provision of
family coverage. (This extended period of cover-                                                                      ACTION: Final regulations.
                                                           ERISA (including the COBRA continua-
age is without regard to whatever rights the employee      tion provisions) or any other State or Fed-
(or members of the employee’s family) may have for                                                                    SUMMARY: This document contains
                                                           eral law, such as the Americans with Dis-
COBRA continuation coverage.)                                                                                         final regulations that provide guidance
     (ii) Conclusion. In this Example 2, the plan          abilities Act. Therefore, although the rules
                                                                                                                      under section 9802(c) of the Internal
provision allowing extended coverage for disabled          of this section would not prohibit a plan
employees and their families satisfies this paragraph
                                                                                                                      Revenue Code relating to the exception
                                                           from treating one group of similarly situ-
(g)(1) (and thus does not violate this section). In                                                                   for certain grandfathered church plans
                                                           ated individuals differently from another
addition, the plan is permitted, under this paragraph                                                                 from the nondiscrimination requirements
                                                           (such as providing different benefit pack-
(g)(1), to charge the disabled employees a higher                                                                     applicable to group health plans under
premium during the extended period of coverage.            ages to current and former employees),
                                                                                                                      section 9802(a) and (b). Final regulations
     Example 3. (i) Facts. To comply with the re-          other Federal or State laws may require
quirements of a COBRA continuation provision, a
                                                                                                                      (T.D. 9298) relating to the nondiscrimina-
                                                           that two separate groups of similarly sit-
group health plan generally makes COBRA continu-                                                                      tion requirements under section 9802(a)
                                                           uated individuals be treated the same for
ation coverage available for a maximum period of 18                                                                   and (b) are being published elsewhere in
                                                           certain purposes (such as making the same
months in connection with a termination of employ-                                                                    this issue of the Bulletin. The regula-
ment but makes the coverage available for a maxi-          benefit package available to COBRA qual-
                                                                                                                      tions will generally affect sponsors of and
mum period of 29 months to certain disabled indi-          ified beneficiaries as is made available to
viduals and certain members of the disabled individ-
                                                                                                                      participants in certain self-funded church
                                                           active employees). In addition, although
ual’s family. Although the plan generally requires                                                                    plans that are group health plans, and the
                                                           this section generally does not impose new
payment of 102 percent of the applicable premium                                                                      regulations provide plan sponsors and plan
                                                           disclosure obligations on plans, this sec-
for the first 18 months of COBRA continuation cov-                                                                    administrators with guidance necessary to
erage, the plan requires payment of 150 percent of         tion does not affect any other laws, includ-
                                                                                                                      comply with the law.
the applicable premium for the disabled individual’s       ing those that require accurate disclosures
COBRA continuation coverage during the disability          and prohibit intentional misrepresentation.
extension if the disabled individual would not be en-
                                                                                                                      DATES: Effective Date: These regulations
                                                               (i) Applicability dates. This section ap-              are effective February 12, 2006.
titled to COBRA continuation coverage but for the
disability.
                                                           plies for plan years beginning on or after                    Applicability Date: These regulations
     (ii) Conclusion. In this Example 3, the plan provi-   July 1, 2007.                                              apply for plan years beginning on or after
sion allowing extended COBRA continuation cover-                                                                      July 1, 2007.
age for disabled individuals satisfies this paragraph                                Mark E. Matthews,
(g)(1) (and thus does not violate this section). In                            Deputy Commissioner for
addition, the plan is permitted, under this paragraph
                                                                                                                      FOR    FURTHER         INFORMATION
                                                                               Services and Enforcement.
(g)(1), to charge the disabled individuals a higher pre-                                                              CONTACT:     Russ      Weinheimer      at
mium for the extended coverage if the individuals                                                                     202–622–6080 (not a toll-free number).


2007–6 I.R.B.                                                                      460                                                          February 5, 2007
SUPPLEMENTARY INFORMATION:                    Explanation and Summary of                      PART 54 — PENSION EXCISE TAXES
                                              Comments
Background                                                                                       Paragraph 1. The authority citation for
                                                 One comment was pleased with the             part 54 is amended by adding an entry in
   This document contains amendments to       guidance in the proposed rules and asked        numerical order to read, in part, as follows:
the Miscellaneous Excise Tax Regulations      that they be published as final rules as soon      Authority: 26 U.S.C. 7805 * * *
(26 CFR part 54) relating to the exception    as possible. The other comment explained           Section 54.9802–2 also issued under 26
for certain grandfathered church plans        why the statute needed this exception and       U.S.C. 9833. * * *
from the nondiscrimination requirements       suggested that the proposed regulations            Par. 2. In §54.9801–1, paragraph (a) is
applicable to group health plans. The         did nothing more than paraphrase the            revised to read as follows:
nondiscrimination requirements applica-       statute. Neither comment asked for any
ble to group health plans were added to the   change in the proposed regulations.             §54.9801–1 Basis and scope.
Internal Revenue Code (Code), in section         These final regulations make no signif-
9802, by the Health Insurance Portability                                                        (a) Statutory basis. Sections 54.9801–1
                                              icant substantive change to the proposed
and Accountability Act of 1996 (HIPAA),                                                       through       54.9801–6,        54.9802–1,
                                              regulations. An effective date has been
Public Law 104–191 (110 Stat. 1936).                                                          54.9802–2, 54.9811–1T, 54.9812–1T,
                                              supplied and references to the supplanted
HIPAA also added similar nondiscrimina-                                                       54.9831–1, and 54.9833–1 (portability
                                              temporary regulations have been deleted,
tion provisions applicable to group health                                                    sections) implement Chapter 100 of
                                              but otherwise no change has been made in
plans and health insurance issuers (such                                                      Subtitle K of the Internal Revenue Code
                                              the final regulations.
as health insurance companies and health                                                      of 1986.
maintenance organizations) under the Em-      Special Analyses                                *****
ployee Retirement Income Security Act                                                            Par. 3. In §54.9801–2, the introductory
of 1974 (ERISA), administered by the              It has been determined that this Trea-      text is amended to read as follows:
U.S. Department of Labor, and the Public      sury decision is not a significant regula-
Health Service Act (PHS Act), adminis-        tory action as defined in Executive Order       §54.9801–2 Definitions.
tered by the U.S. Department of Health        12866. Therefore, a regulatory assessment
                                              is not required. It also has been deter-            Unless otherwise provided, the defi-
and Human Services.
                                              mined that section 553(b) of the Admin-         nitions in this section govern in applying
   Final regulations relating to the HIPAA
                                              istrative Procedure Act (5 U.S.C. chapter       the provisions of §§54.9801–1 through
nondiscrimination requirements in para-
                                              5) does not apply to these regulations, and     54.9801–6,       54.9802–1,    54.9802–2,
graphs (a) and (b) of section 9802 of the
                                              because the regulations do not impose a         54.9811–1T, 54.9812–1T, 54.9831–1, and
Code are being published elsewhere in this
                                              collection of information requirement on        54.9833–1.
issue of the Bulletin. Those regulations
are similar to, and have been developed       small entities, the Regulatory Flexibility      *****
in coordination with, final regulations       Act (5 U.S.C. chapter 6) does not apply.           Par. 4. Section 54.9802–2 is added to
also being published today by the Depart-     Therefore, a Regulatory Flexibility Anal-       read as follows:
ments of Labor and of Health and Human        ysis is not required. Pursuant to section
Services. Guidance under the HIPAA            7805(f) of the Code, the notice of pro-         §54.9802–2 Special rules for certain
nondiscrimination requirements is sum-        posed rulemaking preceding these regula-        church plans.
marized in a joint preamble to the final      tions was submitted to the Small Business
                                                                                                 (a) Exception for certain church
regulations.                                  Administration for comment on its impact
                                                                                              plans—(1) Church plans in general. A
   The exception for certain grandfathered    on small business.
                                                                                              church plan described in paragraph (b)
church plans was added to section 9802,
                                              Drafting Information                            of this section is not treated as failing to
in subsection (c), by section 1532 of the
                                                                                              meet the requirements of section 9802
Taxpayer Relief Act of 1997, Public Law
                                                 The principal author of these regula-        or §54.9802–1 solely because the plan
105–34 (111 Stat. 788). A notice of
                                              tions is Russ Weinheimer, Office of the         requires evidence of good health for cov-
proposed rulemaking on the exception for
                                              Operating Division Counsel/Associate            erage of individuals under plan provisions
certain grandfathered church plans and a
                                              Chief Counsel (Tax Exempt and Govern-           described in paragraph (b)(2) or (3) of this
request for comments (REG–114083–00,
                                              ment Entities). However, other personnel        section.
2001–1 C.B. 630) was published in the
                                              from the IRS and Treasury Department               (2) Health insurance issuers.        See
Federal Register of January 8, 2001. Two
                                              participated in their development.              sections 2702 and 2721(b)(1)(B) of the
written comments were received. After
                                                                                              Public Health Service Act (42 U.S.C.
consideration of the comments, the pro-                         *****
                                                                                              300gg–2 and 300gg–21(b)(1)(B)) and 45
posed regulations are adopted as amended
                                              Adoption of Amendments to the                   CFR 146.121, which require health insur-
by this Treasury decision.
                                              Regulations                                     ance issuers providing health insurance
                                                                                              coverage under a church plan that is a
                                                Accordingly, 26 CFR part 54 is                group health plan to comply with nondis-
                                              amended as follows:                             crimination requirements similar to those



February 5, 2007                                                  461                                                   2007–6 I.R.B.
that church plans are required to comply       of initial eligibility. (i) A plan contains               P will not be treated as failing to meet the require-
with under section 9802 and §54.9802–1         the provisions described in this paragraph                ments of section 9802 or §54.9802–1 for the plan year
except that those nondiscrimination re-        (b)(3) if it requires evidence of good health             solely because the plan requires evidence of good
                                                                                                         health for coverage of individuals enrolling after the
quirements do not include an exception         of any individual who enrolls after the first             first 90 days of initial eligibility under the plan.
for health insurance issuers comparable        90 days of initial eligibility under the plan.               (d) Effective date. This section is appli-
to the exception for church plans under            (ii) A plan does not contain the pro-                 cable to plan years beginning on or after
section 9802(c) and this section.              visions described in this paragraph (b)(3)                July 1, 2007.
    (b) Church plans to which this section     if it provides for a longer (or shorter) pe-                 Par. 5. Section 54.9831–1 is amended
applies—(1) Church plans with certain          riod than 90 days. Thus, for example, a                   by revising paragraphs (b) and (c)(1) to
coverage provisions in effect on July 15,      plan requiring evidence of good health of                 read as follows:
1997. This section applies to any church       any individual who enrolls after the first
plan (as defined in section 414(e)) for a      120 days of initial eligibility under the plan            §54.9831–1 Special rules relating to
plan year if, on July 15, 1997 and at all      does not contain the provisions described                 group health plans.
times thereafter before the beginning of       in this paragraph (b)(3).
the plan year, the plan contains either the        (c) Examples. The rules of this section               *****
provisions described in paragraph (b)(2)       are illustrated by the following examples:                   (b) General exception for certain small
of this section or the provisions described         Example 1. (i) Facts. A church organization          group health plans. The requirements
in paragraph (b)(3) of this section.           maintains two church plans for entities affiliated with   of §§54.9801–1 through 54.9801–6,
                                               the church. One plan is a group health plan that
    (2) Plan provisions applicable to indi-                                                              54.9802–1, 54.9802–2, 54.9811–1T,
                                               provides health coverage to all employees (including
viduals employed by employers of 10 or         ministers and lay workers) of any affiliated church
                                                                                                         54.9812–1T, and 54.9833–1 do not ap-
fewer employees and self-employed indi-        entity that has more than 10 employees. The other         ply to any group health plan for any plan
viduals. (i) A plan contains the provisions    plan is Plan O, which is a group health plan that         year if, on the first day of the plan year,
described in this paragraph (b)(2) if it re-   is not funded through insurance coverage and that         the plan has fewer than two participants
                                               provides health coverage to any employee (including
quires evidence of good health of both —                                                                 who are current employees.
                                               ministers and lay workers) of any affiliated church en-
    (A) Any employee of an employer of         tity that has 10 or fewer employees and any self-em-
                                                                                                            (c) Excepted benefits — (1) In general.
10 or fewer employees (determined with-        ployed individual affiliated with the church (includ-     The requirements of §§54.9801–1 through
out regard to section 414(e)(3)(C), under      ing a self-employed minister of the church). Plan O       54.9801–6,       54.9802–1,     54.9802–2,
which a church or convention or associ-        requires evidence of good health in order for any indi-   54.9811–1T, 54.9812–1T, and 54.9833–1
                                               vidual of a church entity that has 10 or fewer employ-
ation of churches is treated as the em-                                                                  do not apply to any group health plan in
                                               ees to be covered and in order for any self-employed
ployer); and                                   individual to be covered. On July 15, 1997 and at all
                                                                                                         relation to its provision of the benefits
    (B) Any self-employed individual.          times thereafter before the beginning of the plan year,   described in paragraph (c)(2), (3), (4), or
    (ii) A plan does not contain the pro-      Plan O has contained all the preceding provisions.        (5) of this section (or any combination of
visions described in this paragraph (b)(2)          (ii) Conclusion. In this Example 1, because Plan     these benefits).
                                               O contains the plan provisions described in paragraph
if the plan contains only one of the pro-      (b)(2) of this section and because those provisions       *****
visions described in this paragraph (b)(2).    were in the plan on July 15, 1997 and at all times
Thus, for example, a plan that requires evi-   thereafter before the beginning of the plan year, Plan                               Mark E. Matthews,
dence of good health of any self-employed      O will not be treated as failing to meet the require-                          Deputy Commissioner for
individual, but not of any employee of         ments of section 9802 or §54.9802–1 for the plan year                          Services and Enforcement.
                                               solely because the plan requires evidence of good
an employer with 10 or fewer employees,        health for coverage of the individuals described in
does not contain the provisions described                                                                Approved June 22, 2006.
                                               those plan provisions.
in this paragraph (b)(2). Moreover, a plan          Example 2. (i) Facts. A church organization
                                                                                                                                     Eric Solomon,
does not contain the provision described       maintains Plan P, which is a church plan that is not
                                               funded through insurance coverage and that is a group               Acting Deputy Assistant Secretary
in paragraph (b)(2)(i)(A) of this section if
                                               health plan providing health coverage to individuals                     of the Treasury (Tax Policy).
the plan requires evidence of good health      employed by entities affiliated with the church and
of any employee of an employer of fewer        self-employed individuals affiliated with the church
                                                                                                         (Filed by the Office of the Federal Register on December 12,
                                                                                                         2006, 8:45 a.m., and published in the issue of the Federal
than 10 (or greater than 10) employees.        (such as ministers). On July 15, 1997 and at all times    Register for December 13, 2006, 71 F.R. 75055)
Thus, for example, a plan does not con-        thereafter before the beginning of the plan year, Plan
tain the provision described in paragraph      P has required evidence of good health for coverage
                                               of any individual who enrolls after the first 90 days
(b)(2)(i)(A) of this section if the plan re-   of initial eligibility under the plan.
quires evidence of good health of any em-           (ii) Conclusion. In this Example 2, because Plan
ployee of an employer with five or fewer       P contains the plan provisions described in paragraph
employees.                                     (b)(3) of this section and because those provisions
    (3) Plan provisions applicable to indi-    were in the plan on July 15, 1997 and at all times
                                               thereafter before the beginning of the plan year, Plan
viduals who enroll after the first 90 days




2007–6 I.R.B.                                                          462                                                         February 5, 2007
Part IV. Items of General Interest
Notice of Proposed                             requests for public hearings, Kelly Banks      (a signed original and eight (8) copies)
Rulemaking by                                  (202) 622–7180 (not toll-free numbers).        or electronic comments that are submitted
Cross-Reference to                                                                            timely to the IRS. All comments will be
                                               SUPPLEMENTARY INFORMATION:                     available for public inspection and copy-
Temporary Regulations                                                                         ing. A public hearing may be scheduled
                                               Background and Explanation of
                                                                                              if requested in writing by any person that
Guidance Necessary to                          Provisions
                                                                                              timely submits written or electronic com-
Facilitate Business Electronic                    Temporary regulations in this issue of      ments. If a public hearing is scheduled, no-
Filing Under Section 1561                      the Bulletin amend 26 CFR Part 1 to add        tice of the date, time, and place for the pub-
                                               §§1.1502–43T, 1.1561–1T, 1.1561–2T             lic hearing will be published in the Federal
REG–161919–05                                  and 1.1561–3T, and amend §§1.1502–47T          Register.
                                               and 1.1563–1T. The text of those tempo-
AGENCY: Internal Revenue Service                                                              Drafting Information
                                               rary regulations also serves as the text of
(IRS), Treasury.                               these proposed regulations. The preamble          The principal author of these regula-
                                               to the temporary regulations explains the      tions is Grid Glyer of the Office of As-
ACTION: Notice of proposed rulemaking          amendments.
by cross-reference to temporary regula-                                                       sociate Chief Counsel (Corporate). Other
tions.                                                                                        personnel from the Treasury Department
                                               Special Analyses
                                                                                              and the IRS participated in their develop-
SUMMARY: In this issue of the Bulletin,            It has been determined that this notice    ment.
the IRS is issuing temporary regulations       of proposed rulemaking is not a significant                       *****
(T.D. 9304) that affect component mem-         regulatory action as defined in Executive
bers of controlled groups of corporations      Order 12866. Therefore, a regulatory           Proposed Amendments to the
and consolidated groups filing life-nonlife    assessment is not required. It has also        Regulations
Federal income tax returns. They provide       been determined that section 553(b) of the
guidance regarding the apportionment of        Administrative Procedure Act (5 U.S.C.            Accordingly, 26 CFR part 1 is proposed
tax benefit items and the amount and type      chapter 5) does not apply to the follow-       to be amended as follows:
of information these members are required      ing proposed regulations, §§1.1561–1,
                                                                                              PART 1—INCOME TAXES
to submit with their returns. The text of      1.1561–3 and 1.1563–1, and because
those regulations also serves as the text of   these regulations do not impose a col-            Paragraph 1. The authority citation for
these proposed regulations.                    lection of information on small entities,      part 1 continues to read, in part, as follows:
                                               the Regulatory Flexibility Act (5 U.S.C.          Authority: 26 U.S.C. 7805 * * *
DATES: Written or electronic comments,         chapter 6) does not apply. With respect           Par. 2. Section 1.1502–43 is amended
and a request for a public hearing, must be    to the following proposed regulations,         by revising paragraph (d) and adding para-
received by March 22, 2007.                    §§1.1502–43, 1.1502–47 and 1.1561–2,           graph (e) to read as follows:
                                               it is hereby certified that these regula-
ADDRESSES: Send submissions to:                tions will not have a significant economic     §1.1502–43 Consolidated accumulated
CC:PA:LPD:PR          (REG–161919–05),         impact on a substantial number of small        earnings tax.
Room 5203, Internal Revenue Service,           entities. This certification is based on the
P.O. Box 7604, Ben Franklin Station,           fact that these regulations primarily affect      [The text of the proposed amendment
Washington, DC 20044. Submissions may          large corporations (which are members of       to §1.1502–43 is the same as the text for
be hand-delivered Monday through Friday        either controlled or consolidated groups).     §1.1502–43T published elsewhere in this
between the hours of 8 a.m. and 4 p.m.         Therefore, a regulatory flexibility analysis   issue of the Bulletin].
to CC:PA:LPD:PR (REG–161919–05),               is not required. Pursuant to section 7805(f)      Par. 3. Section 1.1502–47 is amended
Courier’s Desk, Internal Revenue Service,      of the Internal Revenue Code, this notice      by revising paragraph (s) and adding para-
1111 Constitution Avenue, NW, Wash-            of proposed rulemaking will be submitted       graph (t) to read as follows:
ington, DC, or sent electronically, via the    to the Chief Counsel for Advocacy of the
IRS internet site at www.irs.gov/regs or       Small Business Administration for com-         §1.1502–47 Consolidated returns by
via the Federal eRulemaking Portal at          ment on their impact on small business.        life-nonlife groups.
www.regulations.gov (indicate IRS and
REG–161919–05).                                Comments and Requests for a Public                [The text of the proposed amendment
                                               Hearing                                        to §1.1502–47 is the same as the text for
FOR      FURTHER         INFORMATION                                                          §1.1502–47T published elsewhere in this
CONTACT: Concerning the proposed                  Before these proposed regulations are       issue of the Bulletin].
regulations, Grid Glyer, (202) 622–7930,       adopted as final regulations, consideration       Par. 4. Section 1.1561–1 is added to
concerning submissions of comments and         will be given to any written comments          read as follows:



February 5, 2007                                                  463                                                   2007–6 I.R.B.
§1.1561–1 General rules regarding                              ACTION: Correction to final and tempo-         Deductions From Intangibles; and Appor-
certain tax benefits available to the                          rary regulations.                              tionment of Stewardship Expense”.
component members of a controlled group                                                                          2. On page 44470, column 2, in the
of corporations.                                               SUMMARY: This document contains cor-           preamble under the paragraph head-
                                                               rections to final and temporary regulations    ing “5.      Comparable Profits Method
    [The text of the proposed §1.1561–1 is                     (T.D. 9278, 2006–34 I.R.B. 256) that was       for Services—Temp.           Treas.     Reg.
the same as the text for §1.1561–1T pub-                       published in the Federal Register on Fri-      § 1.482–9T(f)”, fifth line from the top
lished elsewhere in this issue of the Bul-                     day, August 4, 2006 (71 FR 44466) regard-      of the column, the language “assets play a
letin].                                                        ing the treatment of controlled services       greater role in general” is corrected to read
    Par. 5. Section 1.1561–2 is amended by                     transactions under section 482 and the al-     “assets play a greater role in generating”.
revising paragraphs (a), (b), (c) and (d) and                  location of income from intangibles, in           3. On page 44475, column 3, in the pre-
adding paragraph (f) to read as follows:                       particular with respect to contributions by    amble under the paragraph heading “Ser-
                                                               a controlled party to the value of an intan-   vices Subject to a Qualified Cost Shar-
§1.1561–2 Determination of amount of                           gible owned by another controlled party.       ing Arrangement—Temp. Treas. Reg.
tax benefits.                                                  This document also contains corrections to     § 1.482–9T(m)(3),“ fourth line from the
                                                               final and temporary regulations that mod-      top of the column, the language “two pro-
   [The text of the proposed amendment
                                                               ify the regulations under section 861 con-     visions, the rule § 1.482–” is corrected to
to §1.1561–2 is the same as the text for
                                                               cerning stewardship expenses to be consis-     read “two provisions, the rule in § 1.482–”.
1.1561–2T published elsewhere in this is-
                                                               tent with the changes made to the regula-
sue of the Bulletin].
                                                               tions under section 482.                                               Cynthia Grigsby,
   Par. 6. Section 1.1561–3 is added to
                                                                                                                 Senior Federal Register Liaison Officer,
read as follows:                                               EFFECTIVE DATE: These corrections are                         Legal Processing Division,
                                                               effective on January 1, 2007.                                   Associate Chief Counsel
§1.1561–3 Allocating the section 1561(a)
tax items.                                                     FOR      FURTHER          INFORMATION                    (Procedure and Administration).
                                                               CONTACT: Thomas A. Vidano, (202)               (Filed by the Office of the Federal Register on December 21,
    [The text of the proposed §1.1561–3 is                     435–5265, or Carol B. Tan (202)                2006, 8:45 a.m., and published in the issue of the Federal
the same as the text for §1.1561–3T pub-                       435–5159, for matters relating to sec-
                                                                                                              Register for December 22, 2006, 71 F.R. 76913)
lished elsewhere in this issue of the Bul-                     tion 482, and David F. Bergkuist, (202)
letin].                                                        622–3850, for matters relating to steward-
    Par. 7. Section 1.1563–1 is added to                       ship expenses (not toll-free numbers).         Treatment of Services Under
read as follows:                                                                                              Section 482 Allocation of
                                                               SUPPLEMENTARY INFORMATION:                     Income and Deductions
§1.1563–1 Definition of controlled group
of corporations and component members.                         Background                                     From Intangibles Stewardship
                                                                                                              Expense; Correction
    [The text of the proposed §1.1563–1 is                        The final and temporary regulations
the same as the text for §1.1563–1T pub-                       (T.D. 9278) that are the subject of these      Announcement 2007–11
lished elsewhere in this issue of the Bul-                     corrections is under sections 482 and 861
letin].                                                        of the Internal Revenue Code.                  AGENCY: Internal Revenue Service
                                                                                                              (IRS), Treasury.
                           Mark E. Matthews,                   Need for Correction
                     Deputy Commissioner for                                                                  ACTION: Correction to notice of pro-
                     Services and Enforcement.                     As published, final and temporary regu-
                                                                                                              posed rulemaking by cross-reference to
                                                               lations (T.D. 9278) contain errors that may
(Filed by the Office of the Federal Register on December 21,                                                  temporary regulations, notice of proposed
2006, 8:45 a.m., and published in the issue of the Federal     prove to be misleading and are in need of
                                                                                                              rulemaking, and notice of public hearing.
Register for December 22, 2006, 71 F.R. 76955)                 clarification.
                                                                                                              SUMMARY: This document contains
                                                               Correction of Publication
                                                                                                              corrections to a notice of proposed rule-
Treatment of Services Under                                                                                   making by cross-reference to temporary
                                                                   Accordingly, final and temporary regu-
Section 482; Allocation of                                     lations (T.D. 9278) that were the subject of   regulations, notice of proposed rule-
Income and Deductions From                                     FR Doc. 06–6497 are corrected as follows:      making, and notice of public hearing
Intangibles; Stewardship                                           1. On page 44466, column 1, in the         (REG–146893–02, 2006–34 I.R.B. 317)
                                                               heading, the subject “Treatment of Ser-        that was published in the Federal Register
Expense; Correction
                                                               vices Under Section 482; Allocation of         on Friday, August 4, 2006 (71 FR 44247)
                                                               Income and Deductions From Intangi-            relating to the treatment of controlled
Announcement 2007–10
                                                               bles; Stewardship Expense” is corrected        services transactions under section 482.
AGENCY: Internal Revenue Service                               to read “Treatment of Services Under           These regulations also provide guidance
(IRS), Treasury.                                               Section 482; Allocation of Income and          regarding the allocation of income from



2007–6 I.R.B.                                                                     464                                                   February 5, 2007
intangibles, in particular with respect to         “2. Paragraphs (d)(3)(ii)(C), Example                       Application of Separate
contributions by a controlled party to the      4, Example 5, Example 6 and (j)(6) are                         Limitations to Dividends From
value of an intangible owned by another         added.”                                                        Noncontrolled Section 902
controlled party, as it relates to controlled
services transactions, and modify the reg-      § 1.482–1 [Corrected]                                          Corporations; Correction
ulations under section 861 concerning
stewardship expenses to be consistent
                                                   3.     On page 44248, column 3,                             Announcement 2007–12
                                                § 1.482–1(j), lines 2 and 3, the lan-
with the changes made to the regulations                                                                       AGENCY: Internal Revenue Service
                                                guage “amendment to § 1.482–1(j) is
under section 482.                                                                                             (IRS), Treasury.
                                                the same as the text of § 1.482–1T(j)(1)
FOR      FURTHER          INFORMATION           and (2)” is corrected to read “amendment
                                                to § 1.482–1(j)(6) is the same as the text                     ACTION: Correcting amendments.
CONTACT: Thomas A. Vidano, (202)
435–5265, or Carol B. Tan (202)                 of § 1.482–1T(j)(6)”.
                                                                                                               SUMMARY: This document contains cor-
435–5159, for matters relating to sec-                                                                         rections to final and temporary regulations
                                                § 1.482–8 [Corrected]
tion 482, and David F. Bergkuist, (202)                                                                        (T.D. 9260, 2006–23 I.R.B. 1001) that
622–3850, for matters relating to steward-         4.      On page 44249, column 2,                            were published in the Federal Register
ship expenses (not toll-free numbers).          § 1.482–8(a), line 1, the language “(a)                        on Tuesday, April 25, 2006 (71 FR 24516)
                                                Example 10. Cost of services plus” is cor-                     concerning the application of separate
SUPPLEMENTARY INFORMATION:
                                                rected to read “(b) * * * Example 10. Cost                     foreign tax credit limitations to dividends
Background                                      of services plus”.                                             received from noncontrolled section 902
                                                   5.      On page 44249, column 2,                            corporations under section 904(d)(4).
   The notice of proposed rulemaking            § 1.482–8, paragraph (b) following Ex-
(REG–146893–02, REG–115037–00 and               ample 12. is removed.                                          DATES: These corrections are effective
REG–138603–03) by cross-reference to                                                                           April 25, 2006.
temporary regulations that is the subject       § 1.482–9 [Corrected]
                                                                                                               FOR       FURTHER       INFORMATION
of this correction is under section 482 and
                                                   6.     On page 44249, column 2,                             CONTACT: Ginny Chung (202) 622–3850
861 of the Internal Revenue Code.
                                                § 1.482–9(m)(6), last line, the language                       (not a toll-free call).
Need for Correction                             “operation as defined in § 1.482–8”. is
                                                corrected to read “operation as defined in                     SUPPLEMENTARY INFORMATION:
   As published, the notice of pro-             the proposed § 1.482–8.”.
posed rulemaking (REG–146893–02,                                                                               Background
REG–115037–00 and REG–138603–03)                § 1.861–8 [Corrected]
                                                                                                                  The final and temporary regulations
by cross-reference to temporary regula-                                                                        (T.D. 9260) that are the subject of these
                                                   7.      On page 44249, column 3,
tions contains errors that may prove to be                                                                     corrections are under sections 902, 904,
                                                § 1.861–8(f)(4), line 3, the language
misleading and are in need of clarification.                                                                   and 964 of the Internal Revenue Code.
                                                “same as the text of § 1.861–8T(c)(4)(i)”
Correction of Publication                       is corrected to read “same as the text of
                                                § 1.861–8T(f)(4)(i)”.                                          Need for Correction
   Accordingly, the notice of pro-                 8.      On page 44249, column 3,
                                                                                                                  As published, T.D. 9260 contains errors
posed rulemaking (REG–146893–02,                § 1.861–8(h), line 3, the language “as the
                                                                                                               that may prove to be misleading and are in
REG–138603–03 and REG–115037–00)                text of § 1.861–8T(h)(1) published” is cor-
                                                                                                               need of clarification.
by cross-reference to temporary regula-         rected to read “as the text of § 1.861–8T(h)
tions that were the subject of FR Doc.          published”.                                                                     *****
06–6674, is corrected as follows:
   1. On page 44247, column 2, in the                                   Cynthia Grigsby,                       Correction of Publication
heading, the subject “Treatment of Ser-            Senior Federal Register Liaison Officer,
                                                               Legal Processing Division,                         Accordingly, 26 CFR part 1 is cor-
vices Under Section 482 Allocation of
                                                                 Associate Chief Counsel                       rected by making the following correcting
Income and Deductions From Intangi-
                                                          (Procedure and Administration).                      amendments:
bles Stewardship Expense” is corrected
to read, “Treatment of Services Under           (Filed by the Office of the Federal Register on December 21,   PART 1—INCOME TAXES
Section 482; Allocation of Income and           2006, 8:45 a.m., and published in the issue of the Federal
                                                Register for December 22, 2006, 71 F.R. 46956)
Deductions From Intangibles; and Appor-                                                                           Paragraph 1. The authority for part 1 is
tionment of Stewardship Expense”.                                                                              amended and continues to read in part:
   2. On page 44248, column 2, instruc-                                                                           Authority: 26 U.S.C. 7805 * * *
tional Par. 3., number 2 is corrected to read                                                                     Par. 2. Section 1.902–1 is amended
as follows:                                                                                                    by adding a heading to paragraph (a)(4)(i)




February 5, 2007                                                          465                                                          2007–6 I.R.B.
introductory text and revising the heading     1986 undistributed earnings of that corpo-         (iii) Determination of the source of
for paragraph (c)(8) to read as follows:       ration and the corporation makes a distri-      income. For purposes of this paragraph
                                               bution to shareholders that is a dividend       (c)(4), income will be determined to be
§ 1.902–1 Credit for domestic corporate        or would be a dividend if there were cur-       from sources within or without the QBU’s
shareholder of a foreign corporation for       rent or accumulated earnings and profits,       country of operation under the laws of the
foreign income taxes paid by the foreign       then the post-1986 deficit shall be carried     foreign country of the payor of the income.
corporation.                                   back to the most recent pre-effective date      *****
                                               taxable year of the first- or lower-tier cor-      Par. 7. Section 1.904–5 is amended by
   (a) * * *
                                               poration with positive accumulated profits      revising paragraphs (a) introductory text
   (4) Third- or lower-tier corpora-
                                               computed under section 902. * * *               and (a)(1) and adding Examples 4 and 5 to
tion—(i) Third-tier corporation. * * *
                                               *****                                           paragraph (i)(5) to read as follows:
*****                                             Par. 5. Section 1.904–0 is amended
   (c) * * *                                   by adding the entries for paragraphs (o)(1)     § 1.904–5 Look-through rules as applied
   (8) Effect of certain liquidations, re-     and (o)(2) under § 1.904–5 to read as fol-      to controlled foreign corporations and
organizations, or similar transactions on      lows:                                           other entities.
certain foreign taxes paid or accrued in
taxable years beginning on or before Au-       § 1.904–0 Outline of regulations                   (a) and (a)(1) [Reserved]. For further
gust 5, 1997.                                  provisions for section 904.                     guidance, see § 1.904–5T(a) introductory
***                                                                                            text and (a)(1).
                                               *****
*****                                                                                          *****
   Par. 3. Section 1.902–1T is amended         § 1.904–5 Look-through rules as applied            (i) * * *
by revising the first sentence of paragraph    to controlled foreign corporations and             (5) * * *
(a)(7) to read as follows:                     other entities.                                    Examples 4 and 5 [Reserved]. For fur-
                                                                                               ther guidance, see § 1.904–5T(i)(5) Exam-
§ 1.902–1T Credit for domestic corporate       *****                                           ples 4 and 5.
shareholder of a foreign corporation for           (o) * * *
                                                                                               *****
foreign income taxes paid by the foreign           (1) Rules for controlled foreign corpo-
                                                                                                  Par.   8.    Section 1.904(f)–12T is
corporation (temporary).                       rations and other look-through entities.
                                                                                               amended by revising the heading for
                                                   (2) Rules for noncontrolled section 902
                                                                                               paragraph (g)(1) to read as follows:
   (a) * * *                                   corporations.
   (7) * * * The term foreign income taxes                                                     § 1.904(f)–12T Transition rules
                                               *****
means income, war profits, and excess                                                          (temporary).
                                                  Par. 6. Section 1.904–4 is amended by
profits taxes as defined in § 1.902–1(a),
                                               revising paragraph (c)(4) introductory text
and taxes included in the term income, war                                                     *****
                                               and adding paragraphs (c)(4)(i) through
profits, and excess profits taxes by reason                                                        (g) * * * (1) Recapture of separate limi-
                                               (c)(4)(iii) to read as follows:
of section 903, that are imposed by a for-                                                     tation loss or overall foreign loss in a sep-
eign country or a possession of the United     § 1.904–4 Separate application of section       arate category for dividends from a non-
States, including any such taxes deemed        904 with respect to certain categories of       controlled section 902 corporation.
paid by a foreign corporation under this       income.                                         ***
section. * * *
                                               *****                                           *****
*****
                                                  (c) * * *                                       Par. 9. Section 1.964–1 is amended by:
   Par. 4. Section 1.902–2 is amended
                                                  (3) and (4) [Reserved]. For further             1. Redesignating paragraphs (a) in-
by revising the first sentence of paragraph
                                               guidance, see § 1.904–4T(c)(3) and (4) in-      troductory text, (a)(1), (a)(2) and (a)(3)
(a)(1) to read as follows:
                                               troductory text.                                as paragraphs (a)(1) introductory text,
§ 1.902–2 Treatment of deficits in                (4)(i) Income from sources within the        (a)(1)(i), (a)(1)(ii) and (a)(1)(iii), respec-
post-1986 undistributed earnings and           QBU’s country of operation. Passive             tively.
pre-1987 accumulated profits of a first-       income from sources within the QBU’s               2. Designating the undesignated text
or lower-tier corporation for purposes         country of operation shall be treated as        following newly-designated paragraph
of computing an amount of foreign taxes        one item of income.                             (a)(1)(iii) as paragraph (a)(2).
deemed paid under § 1.902–1.                      (ii) Income from sources without the            3. Removing the comma following the
                                               QBU’s country of operation. Passive in-         word “shall” from newly designated para-
    (a) * * * (1) * * *For purposes of com-    come from sources without the QBU’s             graph (a)(1) introductory text.
puting foreign income taxes deemed paid        country of operation shall be grouped on           4. Removing the last sentence in newly-
under § 1.902–1(b) with respect to divi-       the basis of the tax imposed on that in-        designated paragraph (a)(1)(i).
dends paid by a first- or lower-tier corpo-    come as provided in § 1.904–4T(c)(3)(i)            5. Revising newly-designated para-
ration, when there is a deficit in the post-   through (iv).                                   graph (a)(2), and the text of paragraphs



2007–6 I.R.B.                                                      466                                             February 5, 2007
(b)(1) introductory text and (c)(1) intro-     which the practice has been applied, and       25, 2006, in which such foreign corpora-
ductory text.                                  whether the item to which the adjustment       tion first qualifies as a controlled foreign
   The revisions read as follows:              relates is of a recurring or merely a nonre-   corporation (as defined in section 957 or
                                               curring nature. For the treatment of earn-     953) or a noncontrolled section 902 corpo-
§ 1.964–1 Determination of the earnings        ings and profits whose distribution is pre-    ration (as defined in section 904(d)(2)(E)),
and profits of a foreign corporation.          vented by restrictions and limitations im-     any method of accounting or taxable
                                               posed by a foreign government, see section     year allowable under this section may be
    (a) * * *
                                               964(b) and these regulations. For rules for    adopted, and any election allowable under
    (2) Required adjustments. The com-
                                               determining the earnings and profits (or       this section may be made, by such foreign
putation described in paragraph (a)(1) of
                                               deficit in earnings and profits) of a for-     corporation or on its behalf notwithstand-
this section shall be made in the foreign
                                               eign corporation for taxable years begin-      ing that, in previous years, its books or
corporation’s functional currency (deter-
                                               ning before January 1, 1987, for purposes      financial statements were prepared on a
mined under section 985 and the regula-
                                               of sections 951 through 964, see 26 CFR        different basis, and notwithstanding that
tions under that section) and may be made
                                               1.964–1(a) (revised as of April 1, 2006).      such election is required by the Internal
by following the procedures described in
                                                  (b) * * *(1) * * * The accounting           Revenue Code or regulations to be made
paragraphs (a)(1)(i) through (a)(1)(iii) of
                                               principles to be applied in making the ad-     in a prior taxable year. * * *
this section in an order other than the one
                                               justments required by paragraph (a)(1)(ii)
listed, as long as the result so obtained                                                     *****
                                               of this section shall be those account-
would be the same. In determining earn-                                                           (5) * * *(i) * * * In the event that
                                               ing principles generally accepted in the
ings and profits, or the deficit in earnings                                                  the United States shareholders of the con-
                                               United States for purposes of reflecting
and profits, of a foreign corporation un-                                                     trolled foreign corporation do not, in the
                                               in the financial statements of a domestic
der section 964, the amount of an illegal                                                     aggregate, own (within the meaning of sec-
                                               corporation the operations of its foreign
bribe, kickback, or other payment (within                                                     tion 958(a)) more than 50 percent of the to-
                                               affiliates, including the following:
the meaning of section 162(c), as amended                                                     tal combined voting power of all classes of
by section 288 of the Tax Equity and Fiscal    *****                                          the stock of such foreign corporation enti-
Responsibility Act of 1982 in the case of         (c) * * *(1) * * *The tax accounting        tled to vote, the controlling United States
payments made after September 3, 1982,         standards to be applied in making the ad-      shareholders of the controlled foreign cor-
and these regulations) paid after Novem-       justments required by paragraph (a)(1)(iii)    poration shall be all those United States
ber 3, 1976, by or on behalf of the corpo-     of this section shall be the following:        shareholders who own (within the mean-
ration during the taxable year of the cor-     *****                                          ing of section 958(a)) stock of such corpo-
poration directly or indirectly to an offi-       Par. 10. Section 1.964–1T is amended        ration.
cial, employee, or agent in fact of a gov-     by revising the first sentence of paragraph
ernment shall not be taken into account to     (c)(2) and the last sentence of paragraph      *****
decrease such earnings and profits or to in-   (c)(5)(i) to read as follows:
crease such deficit. No adjustment shall                                                                              Cynthia Grigsby,
be required under paragraph (a)(1)(ii) or      § 1.964–1T Determination of the earnings          Senior Federal Register Liaison Officer,
(iii) of this section unless it is material.   and profits of a foreign corporation               Publications and Regulations Branch,
Whether an adjustment is material depends      (temporary).                                                  Legal Processing Division,
on the facts and circumstances of the par-                                                                     Associate Chief Counsel
ticular case, including the amount of the      *****                                                    (Procedure and Administration).
adjustment, its size relative to the general      (c) * * *
                                                                                              (Filed by the Office of the Federal Register on December 22,
level of the corporation’s total assets and       (2) * * * For the first taxable year of a   2006, 8:45 a.m., and published in the issue of the Federal
annual profit or loss, the consistency with    foreign corporation beginning after April      Register for December 26, 2006, 71 F.R. 77264)




February 5, 2007                                                  467                                                           2007–6 I.R.B.
Definition of Terms
Revenue rulings and revenue procedures           and B, the prior ruling is modified because      of a prior ruling, a combination of terms
(hereinafter referred to as “rulings”) that      it corrects a published position. (Compare       is used. For example, modified and su-
have an effect on previous rulings use the       with amplified and clarified, above).            perseded describes a situation where the
following defined terms to describe the ef-          Obsoleted describes a previously pub-        substance of a previously published ruling
fect:                                            lished ruling that is not considered deter-      is being changed in part and is continued
    Amplified describes a situation where        minative with respect to future transac-         without change in part and it is desired to
no change is being made in a prior pub-          tions. This term is most commonly used in        restate the valid portion of the previously
lished position, but the prior position is be-   a ruling that lists previously published rul-    published ruling in a new ruling that is self
ing extended to apply to a variation of the      ings that are obsoleted because of changes       contained. In this case, the previously pub-
fact situation set forth therein. Thus, if       in laws or regulations. A ruling may also        lished ruling is first modified and then, as
an earlier ruling held that a principle ap-      be obsoleted because the substance has           modified, is superseded.
plied to A, and the new ruling holds that the    been included in regulations subsequently            Supplemented is used in situations in
same principle also applies to B, the earlier    adopted.                                         which a list, such as a list of the names of
ruling is amplified. (Compare with modi-             Revoked describes situations where the       countries, is published in a ruling and that
fied, below).                                    position in the previously published ruling      list is expanded by adding further names in
    Clarified is used in those instances         is not correct and the correct position is       subsequent rulings. After the original rul-
where the language in a prior ruling is be-      being stated in a new ruling.                    ing has been supplemented several times, a
ing made clear because the language has              Superseded describes a situation where       new ruling may be published that includes
caused, or may cause, some confusion.            the new ruling does nothing more than re-        the list in the original ruling and the ad-
It is not used where a position in a prior       state the substance and situation of a previ-    ditions, and supersedes all prior rulings in
ruling is being changed.                         ously published ruling (or rulings). Thus,       the series.
    Distinguished describes a situation          the term is used to republish under the              Suspended is used in rare situations
where a ruling mentions a previously pub-        1986 Code and regulations the same po-           to show that the previous published rul-
lished ruling and points out an essential        sition published under the 1939 Code and         ings will not be applied pending some
difference between them.                         regulations. The term is also used when          future action such as the issuance of new
    Modified is used where the substance         it is desired to republish in a single rul-      or amended regulations, the outcome of
of a previously published position is being      ing a series of situations, names, etc., that    cases in litigation, or the outcome of a
changed. Thus, if a prior ruling held that a     were previously published over a period of       Service study.
principle applied to A but not to B, and the     time in separate rulings. If the new rul-
new ruling holds that it applies to both A       ing does more than restate the substance


Abbreviations
The following abbreviations in current use       ER—Employer.                                     PRS—Partnership.
and formerly used will appear in material        ERISA—Employee Retirement Income Security Act.   PTE—Prohibited Transaction Exemption.
                                                 EX—Executor.                                     Pub. L.—Public Law.
published in the Bulletin.
                                                 F—Fiduciary.                                     REIT—Real Estate Investment Trust.
                                                 FC—Foreign Country.                              Rev. Proc.—Revenue Procedure.
A—Individual.
                                                 FICA—Federal Insurance Contributions Act.        Rev. Rul.—Revenue Ruling.
Acq.—Acquiescence.
B—Individual.                                    FISC—Foreign International Sales Company.        S—Subsidiary.
                                                 FPH—Foreign Personal Holding Company.            S.P.R.—Statement of Procedural Rules.
BE—Beneficiary.
                                                 F.R.—Federal Register.                           Stat.—Statutes at Large.
BK—Bank.
B.T.A.—Board of Tax Appeals.                     FUTA—Federal Unemployment Tax Act.               T—Target Corporation.
                                                 FX—Foreign corporation.                          T.C.—Tax Court.
C—Individual.
                                                 G.C.M.—Chief Counsel’s Memorandum.               T.D. —Treasury Decision.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.                 GE—Grantee.                                      TFE—Transferee.
                                                 GP—General Partner.                              TFR—Transferor.
CI—City.
                                                 GR—Grantor.                                      T.I.R.—Technical Information Release.
COOP—Cooperative.
Ct.D.—Court Decision.                            IC—Insurance Company.                            TP—Taxpayer.
                                                 I.R.B.—Internal Revenue Bulletin.                TR—Trust.
CY—County.
                                                 LE—Lessee.                                       TT—Trustee.
D—Decedent.
DC—Dummy Corporation.                            LP—Limited Partner.                              U.S.C.—United States Code.
                                                 LR—Lessor.                                       X—Corporation.
DE—Donee.
                                                 M—Minor.                                         Y—Corporation.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.   Nonacq.—Nonacquiescence.                         Z —Corporation.
                                                 O—Organization.
DR—Donor.
                                                 P—Parent Corporation.
E—Estate.
                                                 PHC—Personal Holding Company.
EE—Employee.
                                                 PO—Possession of the U.S.
E.O.—Executive Order.
                                                 PR—Partner.


2007–6 I.R.B.                                                          i                                             February 5, 2007
Numerical Finding List1                                       Revenue Rulings:
Bulletins 2007–1 through 2007–6                               2007-1, 2007-3 I.R.B. 265
Announcements:                                                2007-2, 2007-3 I.R.B. 266
                                                              2007-3, 2007-4 I.R.B. 350
2007-1, 2007-1 I.R.B. 243                                     2007-4, 2007-4 I.R.B. 351
2007-2, 2007-2 I.R.B. 263                                     2007-5, 2007-5 I.R.B. 378
2007-3, 2007-4 I.R.B. 376                                     2007-6, 2007-5 I.R.B. 393
2007-5, 2007-4 I.R.B. 376                                     2007-9, 2007-6 I.R.B. 422
2007-6, 2007-4 I.R.B. 376
                                                              Treasury Decisions:
2007-7, 2007-4 I.R.B. 377
2007-8, 2007-5 I.R.B. 416                                     9298, 2007-6 I.R.B. 434
2007-9, 2007-5 I.R.B. 417                                     9299, 2007-6 I.R.B. 460
2007-10, 2007-6 I.R.B. 464                                    9300, 2007-2 I.R.B. 246
2007-11, 2007-6 I.R.B. 464                                    9301, 2007-2 I.R.B. 244
2007-12, 2007-6 I.R.B. 465                                    9302, 2007-5 I.R.B. 382
Notices:                                                      9303, 2007-5 I.R.B. 379
                                                              9304, 2007-6 I.R.B. 423
2007-1, 2007-2 I.R.B. 254                                     9306, 2007-6 I.R.B. 420
2007-2, 2007-2 I.R.B. 254
2007-3, 2007-2 I.R.B. 255
2007-4, 2007-2 I.R.B. 260
2007-5, 2007-3 I.R.B. 269
2007-6, 2007-3 I.R.B. 272
2007-7, 2007-5 I.R.B. 395
2007-8, 2007-3 I.R.B. 276
2007-9, 2007-5 I.R.B. 401
2007-10, 2007-4 I.R.B. 354
2007-11, 2007-5 I.R.B. 405
2007-12, 2007-5 I.R.B. 409
2007-13, 2007-5 I.R.B. 410

Proposed Regulations:

REG-152043-05, 2007-2 I.R.B. 263
REG-161919-05, 2007-6 I.R.B. 463
REG-125632-06, 2007-5 I.R.B. 415

Revenue Procedures:

2007-1, 2007-1 I.R.B. 1
2007-2, 2007-1 I.R.B. 88
2007-3, 2007-1 I.R.B. 108
2007-4, 2007-1 I.R.B. 118
2007-5, 2007-1 I.R.B. 161
2007-6, 2007-1 I.R.B. 189
2007-7, 2007-1 I.R.B. 227
2007-8, 2007-1 I.R.B. 230
2007-9, 2007-3 I.R.B. 278
2007-10, 2007-3 I.R.B. 289
2007-11, 2007-2 I.R.B. 261
2007-12, 2007-4 I.R.B. 354
2007-13, 2007-3 I.R.B. 295
2007-14, 2007-4 I.R.B. 357
2007-15, 2007-3 I.R.B. 300
2007-16, 2007-4 I.R.B. 358
2007-17, 2007-4 I.R.B. 368
2007-18, 2007-5 I.R.B. 413


1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin
2006–52, dated December 26, 2006.


February 5, 2007                                                                          ii                                                                 2007–6 I.R.B.
Finding List of Current Actions on                            Revenue Procedures— Continued:
Previously Published Items1                                   2005-69
                                                              Superseded by
Bulletins 2007–1 through 2007–6
                                                              Rev. Proc. 2007-15, 2007-3 I.R.B. 300
Notices:
                                                              2006-1
2005-29                                                       Superseded by
Modified and superseded by                                    Rev. Proc. 2007-1, 2007-1 I.R.B. 1
Notice 2007-4, 2007-2 I.R.B. 260                              2006-2
2006-2                                                        Superseded by
Modified and superseded by                                    Rev. Proc. 2007-2, 2007-1 I.R.B. 88
Notice 2007-4, 2007-2 I.R.B. 260                              2006-3
2006-50                                                       Superseded by
Amplified, clarified, and modified by                         Rev. Proc. 2007-3, 2007-1 I.R.B. 108
Notice 2007-11, 2007-5 I.R.B. 405                             2006-4
Proposed Regulations:                                         Superseded by
                                                              Rev. Proc. 2007-4, 2007-1 I.R.B. 118
REG-141901-05
                                                              2006-5
Corrected by
                                                              Superseded by
Ann. 2007-7, 2007-4 I.R.B. 377
                                                              Rev. Proc. 2007-5, 2007-1 I.R.B. 161
REG-142270-05
                                                              2006-6
Corrected by
                                                              Superseded by
Ann. 2007-2, 2007-2 I.R.B. 263
                                                              Rev. Proc. 2007-6, 2007-1 I.R.B. 189
REG-127819-06
                                                              2006-7
Corrected by
                                                              Superseded by
Ann. 2007-5, 2007-4 I.R.B. 376
                                                              Rev. Proc. 2007-7, 2007-1 I.R.B. 227
REG-136806-06
                                                              2006-8
Corrected by
                                                              Superseded by
Ann. 2007-6, 2007-4 I.R.B. 376
                                                              Rev. Proc. 2007-8, 2007-1 I.R.B. 230
Revenue Procedures:
                                                              Revenue Rulings:
98-20
                                                              2003-43
Superseded by
                                                              Modified by
Rev. Proc. 2007-12, 2007-4 I.R.B. 354
                                                              Notice 2007-2, 2007-2 I.R.B. 254
2000-38
                                                              2005-76
Modified by
                                                              Supplemented and superseded by
Rev. Proc. 2007-16, 2007-4 I.R.B. 358
                                                              Rev. Rul. 2007-4, 2007-4 I.R.B. 351
2000-50
                                                              Treasury Decisions:
Modified by
Rev. Proc. 2007-16, 2007-4 I.R.B. 358                         9278
2002-9                                                        Corrected by
Modified by                                                   Ann. 2007-10, 2007-6 I.R.B. 464
Rev. Proc. 2007-16, 2007-4 I.R.B. 358                         Ann. 2007-9, 2007-5 I.R.B. 417
Modified and amplified by                                     9286
Rev. Proc. 2007-14, 2007-4 I.R.B. 357                         Corrected by
2004-11                                                       Ann. 2007-8, 2007-5 I.R.B. 416
Superseded by
Rev. Proc. 2007-16, 2007-4 I.R.B. 358

2005-12
Superseded by
Rev. Proc. 2007-17, 2007-4 I.R.B. 368




1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2006–27 through 2006–52 is in Internal Revenue Bulletin 2006–52, dated December 26,
2006.


2007–6 I.R.B.                                                                            iii                                                       February 5, 2007
February 5, 2007   2007–6 I.R.B.
2007–6 I.R.B.   February 5, 2007
February 5, 2007   2007–6 I.R.B.
                                  INTERNAL REVENUE BULLETIN
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