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									                                                                                               Bulletin No. 2011-42
                                                                                                  October 17, 2011



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


INCOME TAX                                                           ESTATE TAX

T.D. 9546, page 505.                                                 Notice 2011–82, page 516.
Final regulations under section 142 of the Code provide the          This notice provides guidance under section 2010 of the Code
definition of solid waste disposal facilities for purposes of the    on electing portability of a deceased spousal unused exclusion
rules applicable to tax-exempt bonds issued by state and local       amount on a Form 706 (United States Estate (and Generation-
governments to finance solid waste disposal facilities.              Skipping Transfer) Tax Return). This notice also announces
                                                                     that the Treasury Department and the Service intend to issue
REG–111283–11, page 573.                                             regulations to implement the provisions of section 2010(c) and
Proposed regulations describe swaps and similar agreements           invites public comments.
that fall within the meaning of section 1256(b)(2)(B) of the
Code. The proposed regulations also revise the definition of a       Rev. Proc. 2011–48, page 527.
notional principal contract under regulations section 1.446–3.       This procedure instructs taxpayers how to file a protective
A public hearing is scheduled for January 19, 2012.                  claim for refund when the estate has a claim or expense not
                                                                     yet deductible under section 2053 of the Code and the cor-
REG–128224–06, page 533.                                             responding regulations. In addition, this procedure details the
Proposed regulations under section 67 of the Code provide            procedures the Service will follow in processing these protec-
guidance on which costs incurred by estates or trusts other          tive claims for refund. Finally, this procedure instructs taxpay-
than grantor trusts (non-grantor trusts) are subject to the 2-per-   ers how to notify the Service that a section 2053 protective
cent floor for miscellaneous itemized deductions under section       claim for refund is ready for consideration.
67(a). A public hearing is scheduled for December 19, 2011.

                                                                     EXCISE TAX
EMPLOYEE PLANS
                                                                     REG–140038–10, page 537.
REG–140038–10, page 537.                                             Proposed regulations under section 9815 of the Code imple-
Proposed regulations under section 9815 of the Code imple-           ment the disclosure requirements to help plans and individuals
ment the disclosure requirements to help plans and individuals       better understand their health coverage, as well as other cover-
better understand their health coverage, as well as other cover-     age options, regarding the summary of benefits and coverage
age options, regarding the summary of benefits and coverage          and the uniform glossary for group health plans and health in-
and the uniform glossary for group health plans and health in-       surance coverage in the group and individual markets under
surance coverage in the group and individual markets under           the Affordable Care Act.
the Affordable Care Act.



                                                                                                (Continued on the next page)



Finding Lists begin on page ii.
ADMINISTRATIVE

Notice 2011–81, page 513.
Optional special per diem rates. This notice provides the
2011–2012 special per diem rates for taxpayers to use in
substantiating the amount of ordinary and necessary business
expenses incurred while traveling away from home, specifically
(1) the special transportation industry rates, (2) the rate for the
incidental expenses only deduction, and (3) the rates and list
of high-cost localities for the high-low substantiation method.

Notice 2011–82, page 516.
This notice provides guidance under section 2010 of the Code
on electing portability of a deceased spousal unused exclusion
amount on a Form 706 (United States Estate (and Generation-
Skipping Transfer) Tax Return). This notice also announces
that the Treasury Department and the Service intend to issue
regulations to implement the provisions of section 2010(c) and
invites public comments.

Rev. Proc. 2011–46, page 518.
Nonaccrual-experience method book safe harbor. This
procedure provides a safe harbor method of accounting for tax-
payers using the nonaccrual-experience method of accounting
under section 448(d)(5) of the Code and regulations section
1.448–2. This procedure also provides procedures for obtain-
ing automatic consent to change to this safe harbor method
and to make certain changes within this method. Rev. Proc.
2006–56 modified and amplified.

Rev. Proc. 2011–47, page 520.
Per diem allowances. This procedure provides optional rules
for deeming substantiated the amount of certain business ex-
penses of traveling away from home reimbursed to an em-
ployee, partner, or volunteer, or deductible by an employee
or self-employed individual. Rev. Proc. 2010–39 amplified,
modified, and superseded.

Rev. Proc. 2011–48, page 527.
This procedure instructs taxpayers how to file a protective
claim for refund when the estate has a claim or expense not
yet deductible under section 2053 of the Code and the cor-
responding regulations. In addition, this procedure details the
procedures the Service will follow in processing these protec-
tive claims for refund. Finally, this procedure instructs taxpay-
ers how to notify the Service that a section 2053 protective
claim for refund is ready for consideration.




October 17, 2011                                                      2011–42 I.R.B.
The IRS Mission
Provide America’s taxpayers top-quality service by helping                        force the law with integrity and fairness to all.
them understand and meet their tax responsibilities and en-


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 Secre-
or technical advice to Service field offices, identifying details                 tary (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.




2011–42 I.R.B.                                                                                                                    October 17, 2011
                   .




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


2011–42 I.R.B.                                                             505                                             October 17, 2011
The Final Regulations retain this definition     because it unduly restricts the scope of        dition, the legislative history provides, in
of a solid waste disposal facility.              residual material in many circumstances         relevant part, that “the conferees wish to
                                                 and it arbitrarily treats various industries    clarify that solid waste does not include
3. Definition of Solid Waste.                    and activities differently because residual     most hazardous waste (including radioac-
                                                 amounts vary widely by industry and ac-         tive waste).” H.Rep. No. 99–841, at
    The Proposed Regulations defined the
                                                 tivity. The Final Regulations adopt this        II–704 (1986), 1986–3 (Vol. 4) C.B. 704.
term solid waste to mean garbage, refuse,
                                                 comment to eliminate the five percent               Some commentators expressed concern
and other solid material derived from any
                                                 (5%) size limitation on residual material       that the introduction of virgin material
agricultural, commercial, consumer, or in-
                                                 and otherwise generally retain the analytic     or precious metals into a final disposal
dustrial operation or activity, based largely
                                                 standard for residual material. The Final       process, such as a landfill (as contrasted
on an existing definition under the Exist-
                                                 Regulations also expand the definition of       with a recycling process), could disqualify
ing Regulations. The Proposed Regula-
                                                 residual material to include material de-       a facility from treatment as a qualified
tions refined the existing definition to re-
                                                 rived from providing a service in which         solid waste disposal facility. The Final
quire that solid waste be either used ma-
                                                 no product is produced.                         Regulations address this comment favor-
terial or residual material. The Proposed
                                                     Further, for purposes of determining        ably and modify the definition of solid
Regulations also eliminated the No-Value
                                                 residual material when multiple produc-         waste to allow the introduction of virgin
Test. Additionally, the Proposed Regula-
                                                 tion processes are operated on the same         materials and precious metals into a final
tions required that the person who acquires
                                                 site, commentators recommended a sep-           disposal process. The Final Regulations
the material must reasonably expect to in-
                                                 arate evaluation of each process. Based         also add a provision that allows the IRS to
troduce it into a qualified solid waste dis-
                                                 on reasons associated with scope and ad-        identify other excluded precious metals in
posal process within a reasonable period of
                                                 ministrability, the IRS and the Treasury        future public administrative guidance.
time after acquisition.
                                                 Department intended to cover only resid-            Commentators also recommended
    The Proposed Regulations defined used
                                                 ual material that remains at the end of         treating hazardous waste and radioactive
material to mean any material that has
                                                 integrated processes that are functionally      waste as solid waste. The Final Regula-
been used previously as an agricultural,
                                                 interconnected or interdependent, based         tions generally do not adopt this comment.
commercial, consumer, or industrial prod-
                                                 on all the facts and circumstances. Ac-         The IRS and the Treasury Department
uct or as a component of any such product.
                                                 cordingly, the Final Regulations do not         believe that Congress generally intended
The Proposed Regulations defined resid-
                                                 adopt this comment. Instead, the Final          to exclude these materials from the def-
ual material to mean any residual byprod-
                                                 Regulations adopt an integrated process         inition of solid waste. Recognizing that
uct or excess unused raw material that re-
                                                 standard to limit residual material.            only certain hazardous waste and radioac-
mains from the production of any agricul-
                                                                                                 tive waste are required to be disposed of
tural, commercial, consumer, or industrial       4. Specific Exclusions from the Definition      at regulated facilities, however, the Final
product, provided that material qualified        of Solid Waste.                                 Regulations limit the exclusions for these
as residual material only to the extent that
                                                                                                 two types of waste to the extent that they
it constituted less than five percent (5%)           In general, the Proposed Regulations
                                                                                                 are required to be disposed of or contained
of the total material introduced into the        excluded from the definition of solid waste
                                                                                                 at a regulated hazardous waste or radioac-
production process and it had a fair mar-        the following items: (1) virgin material;
                                                                                                 tive waste disposal facility.
ket value that is reasonably expected to be      (2) solids within liquids and liquid waste;
lower than that of any product made in that      (3) precious metals; (4) hazardous mate-        5. Qualified Solid Waste Disposal
production process.                              rial; and (5) radioactive material. The         Process.
    The Final Regulations generally retain       Final Regulations retain these exclusions
the core definition of solid waste from the      with certain technical modifications.              The Proposed Regulations provided for
Proposed Regulations but modify that def-            The exclusion for virgin material aimed     three eligible types of solid waste disposal
inition in certain technical respects. The       to distinguish solid waste disposal from        processes: a final disposal process, an en-
Final Regulations clarify that material is       manufacturing. The exclusion for certain        ergy conversion process, and a recycling
“solid” only if it is solid at ambient temper-   precious metals aimed to recognize that         process. To provide flexibility for future
ature and pressure. The Final Regulations        recovery of these metals generally would        innovation, the Proposed Regulations pro-
also clarify that solid waste can result from    take place without regard to a recycling        vided that, absent an express restriction in
governmental operations or activities. The       industry. With respect to the exclusions        the proposed regulations, a solid waste dis-
Final Regulations expand the definition of       for hazardous and radioactive waste, the        posal function may employ any biologi-
solid waste to include animal waste.             statute and legislative history indicate that   cal, engineering, industrial, or technolog-
    With respect to the definition of resid-     Congress intended to exclude hazardous          ical method.
ual material, commentators generally             waste and radioactive waste from solid             The Final Regulations generally retain
supported the analytic standard under the        waste. The statute treats qualified haz-        the eligible types of solid waste disposal
Proposed Regulations, but recommended            ardous waste facilities as eligible exempt      processes from the Proposed Regulations,
removing the five percent (5%) size limi-        facilities under section 142(a)(10) sepa-       with technical clarifications. The Final
tation on residual material. Commentators        rate and apart from solid waste disposal        Regulations clarify that a final disposal
recommended removing this size limit             facilities under section 142(a)(6). In ad-      process includes the spreading of solid



October 17, 2011                                                    506                                                 2011–42 I.R.B.
waste in an environmentally compliant             with an annual test during start-up periods     Effective/Applicability Dates
and safe manner. The Final Regulations            and aberrational years for various reasons.
also clarify that an energy conversion                The Final Regulations retain the an-            The Final Regulations apply to bonds
process ends at the point at which useful         nual 65 percent test for mixed-input facil-     to which section 142 applies that are sold
energy is first created or incorporated into      ities with modifications. In response to        on or after October 18, 2011. Issuers may
the form of synthesis gas, heat, hot water,       the public comments, the Final Regula-          apply the Final Regulations to outstanding
or other useful energy.                           tions provide a special rule that allows a      bonds sold before October 18, 2011. The
                                                  three-year curative period to address the       Final Regulations need not be applied to
6. First Useful Product Principle.                impact of extraordinary events outside the      bonds that are issued in a current refunding
                                                  control of the operator of the solid waste      to refund bonds to which the Final Regu-
   The Proposed Regulations provided                                                              lations do not apply if the weighted aver-
                                                  disposal facility (such as natural disasters,
guidance on the standard for determining                                                          age maturity of the refunding bonds is no
                                                  strikes, major utility disruptions, or gov-
the first useful product for purposes of                                                          longer than the remaining weighted aver-
                                                  ernmental interventions). In addition, the
establishing the end point of a solid waste                                                       age maturity of the refunded bonds.
                                                  Final Regulations provide that the annual
disposal process. The first useful prod-
                                                  testing does not begin until the facility is
uct principle has particular application to                                                       Special Analyses
                                                  placed in service within the meaning of
recycling. Under the Proposed Regula-
                                                  the special placed-in-service definition in         It has been determined that this Trea-
tions, a useful product generally included
                                                  §1.150–2(c), which focuses on the point at      sury decision is not a significant regula-
a product useful for consumption, either
                                                  which a facility is operational at substan-     tory action as defined in Executive Order
as an ultimate end-use product or as an
                                                  tially its design level.                        12866, as supplemented by Executive Or-
input to some stage of a manufacturing
or production process, and that could be                                                          der 13563. Therefore, a regulatory assess-
                                                  8. Certain Other Changes.
sold for such use (taking into account                                                            ment is not required. It also has been de-
operational constraints on such sales for             Several commentators recommended            termined that section 553(b) of the Admin-
certain integrated processes), whether or         removal of the proposed concept of facil-       istrative Procedure Act (5 U.S.C. chapter
not actually sold.                                ities that perform a preliminary function       5) does not apply to these regulations, and,
   The Final Regulations generally retain         for a qualified solid waste disposal process    because the regulations are interpretative
the first useful product standard from the        and removal of the threshold limit on           and do not impose a collection of infor-
Proposed Regulations. Some commen-                preliminary functions that requires more        mation on small entities, the Regulatory
tators recommended that determinations            than 50 percent of the materials that result    Flexibility Act (5 U.S.C. chapter 6) does
under the first useful product rule take into     from preliminary functions to constitute        not apply. Pursuant to section 7805(f) of
account geographic location and trans-            solid waste. The Final Regulations retain       the Code, the proposed regulations preced-
portation costs in certain situations. The        the concept of a preliminary function, but      ing these final regulations were submitted
Final Regulations adopt this comment.             remove the 50 percent threshold limit on        to the Chief Counsel for Advocacy of the
                                                  preliminary functions. The Final Regu-          Small Business Administration for com-
7. Mixed-Input Facilities.                        lations also provide for application of a       ment on its impact on small business.
                                                  mixed-use accounting rule to facilities that
    The Proposed Regulations provided                                                             Drafting Information
                                                  perform preliminary functions.
a mixed-input accounting rule, which
                                                      One commentator expressed concern               The principal author of these final reg-
treated a facility as a qualified solid waste
                                                  that Example 2 in the Proposed Reg-             ulations is Timothy L. Jones, Office of
disposal facility if at least 65 percent of all
                                                  ulations was confusing, and the Final           Associate Chief Counsel (Financial Insti-
of the material introduced into such facil-
                                                  Regulations remove that example with no         tutions and Products). However, other
ity in each year consisted of solid waste.
                                                  substantive inference intended by that re-      personnel from the IRS and the Treasury
This proposed rule recognizes that recy-
                                                  moval. The Final Regulations also expand        Department participated in their develop-
cling processes may require supplemental
                                                  and clarify certain other examples.             ment.
inputs besides solid waste to operate vi-
                                                      Commentators recommended various
ably. This proposed rule is similar to an                                                                           *****
                                                  transition rules for applicability of the Fi-
existing rule under §1.103–8(f)(2)(ii)(c) of
                                                  nal Regulations to refunding bonds issued       Adoption of Amendments to the
the Existing Regulations. This proposed
                                                  prior to the date of publication of the final   Regulations
rule requires annual testing for compliance
                                                  regulations. The Final Regulations pro-
with the requisite 65 percent solid waste
                                                  vide a transition rule for current refunding       Accordingly, under the authority of
threshold. Several commentators recom-
                                                  bonds the weighted average maturity of          26 U.S.C. 7805, 26 CFR parts 1 and 17 are
mended reformulating this 65 percent test
                                                  which is no longer than the remaining           amended as follows:
to require compliance based on an ag-
                                                  weighted average maturity of the refunded
gregate testing period measured over the                                                          PART 1—INCOME TAXES
                                                  bonds.
life of the tax-exempt bonds instead of an
annual testing period. These commenta-                                                               Paragraph 1. The authority citation for
tors expressed concerns about compliance                                                          part 1 continues to read in part as follows:
                                                                                                     Authority: 26 U.S.C. 7805 * * *


2011–42 I.R.B.                                                       507                                             October 17, 2011
§1.103–8 [Amended]                              meets the requirements of this paragraph         pended solids in industrial waste water
                                                (c)(1)(i)(B). The material must be a resid-      effluents, dissolved materials in irrigation
   Par. 2. Section 1.103–8 is amended by        ual byproduct or excess raw material that        return flows or other common water pol-
removing paragraph (f)(2)(ii) and redesig-      results from or remains after the com-           lutants, and liquid or gaseous waste.
nating paragraph (f)(2)(iii) as (f)(2)(ii).     pletion of any agricultural, commercial,             (iii) Precious metals. Except to the ex-
   Par. 3. Section 1.142(a)(6)–1 is added       consumer, governmental, or industrial            tent that a precious metal constitutes an in-
to read as follows:                             production process or activity or from the       put to a final disposal process and/or an un-
                                                provision of any service. In the case of         recoverable trace of the particular precious
§1.142(a)(6)–1 Exempt facility bonds:           multiple processes constituting an inte-         metal, solid waste excludes gold, silver,
solid waste disposal facilities.                grated manufacturing or industrial process,      ruthenium, rhodium, palladium, osmium,
                                                the material must result from or remain          iridium, platinum, gallium, rhenium, and
    (a) In general. This section defines the    after the completion of such integrated          any other precious metal material as may
term solid waste disposal facility for pur-     process. As of the issue date of the bonds       be identified by the Internal Revenue Ser-
poses of section 142(a)(6).                     used to finance the solid waste disposal         vice in future public administrative guid-
    (b) Solid waste disposal facility. The      facility, the material must be reasonably        ance.
term solid waste disposal facility means a      expected to have a fair market value that is         (iv) Hazardous material. Solid waste
facility to the extent that the facility—       lower than the value of all of the products      excludes any hazardous material that must
    (1) Processes solid waste (as defined in    made in that production process or lower         be disposed of at a facility that is subject to
paragraph (c) of this section) in a qualified   than the value of the service that produces      final permit requirements under subtitle C
solid waste disposal process (as defined in     such residual material.                          of title II of the Solid Waste Disposal Act
paragraph (d) of this section);                     (ii) Reasonably expected introduc-           as in effect on the date of the enactment of
    (2) Performs a preliminary function (as     tion into a qualified solid waste disposal       the Tax Reform Act of 1986 (which is Oc-
defined in paragraph (f) of this section); or   process. Material meets the requirements         tober 22, 1986). See section 142(h)(1) of
    (3) Is functionally related and             of this paragraph (c)(1)(ii) if it is reason-    the Internal Revenue Code for the defini-
subordinate (within the meaning of              ably expected by the person who gener-           tion of qualified hazardous waste facilities.
§1.103–8(a)(3)) to a facility described in      ates, purchases, or otherwise acquires it            (v) Radioactive material. Solid waste
paragraph (b)(1) or (b)(2) of this section.     to be introduced within a reasonable time        excludes any radioactive material subject
    (c) Solid waste—(1) In general. Ex-         after such generation, purchase or acqui-        to regulation under the Nuclear Regulatory
cept to the extent excluded under para-         sition into a qualified solid waste disposal     Act (10 CFR §1.1 et seq.), as in effect on
graph (c)(2) of this section, for purposes      process described in paragraph (d) of this       the issue date of the bonds.
of section 142(a)(6), the term solid waste      section.                                             (d) Qualified solid waste disposal
means garbage, refuse, and other solid ma-          (2) Exclusions from solid waste. The         process. The term qualified solid waste
terial derived from any agricultural, com-      following materials do not constitute solid      disposal process means the processing of
mercial, consumer, governmental, or in-         waste:                                           solid waste in a final disposal process (as
dustrial operation or activity if the mate-         (i) Virgin material. Except to the extent    defined in paragraph (d)(1) of this section),
rial meets the requirements of both para-       that virgin material constitutes an input to a   an energy conversion process (as defined
graph (c)(1)(i) and paragraph (c)(1)(ii) of     final disposal process or residual material,     in paragraph (d)(2) of this section), or a
this section. For purposes of this section,     solid waste excludes any virgin material.        recycling process (as defined in paragraph
material is solid if it is solid at ambient     The term virgin material means material          (d)(3) of this section). Absent an express
temperature and pressure.                       that has not been processed into an agricul-     restriction to the contrary in this section,
    (i) Used material or residual material.     tural, commercial, consumer, governmen-          a qualified solid waste disposal process
Material meets the requirements of this         tal, or industrial product, or a component       may employ any biological, engineering,
paragraph (c)(1)(i) if it is either used ma-    of any such product. Further, for this pur-      industrial, or technological method.
terial (as defined in paragraph (c)(1)(i)(A))   pose, material continues to be virgin ma-            (1) Final disposal process. The term fi-
of this section or residual material (as de-    terial after it has been grown, harvested,       nal disposal process means the placement
fined in paragraph(c)(1)(i)(B) of this sec-     mined, or otherwise extracted from its nat-      of solid waste in a landfill (including, for
tion).                                          urally occurring location and cleaned, di-       this purpose, the spreading of solid waste
    (A) Used material. The term used ma-        vided into component elements, modified,         over land in an environmentally compli-
terial means any material that is a prod-       or enhanced, as long as further processing       ant and safe manner with no intent to re-
uct of any agricultural, commercial, con-       is required before it becomes an agricul-        move such solid waste), the incineration of
sumer, governmental, or industrial opera-       tural, commercial, consumer, or industrial       solid waste without capturing any useful
tion or activity, or a component of any such    product, or a component of any such prod-        energy, or the containment of solid waste
product or activity, and that has been used     uct.                                             with a reasonable expectation as of the date
previously. Used material also includes             (ii) Solids within liquids and liquid        of issue of the bonds that the containment
animal waste produced by animals from a         waste. Solid waste excludes any solid            will continue indefinitely and that the solid
biological process.                             or dissolved material in domestic sewage         waste has no current or future beneficial
    (B) Residual material.         The term     or other significant pollutant in water          use.
residual material means material that           resources, such as silt, dissolved or sus-


October 17, 2011                                                   508                                                   2011–42 I.R.B.
    (2) Energy conversion process. The            useful product has been produced may take          total materials processed in that qualified
term energy conversion process means a            into account operational constraints that          solid waste disposal process or preliminary
thermal, chemical, or other process that is       affect the point in production when a use-         function that constitute solid waste for that
applied to solid waste to create and cap-         ful product reasonably can be extracted or         year.
ture synthesis gas, heat, hot water, steam,       isolated and sold independently. For this              (ii) Special rule for mixed-input pro-
or other useful energy. The energy con-           purpose, the costs of extracting, isolating,       cesses if at least 65 percent of the materials
version process begins at the point of the        storing, and transporting the product to a         processed are solid waste—(A) In general.
first application of such process. The en-        market may only be taken into account as           Except as otherwise provided in paragraph
ergy conversion process ends at the point         operational constraints if the product is not      (g)(2)(ii)(B) of this section, for each facil-
at which the useful energy is first created,      to be used as part of an integrated manu-          ity (or a portion of a mixed-use facility)
captured, or incorporated into the form of        facturing or industrial process in the same        performing a qualified solid waste disposal
synthesis gas, heat, hot water, or other use-     location as that in which the product is pro-      process or preliminary function, if the an-
ful energy and before any transfer or dis-        duced.                                             nual percentage of solid waste processed in
tribution of such synthesis gas, heat, hot            (f) Preliminary function. A prelimi-           that qualified solid waste disposal process
water or other useful energy, regardless of       nary function is a function to collect, sep-       or preliminary function for each year that
whether such synthesis gas, heat, hot wa-         arate, sort, store, treat, process, disassem-      the issue is outstanding (beginning with
ter, or other useful energy constitutes a first   ble, or handle solid waste that is prelimi-        the date such facility is placed in service
useful product within the meaning of para-        nary to and directly related to a qualified        within the meaning of §1.150–2(c)) equals
graph (e) of this section.                        solid waste disposal process.                      at least 65 percent of the materials pro-
    (3) Recycling process—(i) In general.             (g) Mixed-use facilities—(1) In gen-           cessed in that qualified solid waste dis-
The term recycling process means recon-           eral. If a facility is used for both a qualified   posal process or preliminary function, then
stituting, transforming, or otherwise pro-        solid waste disposal function (including a         all of the costs of the property used for such
cessing solid waste into a useful product.        qualified solid waste disposal process or          process are treated as allocable to a quali-
The recycling process begins at the point         a preliminary function) and a nonquali-            fied solid waste disposal process. The an-
of the first application of a process to re-      fied function (a mixed-use facility), then         nual percentage of solid waste processed in
constitute or transform the solid waste into      the costs of the facility allocable to the         such qualified solid waste disposal process
a useful product, such as decontamination,        qualified solid waste disposal function are        or preliminary function for any year is the
melting, re-pulping, shredding, or other          determined using any reasonable method,            percentage, by weight or volume, of the
processing of the solid waste to accom-           based on all the facts and circumstances.          total materials processed in that qualified
plish this purpose. The recycling process         See §1.103–8(a)(1) for allocation rules on         solid waste disposal process or preliminary
ends at the point of completion of produc-        amounts properly allocable to an exempt            function that constitute solid waste for that
tion of the first useful product from the         facility. Facilities qualify as functionally       year.
solid waste.                                      related and subordinate to a qualified solid           (B) Special rule for extraordinary
    (ii) Refurbishment, repair, or similar        waste disposal function only to the extent         events. In the case of an extraordinary
activities. The term recycling process            that they are functionally related and sub-        event that is beyond the control of the
does not include refurbishment, repair, or        ordinate to the portion of the mixed-use fa-       operator of a solid waste disposal facility
similar activities. The term refurbishment        cility that is used for one or more qualified      (such as a natural disaster, strike, major
means the breakdown and reassembly of a           solid waste disposal functions (including          utility disruption, or governmental inter-
product if such activity is done on a prod-       a qualified solid waste disposal process or        vention) and that causes a solid waste
uct-by-product basis and if the finished          a preliminary function).                           disposal facility to be unable to meet the 65
product contains more than 30 percent of              (2) Mixed inputs—(i) In general. Ex-           percent test under paragraph (g)(2)(ii)(A)
its original materials or components.             cept as otherwise provided in paragraph            of this section for a particular year, the
    (e) First useful product. The term first      (g)(2)(ii) of this section, for each facility      percentage of solid waste processed for
useful product means the first product pro-       (or a portion of a mixed-use facility) per-        that year equals—
duced from the processing of solid waste in       forming a qualified solid waste disposal               (1) The sum of the amount of solid
a solid waste disposal process that is useful     process or a preliminary function, the per-        waste processed in the solid waste disposal
for consumption in agricultural, consumer,        centage of the costs of the property used          facility for the year affected by the extraor-
commercial, governmental, or industrial           for such process that are allocable to a           dinary event and the amount of solid waste
operation or activity and that could be sold      qualified solid waste disposal process or          processed in the solid waste disposal facil-
for such use, whether or not actually sold.       a preliminary function cannot exceed the           ity during the following two years in ex-
A useful product includes both a product          average annual percentage of solid waste           cess of the amount required to meet the
useful to an individual consumer as an ul-        processed in that qualified solid waste dis-       general 65 percent threshold for the facil-
timate end-use consumer product and a             posal process or that preliminary function         ity during each of such two years; divided
product useful to an industrial user as a ma-     while the issue is outstanding. The an-            by
terial or input for processing in some stage      nual percentage of solid waste processed in            (2) The total materials processed in the
of a manufacturing or production process          that qualified solid waste disposal process        solid waste disposal facility during the
to produce a different end-use consumer           or preliminary function for any year is the        year affected by the extraordinary event.
product. The determination of whether a           percentage, by weight or volume, of the            If the resulting measure of solid waste


2011–42 I.R.B.                                                        509                                               October 17, 2011
processed for the year affected by the                      qualified solid waste disposal process. The landfill         cumstances here. Specifically, taking into account the
extraordinary event equals at least 65 per-                 is a qualified solid waste disposal facility.                operational constraints on Company H’s facility that
cent, then the facility is treated as meeting                    Example 5. Qualified Solid Waste Disposal               limit its ability reasonably to extract, isolate, and sell
                                                            Process—Recycling Tires. Company E owns a fa-                the paper pulp independently, the first useful products
the requirements of the 65 percent test un-                 cility that converts used tires into roadbed material.       within the meaning of paragraph (e) of this section
der paragraph (g)(2)(ii)(A) of this section                 The used tires are used material within the meaning          from Company H’s recycling process are the indus-
for such year.                                              of paragraph (c)(1)(i)(A) of this section that qualifies     trial-sized rolls of paper. The portion of Company
    (iii) Facilities functionally related and               as solid waste. Between the introduction of the old          H’s facility that processes the discarded magazines
subordinate to mixed-input facilities.                      tires into the roadbed manufacturing process and the         and produces industrial-sized rolls of paper is a qual-
                                                            completion of the roadbed material, the facility does        ified solid waste disposal facility, and the portion of
Except to the extent that facilities are                    not create any interim useful products. The process          Company H’s facility that further processes the indus-
functionally related and subordinate to a                   for the manufacturing of the roadbed material from           trial-sized rolls of paper into retail paper towels is not
mixed-input facility that meets the 65 per-                 the old tires is a qualified solid waste disposal process    a qualified solid waste facility.
cent test under paragraph (g)(2)(ii) of this                as a recycling process and the facility that converts              (ii) The facts are the same as in paragraph (i) of
section, facilities qualify as functionally                 the tires into roadbed material is a qualified solid         this Example 8, except that Company H is able rea-
                                                            waste disposal facility. This conclusion would be the        sonably to extract the cleaned paper pulp from the
related and subordinate to a mixed-input                    same if the recycling process took place at more than        process without degradation of the pulp and to sell
facility only to the extent that they are                   one plant.                                                   the cleaned paper pulp at its dock for a price that ex-
functionally related and subordinate to the                      Example 6. Qualified Solid Waste Disposal               ceeds its costs of extracting the pulp from the process.
qualified portion of the mixed-input facil-                 Process—Energy Conversion Process. Company                   Therefore, the paper pulp is the first useful product
ity that is used for one or more qualified                  F receives solid waste from a municipal garbage              within the meaning of paragraph (e) of this section.
                                                            collector. Company F burns that solid waste in an            As a result, the portion of Company H’s facility that
solid waste disposal functions (including                   incinerator to remove exhaust gas and to produce             processes the discarded magazines is a qualified solid
a qualified solid waste disposal process or                 heat. Company F further processes the heat in a heat         waste disposal facility, and the portion of Company
a preliminary function).                                    exchanger to produce steam. Company F further                H’s facility that produces industrial-sized rolls of pa-
    (h) Examples. The following examples                    processes the steam to generate electricity. The en-         per is not a qualified solid waste disposal facility. If,
illustrate the application of this section:                 ergy conversion process ends with the production of          however, the only reasonable way Company H could
                                                            steam. The facilities used to burn the solid waste and       sell the pulp was to transport the pulp to a distant mar-
    Example 1.          Nonqualified Unused Mate-
                                                            to capture the steam as useful energy are qualified          ket, then the costs of storing and transporting the pulp
rial—Cloth. Company A takes wool and weaves it
into cloth and then sells the cloth to a manufacturer       solid waste disposal facilities because they process         to the market may be taken into account in determin-
                                                            solid waste in an energy conversion process. The             ing whether the pulp is the first useful product.
to manufacture clothing. The cloth is material that
                                                            generating facilities used to process the steam further            Example 9. Preliminary Function—Energy Con-
has not been used previously as a product of or other-
wise used in an agricultural, commercial, consumer,         to generate electricity are not engaged in the energy        version Process. (i) Company I owns a paper mill.
                                                            conversion process and are not qualified solid waste         At the mill, logs from nearby timber operations are
governmental, or industrial operation or activity,
                                                            disposal facilities.                                         processed through a machine that removes bark. The
or as a component of any such product or activity.
Accordingly, the cloth is not solid waste.                       Example 7. Nonqualified Refurbishment. Com-             stripped logs are used to manufacture paper. The
                                                            pany G purchases used cars and restores them. This           stripped bark has the lowest fair market value of any
    Example 2. Residual Material—Waste Coal.
                                                            restoration process includes disassembly, cleaning,          product produced from the paper mill. The stripped
Company B mines coal. Some of the ore mined is
a low quality byproduct of coal mining commonly             and repairing of the cars. Parts that cannot be repaired     bark falls onto a conveyor belt that transports the bark
                                                            are replaced. The restored cars contain at least 30 per-     to a storage bin that is used to store the bark briefly
known as waste coal, which cannot be converted to
                                                            cent of the original parts. While the cars are used ma-      until Company I feeds the bark into a boiler. The
energy under a normal energy-production process
because the BTU content is too low. Waste coal has          terial, the refurbishing process is not a qualified solid    conveyor belt and storage bin are used only for these
                                                            waste disposal process. Accordingly, Company G’s             purposes. The boiler is used only to create steam by
the lowest fair market value of any product produced
                                                            facility is not a qualified solid waste disposal facility.   burning the bark, and the steam is used to generate
in Company B’s coal mining process. Waste coal
is solid waste because it is residual material within            Example 8. Qualified Solid Waste Disposal Facil-        electricity. The stripped bark is solid waste because
                                                            ity—First Useful Product Rule—Paper Recycling. (i)           it is residual material within the meaning of paragraph
the meaning of paragraph (c)(1)(i)(B) of this section
                                                            Company H employs an integrated process to re-pulp           (c)(1)(i)(B) of this section and Company I expects to
and Company B reasonably expects to introduce the
waste coal into a solid waste disposal process.             discarded magazines, clean the pulp, and produce re-         introduce the bark into an energy conversion process
                                                            tail paper towel products. Operational constraints on        within a reasonable period of time. The creation of
    Example 3. Virgin Material—Logs. Company C
                                                            Company H’s process do not allow for reasonable ex-          steam from the stripped bark is an energy conversion
cuts down trees and sells the logs to another company,
which further processes the logs into lumber. In order      traction, isolation, and sale of the cleaned paper pulp      process that starts with the incineration of the stripped
                                                            independently without degradation of the pulp. Com-          bark. The energy conversion process is a qualified
to facilitate shipping, Company C cuts the trees into
                                                            pany H further processes the paper pulp into large in-       solid waste disposal process. The conveyor belt per-
uniform logs. The trees are not solid waste because
they are virgin material within the meaning of para-        dustrial-sized rolls of paper which are approximately        forms a collection activity that is preliminary and that
                                                            12 feet in diameter. At this point in the process,           is directly related to the solid waste disposal func-
graph (c)(2)(i) of this section that are not being intro-
                                                            Company H could either sell such industrial-sized            tion. The storage bin performs a storage function that
duced into a final disposal process within the mean-
                                                            rolls of paper to another company for further pro-           is preliminary and that is directly related to the solid
ing of paragraph (d)(1) of this section. The division
                                                            cessing to produce retail paper products or it could         waste disposal function. Thus, the conveyor belt and
of such trees into uniform logs does not change the
                                                            produce those retail products itself. In general, pa-        storage bin are solid waste disposal facilities. The
status of the trees as virgin material.
                                                            per pulp is a useful product that is bought and sold on      bark removal process is not a preliminary function
    Example 4. Qualified Solid Waste Disposal
                                                            the market as a material for input into manufacturing        because it is not directly related to the energy conver-
Process—Landfill. Company D plans to construct a
                                                            or production processes. The discarded magazines             sion process and it does not become so related merely
landfill. The landfill will not be subject to the final
                                                            are used material within the meaning of paragraph            because it results in material that is solid waste.
permit requirements under subtitle C of title II of the
                                                            (c)(1)(i)(A) of this section. Company H’s facility is              (ii) The facts are the same as in paragraph (i) of
Solid Waste Disposal Act (as in effect on the date of
                                                            engaged in a recycling process within the meaning            this Example 9, except that the stripped bark repre-
enactment of the Tax Reform Act of 1986). As of
                                                            of paragraph (d)(3) of this section to the extent that       sents only 55 percent by weight and volume of the
the issue date, Company D expects that the landfill
                                                            it repulps and cleans the discarded magazines gen-           materials that are transported by the conveyor belt.
will be filled entirely with material that will qualify
                                                            erally and further to the extent that it produces in-        The remaining 45 percent of the materials transported
as solid waste within the meaning of paragraph (c)
                                                            dustrial-sized rolls of paper under the particular cir-      by the conveyor belt are not solid waste and these
of this section. Placing solid waste into a landfill is a



October 17, 2011                                                                    510                                                                2011–42 I.R.B.
other materials are sorted from the conveyor belt by a     (Filed by the Office of the Federal Register on August 18,   that the Treasury Department and the Internal Rev-
sorting machine immediately before the stripped bark       2011, 8:45 a.m., and published in the issue of the Federal   enue Service intend to issue regulations to implement
                                                           Register for August 19, 2011, 76 F.R. 51879)
arrives at the storage bin. Fifty-five percent of the                                                                   the provisions of section 2010(c) of the Code and
costs of the conveyor belt and the sorting machine are                                                                  invites public comments. See Notice 2011-82, page
allocable to solid waste disposal functions.                                                                            516.
     Example 10. Preliminary Function—Final Dis-           Section 162.—Trade or
posal Process. Company J owns a waste transfer             Business Expenses
station and uses it to collect, sort, and process solid                                                                 Section 2053.—Expenses,
waste. Company J uses its trucks to haul the solid
waste to the nearest landfill. At least 65 percent by
                                                           26 CFR 1.162–17: Reporting and substantiation of             Indebtedness, and Taxes
                                                           certain business expenses of employees.
weight and volume of the material brought to the
                                                                                                                        26 CFR 20.2053–1: Deductions for expenses, indebt-
transfer station is solid waste. The waste transfer sta-      Rules are provided for substantiating the amount          edness, and taxes; in general
tion and the trucks perform functions that are prelim-
                                                           of a deduction for an expense for meal and incidental
inary and directly related to the solid waste disposal
                                                           expenses, or for incidental expenses only, incurred              This revenue procedure instructs taxpayers how to
function of the landfill. Thus, the waste transfer sta-
                                                           while traveling away from home. See Rev. Proc.               file a protective claim for refund when the estate has
tion and the trucks qualify as solid waste disposal fa-
                                                           2011-47, page 520.                                           a claim or expense not yet deductible under section
cilities.
     Example 11. Mixed-Input Facility. Company K                                                                        2053 of the Internal Revenue Code and the corre-
owns an incinerator financed by an issue and uses the                                                                   sponding regulations. In addition, this revenue pro-
incinerator exclusively to burn coal and other solid
                                                           Section 274.—Disallowance                                    cedure details the procedures the Service will follow
material to create steam. Each year while the is-          of Certain Entertainment,                                    in processing these protective claims for refund. Fi-
sue is outstanding, 40 percent by volume and 45 per-       Etc., Expenses                                               nally, this revenue procedure instructs taxpayers how
cent by weight of the solid material that Company K                                                                     to notify the Service that a section 2053 protective
processes in the conversion process is coal. The re-       26 CFR 1.274–5: Substantiation requirements.                 claim for refund is ready for consideration. See Rev.
mainder of the solid material is either used material                                                                   Proc. 2011-48, page 527.
or residual material within the meaning of paragraph          Rules are provided for substantiating the amount
(c)(1)(i) of this section. Sixty percent of the costs of   of a deduction for an expense for meal and incidental
the property used to perform the energy conversion         expenses, or for incidental expenses only, incurred          Section 6402.—Authority to
process are allocable to a solid waste disposal func-      while traveling away from home. See Rev. Proc.               Make Credits or Refunds
tion.                                                      2011-47, page 520.
   (i) Effective/Applicability Dates—(1)                                                                                26 CFR 301.6402–1: Authority to make credits or
In general. Except as otherwise provided                                                                                refunds.
in this paragraph (i), this section applies                Section 446.—General Rule
to bonds to which section 142 applies that                 for Methods of Accounting                                        This revenue procedure instructs taxpayers how to
                                                                                                                        file a protective claim for refund when the estate has
are sold on or after October 18, 2011.                        This revenue procedure provides a book safe               a claim or expense not yet deductible under section
   (2) Elective retroactive application. Is-               harbor method of accounting for taxpayers using the          2053 of the Internal Revenue Code and the corre-
suers may apply this section, in whole, but                nonaccrual-experince method of accounting and pro-           sponding regulations. In addition, this revenue pro-
not in part, to outstanding bonds to which                 cedures for obtaining automatic consent to change to         cedure details the procedures the Service will follow
section 142 applies and which were sold                    the method and to make certain changes within the            in processing these protective claims for refund. Fi-
before October 18, 2011.                                   method. See Rev. Proc. 2011-46, page 518.                    nally, this revenue procedure instructs taxpayers how
                                                                                                                        to notify the Service that a section 2053 protective
   (3) Certain refunding bonds. An issuer
                                                                                                                        claim for refund is ready for consideration. See Rev.
need not apply this section to bonds that                  Section 481.—Adjustments                                     Proc. 2011-48, page 527.
are issued in a current refunding to refund                Required by Changes in
bonds to which this section does not ap-                   Methods of Accounting
ply if the weighted average maturity of the                                                                             Section 6501.—Limitations
refunding bonds is no longer than the re-                     This revenue procedure provides procedures for            on Assessment and
maining weighted average maturity of the                   taxpayers using the nonaccrual-experience (NAE)              Collection
refunded bonds.                                            method of accounting to change to a book safe harbor
                                                           NAE method of accounting. Taxpayer changing to               26 CFR 301.6501(a)–1: Period of limitations upon
                                                           the NAE book safe harbor method must make an ad-             assessment and collection.
PART 17 [Removed]
                                                           justment under section 481(a) of the Code, however
                                                           taxpayers make certain changes within the method                 This revenue procedure instructs taxpayers how to
   Par. 4. Part 17 is removed.                                                                                          file a protective claim for refund when the estate has
                                                           using a cut-off. See Rev. Proc. 2011-46, page 518.
                                                                                                                        a claim or expense not yet deductible under section
                             Steven T. Miller,                                                                          2053 of the Internal Revenue Code and the corre-
                    Deputy Commissioner for                Section 2010.—Unified                                        sponding regulations. In addition, this revenue pro-
                    Services and Enforcement.              Credit Against Estate Tax                                    cedure details the procedures the Service will follow
                                                                                                                        in processing these protective claims for refund. Fi-
Approved August 9, 2011.                                      This notice provides guidance under section               nally, this revenue procedure instructs taxpayers how
                                                           2010(c) of the Code on electing portability of a de-         to notify the Service that a section 2053 protective
                         Emily S. McMahon,                 ceased spousal unused exclusion amount on a Form             claim for refund is ready for consideration. See Rev.
                 (Acting) Assistant Secretary              706 (United States Estate (and Generation-Skipping           Proc. 2011-48, page 527.
                 of the Treasury (Tax Policy).             Transfer) Tax Return). This notice also announces




2011–42 I.R.B.                                                                     511                                                        October 17, 2011
Section 6511.—Limitations                                to notify the Service that a section 2053 protective     a claim or expense not yet deductible under section
on Credit or Refund                                      claim for refund is ready for consideration. See Rev.    2053 of the Internal Revenue Code and the corre-
                                                         Proc. 2011-48, page 527.                                 sponding regulations. In addition, this revenue pro-
26 CFR 301.6511(a)–1: Period of limitation on filing                                                              cedure details the procedures the Service will follow
claim.                                                                                                            in processing these protective claims for refund. Fi-
                                                         Section 6514.—Credits                                    nally, this revenue procedure instructs taxpayers how
    This revenue procedure instructs taxpayers how to    or Refunds after Period                                  to notify the Service that a section 2053 protective
file a protective claim for refund when the estate has   of Limitation                                            claim for refund is ready for consideration. See Rev.
a claim or expense not yet deductible under section                                                               Proc. 2011-48, page 527.
2053 of the Internal Revenue Code and the corre-         26 CFR 301.6514(a)–1: Credits or refunds after pe-
sponding regulations. In addition, this revenue pro-     riod of limitation.
cedure details the procedures the Service will follow
in processing these protective claims for refund. Fi-        This revenue procedure instructs taxpayers how to
nally, this revenue procedure instructs taxpayers how    file a protective claim for refund when the estate has




October 17, 2011                                                                512                                                          2011–42 I.R.B.
Part III. Administrative, Procedural, and Miscellaneous
2011–2012 Special Per Diem                      paid or incurred while traveling away from     per diem rates in lieu of the rates described
Rates                                           home. Taxpayers using the rates and list of    in section 4.01 of Rev. Proc. 2011–47
                                                high-cost localities provided in this notice   (the per diem substantiation method) are
Notice 2011–81                                  must comply with Rev. Proc. 2011–47.           $242 for travel to any high-cost locality
                                                                                               and $163 for travel to any other locality
SECTION 1. PURPOSE                              SECTION 3. SPECIAL M&IE RATES                  within CONUS. The amount of the $242
                                                FOR TRANSPORTATION INDUSTRY                    high rate and $163 low rate that is treated
   This annual notice provides the                                                             as paid for meals for purposes of § 274(n)
2011–2012 special per diem rates for tax-          The special M&IE rates for taxpayers
                                                                                               is $65 for travel to any high-cost local-
payers to use in substantiating the amount      in the transportation industry are $59 for
                                                                                               ity and $52 for travel to any other locality
of ordinary and necessary business ex-          any locality of travel in the continental
                                                                                               within CONUS. See section 5.02 of Rev.
penses incurred while traveling away from       United States (CONUS) and $65 for any
                                                                                               Proc. 2011–47. The per diem rates in lieu
home, specifically (1) the special trans-       locality of travel outside the continental
                                                                                               of the rates described in section 4.02 of
portation industry meal and incidental          United States (OCONUS). See section
                                                                                               Rev. Proc. 2011–47 (the meal and inciden-
expenses rates (M&IE rates), (2) the rate       4.04 of Rev. Proc. 2011–47.
                                                                                               tal expenses only substantiation method)
for the incidental expenses only deduc-         SECTION 4. RATE FOR INCIDENTAL                 are $65 for travel to any high-cost local-
tion, and (3) the rates and list of high-cost   EXPENSES ONLY DEDUCTION                        ity and $52 for travel to any other locality
localities for purposes of the high-low                                                        within CONUS.
substantiation method.                             The rate for any CONUS or OCONUS                2. High-cost localities. The following
                                                locality of travel for the incidental ex-      localities have a federal per diem rate of
SECTION 2. BACKGROUND                           penses only deduction is $5 per day. See       $202 or more, and are high-cost localities
                                                section 4.05 of Rev. Proc. 2011–47.            for all of the calendar year or the portion of
   Rev. Proc. 2011–47, 2011–42 I.R.B.
                                                                                               the calendar year specified in parentheses
520, provides rules for using a per diem        SECTION 5. HIGH-LOW                            under the key city name.
rate to substantiate, under § 274(d) of the     SUBSTANTIATION METHOD
Internal Revenue Code and § 1.274–5 of
the Income Tax Regulations, the amount of          1. Annual high-low rates. For purposes
ordinary and necessary business expenses        of the high-low substantiation method, the


 Key City                                                                                  County or other defined location
 Arizona
     Sedona                                                                                City limits of Sedona
       (March 1-April 30)

 California
     Monterey                                                                              Monterey
     Napa                                                                                  Napa
       (October 1-November 30 and April 1-September 30)
     San Diego                                                                             San Diego
     San Francisco                                                                         San Francisco
     Santa Barbara                                                                         Santa Barbara
     Santa Monica                                                                          City limits of Santa Monica
     Yosemite National Park                                                                Mariposa
       (June 1-August 31)

 Colorado
    Aspen                                                                                  Pitkin
       (December 1-March 31 and June 1-August 31)
    Denver/Aurora                                                                          Denver, Adams, Arapahoe, and Jefferson
    Steamboat Springs                                                                      Routt
       (December 1-March 31)
    Telluride                                                                              San Miguel
       (December 1-March 31)




2011–42 I.R.B.                                                    513                                             October 17, 2011
Key City                                                                             County or other defined location
   Vail                                                                              Eagle
     (December 1-August 31)

District of Columbia
    Washington D.C. (also the cities of Alexandria, Falls Church, and Fairfax, and the counties of Arlington and Fairfax, in
    Virginia; and the counties of Montgomery and Prince George’s in Maryland) (See also Maryland and Virginia)

Florida
    Fort Lauderdale                                                                  Broward
      (January 1-May 31)
    Fort Walton Beach/De Funiak Springs                                              Okaloosa and Walton
      (June 1-July 31)
    Key West                                                                         Monroe
    Miami                                                                            Miami-Dade
      (December 1-March 31)
    Naples                                                                           Collier
      (January 1-April 30)

Illinois
     Chicago                                                                         Cook and Lake
        (October 1-November 30 and April 1-September 30)

Louisiana
   New Orleans                                                                       Orleans, St. Bernard, Jefferson and
      (October 1-June 30)                                                            Plaquemine Parishes

Maine
   Bar Harbor                                                                        Hancock
      (July 1-August 31)

Maryland
   Baltimore City                                                                    Baltimore City
     (October 1-November 30 and March 1-September 30)
   Cambridge/St. Michaels                                                            Dorchester and Talbot
     (June 1-August 31)
   Ocean City                                                                        Worcester
     (June 1-August 31)
   Washington, DC Metro Area                                                         Montgomery and Prince George’s

Massachusetts
   Boston/Cambridge                                                                  Suffolk, City of Cambridge
   Falmouth                                                                          City limits of Falmouth
     (July 1-August 31)
   Martha’s Vineyard                                                                 Dukes
     (July 1-August 31)
   Nantucket                                                                         Nantucket
     (June 1-September 30)

New Hampshire
   Conway                                                                            Carroll
     (July 1-August 31)




October 17, 2011                                             514                                              2011–42 I.R.B.
 Key City                                                                                     County or other defined location
 New York
    Floral Park/Garden City/Great Neck                                                        Nassau
    Glens Falls                                                                               Warren
      (July 1-August 31)
    Lake Placid                                                                               Essex
      (July 1-August 31)
    Manhattan (includes the boroughs of Manhattan, Brooklyn, the Bronx, Queens                Bronx, Kings, New York, Queens,
    and Staten Island)                                                                        Richmond
    Saratoga Springs/Schenectady                                                              Saratoga and Schenectady
      (July 1-August 31)
    Tarrytown/White Plains/New Rochelle                                                       Westchester

 North Carolina
    Kill Devil                                                                                Dare
       (June 1-August 31)

 Pennsylvania
    Philadelphia                                                                              Philadelphia

 Rhode Island
    Jamestown/Middletown/Newport                                                              Newport
      (October 1-October 31 and May 1-September 30)

 Utah
    Park City                                                                                 Summit
      (January 1-March 31)

 Virginia
     Washington, DC Metro Area                                                                Cities of Alexandria, Fairfax, and Falls
                                                                                              Church; counties of Arlington and Fairfax
     Virginia Beach                                                                           City of Virginia Beach
       (June 1-August 31)

 Washington
    Seattle                                                                                   King

 Wyoming                                                                                      Teton and Sublette
   Jackson/Pinedale
      (July 1-August 31)

    3. Changes in high-cost localities. The        thorne/Breckenridge, Colorado; River-          cidental expenses only paid or incurred on
list of high-cost localities in this notice dif-   head/Ronkonkoma/Melville, New York;            or after October 1, 2011. See sections 4.06
fers from the list of high-cost localities         and Stowe, Vermont.                            and 5.04 of Rev. Proc. 2011–47 for transi-
in section 5.03 of Rev. Proc. 2010–39                                                             tion rules for the last 3 months of calendar
(changes listed by key cities).                    SECTION 6. EFFECTIVE DATE                      year 2011.
    a. No localities have been added to the
                                                      This notice is effective for per diem al-
list of high-cost localities.                                                                     DRAFTING INFORMATION
                                                   lowances for lodging, meal and inciden-
    b. The portion of the year for which the
                                                   tal expenses, or for meal and incidental           The principal author of this no-
following are high-cost localities has been
                                                   expenses only that are paid to any em-         tice is Eric D. Brauer of the Office of
changed: Yosemite National Park, Califor-
                                                   ployee on or after October 1, 2011, for        Associate Chief Counsel (Income Tax
nia; and Chicago, Illinois.
                                                   travel away from home on or after Octo-        & Accounting). For further information
    c. The following localities have been
                                                   ber 1, 2011. For purposes of computing the     regarding this notice, contact Mr. Brauer
removed from the list of high-cost lo-
                                                   amount allowable as a deduction for travel     at (202) 622–4970 (not a toll-free call).
calities: Phoenix/Scottsdale, Arizona;
                                                   away from home, this notice is effective
South Lake Tahoe, California; Silver-
                                                   for meal and incidental expenses or for in-


2011–42 I.R.B.                                                       515                                            October 17, 2011
Guidance on Electing                             BACKGROUND                                      if the executor of the deceased spouse
Portability of Deceased                                                                          timely files a Form 706 for the deceased
                                                     Sections 302(a)(1) and 303(a) of            spouse’s estate, on which the executor
Spousal Unused Exclusion                         TRUIRJCA, enacted on December 17,               computes the deceased spousal unused
Amount                                           2010, amended section 2010(c) of the            exclusion amount and makes a portabil-
                                                 Code. Section 2010(c), as amended,              ity election. An election, once made, is
Notice 2011–82                                   generally allows the surviving spouse of a      irrevocable. However, no election may be
                                                 decedent dying after December 31, 2010,         made if the Form 706 is filed after the time
PURPOSE
                                                 to use the decedent’s unused exclusion          prescribed by law (including extensions)
    This notice alerts executors of the          amount in addition to the surviving             for filing a Form 706.
estates of decedents dying after Decem-          spouse’s own basic exclusion amount.                Section 6075(a) requires the executor
ber 31, 2010, of the need to file a Form         Thus, sections 302(a)(1) and 303(a) of          of a decedent’s estate filing a tax return
706, United States Estate (and Genera-           TRUIRJCA eliminate the need for spouses         to file the Form 706 within 9 months af-
tion-Skipping Transfer) Tax Return, within       to retitle property and create trusts solely    ter the date of the decedent’s death. Sec-
the time prescribed by law (including ex-        to take full advantage of each spouse’s         tion 6081(a) provides that the Secretary
tensions) in order to elect to allow the         basic exclusion amount.                         may grant a reasonable extension of time
decedent’s surviving spouse to take ad-              Section 2010(c)(1) of the Code pro-         for filing any return; however, generally,
vantage of the deceased spouse’s unused          vides that the applicable credit amount is      no such extension may be for more than 6
exclusion amount, if any, pursuant to            the amount of the tentative tax that would      months. Section 20.6081–1(b) of the Es-
section 303(a) of the Tax Relief, Unem-          be determined under section 2001(c) if the      tate Tax Regulations grants executors of
ployment Insurance Reauthorization, and          amount with respect to which the tenta-         decedents’ estates an automatic 6-month
Job Creation Act of 2010, P.L. 111–312           tive tax is to be computed were equal to        extension of time to file the Form 706.
(124 Stat. 3302) (TRUIRJCA) and section          the applicable exclusion amount. Thus,          Executors currently may request the auto-
2010(c)(5)(A) of the Internal Revenue            generally, the applicable credit amount         matic extension of time to file Form 706 by
Code (Code). In particular, for the execu-       effectively exempts from federal estate         timely filing Form 4768, “Application for
tor of the estate of a decedent to elect under   and gift tax a person’s taxable transfers       Extension of Time To File a Return and/or
section 2010(c)(5)(A) (a “portability elec-      with a cumulative value not exceeding the       Pay U.S. Estate (and Generation-Skipping
tion”) to allow the decedent’s surviving         applicable exclusion amount.                    Transfer) Taxes.”
spouse to use the decedent’s unused exclu-           Under section 2010(c)(2), a person’s            Section 2010(c)(5)(B) allows the Secre-
sion amount, the executor is required to file    applicable exclusion amount is the sum of       tary to examine a return of the predeceased
a Form 706 for the decedent’s estate, even       (A) the basic exclusion amount and (B)          spouse, even after the time has expired un-
if the executor is not otherwise obligated       in the case of a surviving spouse, the de-      der section 6501 for assessing tax under
to file a Form 706. This notice also alerts      ceased spousal unused exclusion amount,         chapter 11 or 12, to make determinations
executors of the estates of decedents dying      if any.                                         with respect to the deceased spousal un-
after December 31, 2010, that the estate             Section 2010(c)(3) sets the basic exclu-    used exclusion amount, notwithstanding
of such a decedent will be considered to         sion amount at $5,000,000 in 2011, to be        any period of limitation in section 6501.
have made a portability election if a Form       adjusted annually for inflation after 2011.         Section 2010(c)(6) provides that the
706 is timely filed in accordance with the           Section 2010(c)(4) defines the term         Secretary shall prescribe regulations as
instructions for that form. For those es-        “deceased spousal unused exclusion              may be necessary or appropriate to imple-
tates filing a Form 706 that choose not to       amount” to mean, with respect to the sur-       ment section 2010(c).
make a portability election, this notice ad-     viving spouse of a decedent dying after
dresses how to avoid making the election.        December 31, 2010, the lesser of (A) the        DISCUSSION
This notice also reminds taxpayers that a        basic exclusion amount, or (B) the excess
                                                 of (i) the basic exclusion amount of the last       The Treasury Department and the Ser-
portability election can be made only on
                                                 such deceased spouse of such surviving          vice anticipate that, as a general rule,
a Form 706 timely filed by the estate of a
                                                 spouse, over (ii) the amount with respect       married couples will want to ensure that
decedent dying after December 31, 2010,
                                                 to which the tentative tax is determined        the unused basic exclusion amount of the
and any attempt to make a portability
                                                 under section 2001(b)(1) on the estate of       first spouse to die will be available to
election on a Form 706 filed for the
                                                 such deceased spouse. The unused ex-            the surviving spouse and, thus, that the
estate of a decedent dying on or before
                                                 clusion amount of a deceased spouse who         estates of most (if not all) married dece-
December 31, 2010, will be ineffective.
                                                 died before January 1, 2011, cannot be          dents dying after December 31, 2010, will
Finally, this notice alerts taxpayers that
                                                 used by the surviving spouse, regardless        want to make the portability election. As
the Treasury Department and the Internal
                                                 of the date of the surviving spouse’s death.    indicated above, because the election is
Revenue Service (Service) intend to issue
                                                     Under section 2010(c)(5)(A), a de-          to be made on a timely-filed Form 706,
regulations under section 2010(c) of the
                                                 ceased spousal unused exclusion amount          the Treasury Department and the Service
Code to address issues arising with respect
                                                 may be taken into account by a surviv-          anticipate a significant increase in the
to the portability election, and anticipate
                                                 ing spouse in determining the surviving         number of Forms 706 that will be filed
that those regulations will be consistent
                                                 spouse’s applicable exclusion amount only       by the estates of decedents dying after
with the provisions of this notice.


October 17, 2011                                                    516                                                 2011–42 I.R.B.
December 31, 2010, and that many of             tion 2010(c)(6), to address various issues           5. The Treasury Department and the
those returns will be filed by the estates of   arising with respect to implementation of         Service intend to issue regulations to im-
decedents whose gross estates have a value      the provisions of section 2010(c).                plement the provisions of section 2010(c).
below the applicable exclusion amount.
    As a result, the Treasury Department        GUIDANCE                                          REQUEST FOR COMMENTS
and the Service believe that the procedure
                                                    1. If the executor of the estate of a dece-      Comments are invited on the following
for making the portability election on the
                                                dent dying after December 31, 2010, in-           specific issues, which have been identified
Form 706 should be as straightforward and
                                                tends to make the portability election to         for consideration in proposed regulations
uncomplicated as possible to reduce the
                                                allow the decedent’s surviving spouse to          to be issued under section 2010(c):
risk of inadvertently missed elections. To
                                                use the deceased spousal unused exclusion            1. The determination in various circum-
that end, the Treasury Department and the
                                                amount, the executor must file a complete         stances of the deceased spousal unused ex-
Service have determined that the timely
                                                Form 706 within the time prescribed by            clusion amount and the applicable exclu-
filing of a Form 706, prepared in accor-
                                                law (including extensions), regardless of         sion amount;
dance with the instructions for that form,
                                                whether or not the gross estate has a value          2. The order in which exclusions are
will constitute the making of a portabil-
                                                in excess of the exclusion amount or oth-         deemed to be used;
ity election by the estate of a decedent dy-
                                                erwise is obligated to file a Form 706.              3. The effect of the last predeceas-
ing after December 31, 2010. Thus, by
                                                    2. The estate of a decedent dying af-         ing spouse limitation described in section
timely filing a properly-prepared and com-
                                                ter December 31, 2010, will be deemed to          2010(c)(4)(B)(i);
plete Form 706, an estate will be con-
                                                make the portability election to allow the           4. The scope of the Service’s right to
sidered to have made the portability elec-
                                                decedent’s surviving spouse to use the de-        examine a return of the first spouse to die
tion without the need to make an affir-
                                                ceased spousal unused exclusion amount            without regard to any period of limitation
mative statement, check a box, or oth-
                                                by the timely filing of a complete and prop-      in section 6501; and
erwise affirmatively elect, on the Form
                                                erly-prepared Form 706. To ensure the                5. Any additional issues that should be
706. Until such time as the IRS revises the
                                                correct exclusion amount and tax rates, ex-       considered for inclusion in the proposed
Form 706 to expressly contain the compu-
                                                ecutors should use the Form 706 issued for        regulations.
tation of the deceased spousal unused ex-
                                                the year of the decedent’s death. Until such         Comments will be considered if submit-
clusion amount, a timely-filed and com-
                                                time as the IRS revises the Form 706 to ex-       ted in writing by October 31, 2011. All
plete Form 706 that is prepared in accor-
                                                pressly contain the computation of the de-        comments will be available for public in-
dance with the instructions for that form
                                                ceased spousal unused exclusion amount, a         spection and copying. Comments may be
will be deemed to contain the computa-
                                                complete and properly-prepared Form 706           submitted in one of three ways:
tion of the deceased spousal unused ex-
                                                will be deemed to contain the computation
clusion amount, thereby satisfying the re-                                                        a.   By mail to CC:PA:LPD:PR (Notice
                                                of the deceased spousal unused exclusion
quirements in section 2010(c)(5)(A) for                                                                2011–82), Room 5203, Internal Rev-
                                                amount.
making an effective election.                                                                          enue Service, P.O. Box 7604, Ben
                                                    3. The executor of the estate of a dece-
    The Treasury Department and the Ser-                                                               Franklin Station, Washington, DC
                                                dent dying after December 31, 2010, that
vice acknowledge that an estate may not                                                                20044.
                                                timely files a complete Form 706, but
want to make the portability election. Not                                                        b.   Electronically                  to
                                                that chooses not to make the portability
filing a timely Form 706 will prevent the                                                              Notice.Comments@irscounsel.treas.gov.
                                                election to allow the decedent’s surviving
making of that election. However, if such                                                              Please include “Notice 2011–82” in
                                                spouse to use the deceased spousal unused
an estate is obligated to file a Form 706 be-                                                          the subject line of any electronic
                                                exclusion amount, must follow the in-
cause the value of the gross estate exceeds                                                            communications.
                                                structions for Form 706 that will describe
the applicable exclusion amount, or files a                                                       c.   By hand-delivery Monday through
                                                the steps the executor must take to notify
Form 706 for another reason, the execu-                                                                Friday between the hours of 8 a.m.
                                                the Service that the decedent’s estate is
tor must follow the instructions for Form                                                              and 4 p.m. to CC:PA:LPD:PR (Notice
                                                not making the portability election. If the
706 that will describe the necessary steps                                                             2011–82), Courier’s Desk, Internal
                                                executor of such an estate chooses not to
to avoid making the election.                                                                          Revenue Service, 1111 Constitution
                                                make the portability election and is not
    The Treasury Department and the Ser-                                                               Ave., NW, Washington, DC 20224.
                                                otherwise obligated to file a Form 706, not
vice recognize that the due date for filing
                                                timely filing a Form 706 will effectively         EFFECTIVE DATE
Form 706 for those decedents dying in the
                                                prevent the making of that election.
first quarter of 2011 is fast approaching
                                                    4. The estate of a decedent dying on or           This notice is applicable with respect
and remind executors of the ability to re-
                                                before December 31, 2010, is not entitled         to the estates of decedents dying after De-
quest an automatic 6-month extension by
                                                to make a portability election. Any attempt       cember 31, 2010.
filing Form 4768 before the due date for
                                                to make a portability election on a Form
filing Form 706. See § 20.6081–1(a) and                                                           DRAFTING INFORMATION
                                                706 filed for the estate of such a decedent
(b) of the Estate Tax Regulations.
                                                will be ineffective.
    The Treasury Department and the Ser-                                                             The principal author of this notice
vice intend to issue regulations, pursuant                                                        is Karlene M. Lesho of the Office of
to the specific authority provided in sec-                                                        Associate Chief Counsel (Passthroughs


2011–42 I.R.B.                                                      517                                             October 17, 2011
and Special Industries).     For further            use to determine the uncollectible amount.      in the future does not qualify under this
information regarding this notice, contact          Section 1.448–2(b) provides that, except        revenue procedure.
Karlene M. Lesho at (202) 622–3090 (not             as provided in other published guidance, a          (3) Current year NAE-eligible accounts
a toll-free call).                                  taxpayer that wishes to change to a NAE         receivable. Current year NAE-eligible ac-
                                                    method other than one of the safe har-          counts receivable are accounts receivable
                                                    bor methods must request advance consent        described in § 1.448–2(c)(1)(i) that a tax-
26 CFR 601.204: Changes in accounting periods and
in methods of accounting.
                                                    from the Commissioner.                          payer earns during the current taxable year.
(Also Part I, §§ 446, 448, 481.)                       .05 Rev. Proc. 2011–14, 2011–4 I.R.B.        They do not include accounts receivable
                                                    330, provides procedures for a taxpayer to      for which a taxpayer is prohibited from
Rev. Proc. 2011–46                                  obtain automatic consent of the Commis-         using the nonaccrual experience method,
                                                    sioner to change to a method of accounting      such as amounts not earned through the
                                                    described in the Appendix to Rev. Proc.         performance of services and amounts for
SECTION 1. PURPOSE                                  2011–14.                                        which the taxpayer charges interest or
                                                       .06 Rev. Proc. 2006–56, 2006–2 C.B.          penalties for failure to timely pay. See
   This revenue procedure provides a                1169, provides procedures for requesting        § 1.448–2(c)(1)(ii).
book safe harbor method of accounting               the consent of the Commissioner to make             (4) Computation of NAE-eligible
for taxpayers using the nonaccrual-ex-              certain changes to, from, or within a NAE       amount. A taxpayer may use any reason-
perience (NAE) method of accounting                 method of accounting and to adopt certain       able method to determine the amount of
under § 448(d)(5) of the Internal Revenue           NAE methods.                                    the taxpayer’s applicable financial state-
Code and § 1.448–2 of the Income Tax                                                                ment allowance for doubtful accounts that
Regulations. This revenue procedure also            SECTION 3. SCOPE                                is attributable to current year NAE-eli-
provides the procedures by which a tax-                                                             gible accounts receivable. In general, a
payer may obtain automatic consent (1)                 This revenue procedure applies to a          method will not be considered reasonable
to change to the NAE book safe harbor               taxpayer that is eligible to use the NAE        if the method fails to consider relevant
method, and (2) to make certain changes             method of accounting under § 448(d)(5)          information that is readily available to the
within the NAE book safe harbor method.             and § 1.448–2, and has an applicable fi-        taxpayer that would produce a result that
                                                    nancial statement, as defined in section        is materially different than the method
SECTION 2. BACKGROUND                               4.02 of this revenue procedure.                 employed by the taxpayer.
    .01 Section 448(d)(5) provides that cer-                                                            (5) Periodic system compatibility. The
                                                    SECTION 4. APPLICATION
tain taxpayers may use the NAE method                                                               NAE book safe harbor is a qualifying peri-
to account for amounts to be received for               .01 NAE book safe harbor.                   odic system of accounting for billings un-
the performance of services. In general,                (1) In general. A taxpayer within the       der Notice 88–51, 1988–1 C.B. 535.
taxpayers eligible to use a NAE method              scope of this revenue procedure may com-            .02 Applicable financial statement.
are not required to accrue any portion of           pute its uncollectible amount under the         A taxpayer’s applicable financial state-
amounts that, based on the taxpayer’s ex-           NAE book safe harbor method by mul-             ment is the taxpayer’s financial statement
perience, will not be collected.                    tiplying the portion of the year-end al-        listed in paragraphs (1) through (3) of this
    .02 The NAE method is available only            lowance for doubtful accounts on the tax-       section 4.02 that has the highest priority
to a taxpayer using an accrual method of            payer’s applicable financial statement that     (including priority within paragraph (2)).
accounting that either provides services in         is attributable to current year NAE-eligible    A taxpayer that does not have a finan-
a field described in § 448(d)(2)(A) (health,        accounts receivable by 95 percent. A tax-       cial statement described in this section
law, engineering, architecture, accounting,         payer using the NAE book safe harbor is         4.02 does not have an applicable financial
actuarial science, performing arts, or con-         generally subject to the rules in § 1.448–2;    statement for purposes of this revenue
sulting), or that meets the $5 million an-          however, the NAE book safe harbor is not        procedure. A taxpayer’s financial state-
nual gross receipts test of § 448(c). The           subject to the self-testing requirements of     ment that is properly incorporated into a
NAE method may not be used for amounts              § 1.448–2(e).                                   parent’s consolidated applicable financial
for which the taxpayer charges interest or              (2) Allowance for doubtful accounts.        statement that is described in this section
penalties for failure to timely pay. See            For purposes of this revenue procedure,         4.02 will qualify as an applicable financial
§ 448(d)(5)(B) and § 1.448–2(c)(1)(ii).             an allowance for doubtful accounts on a         statement. The financial statements are, in
    .03 Section 448(d)(5)(C) provides that          taxpayer’s applicable financial statement       descending priority —
the Secretary shall provide guidance that           must represent the amount of outstand-              (1) A financial statement required to
permits taxpayers to use computations and           ing accounts receivable the taxpayer antic-     be filed with the Securities and Exchange
formulas that, based on experience, accu-           ipates it will not collect. Therefore, an al-   Commission (SEC) (the 10-K or the An-
rately reflect the amount of income that a          lowance that is computed to maximize the        nual Statement to Shareholders);
taxpayer will not collect (the uncollectible        deferral of taxable income under this rev-          (2) A certified audited financial state-
amount).                                            enue procedure and does not represent the       ment that is accompanied by the report of
    .04 Section 1.448–2(f) describes safe           amount of outstanding accounts receivable       an independent CPA (or in the case of a
harbor NAE methods that a taxpayer may              the taxpayer anticipates it will not collect    foreign corporation, by the report of a sim-



October 17, 2011                                                       518                                                 2011–42 I.R.B.
ilarly qualified independent professional),                 SECTION 5. CHANGE IN METHOD                     ment to a taxpayer’s estimates in determin-
that is used for —                                          OF ACCOUNTING                                   ing its allowance for doubtful accounts that
    (a) Credit purposes,                                                                                    does not change the base or formula is not
    (b) Reporting to shareholders, or                           .01 Change to the NAE book safe har-        a change in the method of determining the
    (c) Any other substantial non-tax pur-                  bor.                                            allowance for doubtful accounts under this
pose; or                                                        (1) In general. A change in a taxpayer’s    paragraph 5.02. For example, if a taxpayer
    (3) A financial statement (other than a                 method of accounting to the NAE book            estimates that 4% of its receivables are un-
tax return) required to be provided to the                  safe harbor method is a change in method        collectible in a taxable year, and using the
federal or a state government or any fed-                   of accounting to which the provisions of        same methodology estimates that 6% of its
eral or state agency (other than the SEC or                 §§ 446 and 481 and the regulations there-       receivables are uncollectible in the subse-
the Internal Revenue Service).                              under apply. A taxpayer within the scope        quent taxable year, the adjustment to its
    .03 Examples.                                           of this revenue procedure is granted the        estimate is not a change in the method of
     Example 1. Application of NAE book safe har-           consent of the Commissioner to change to        determining the allowance for doubtful ac-
bor. (i) On December 31, 2011, the balance sheet in         the NAE book safe harbor method permit-         counts.
calendar-year Taxpayer’s applicable financial state-
                                                            ted under section 4 of this revenue proce-          (2) Restatement of applicable financial
ment includes an allowance for doubtful accounts of
$1,300,000. Of this balance, $300,000 represents the        dure if the taxpayer complies with the ap-      statements. A taxpayer’s restatement of
amount attributable to current year accounts receiv-        plicable provisions of Rev. Proc. 2006–56       its applicable financial statements does
able that Taxpayer anticipates it will not collect in the   and Rev. Proc. 2011–14 (or any succes-          not invalidate the taxpayer’s method of
future.                                                     sor).                                           accounting or change its uncollectible
     (ii) Taking into account relevant information that
                                                                (2) Scope limitations. The scope lim-       amount determined under the NAE book
is readily available, Taxpayer makes a reasonable de-
termination that $200,000 of the $300,000 current           itations in section 4.02 of Rev. Proc.          safe harbor in earlier taxable years.
year addition to the financial statement allowance for      2011–14 (or any successor) do not apply             (3) Manner of making change.
doubtful accounts is attributable to its current year       for a taxpayer’s first taxable year ending          (a) A taxpayer makes a change in
NAE-eligible accounts receivable. Taxpayer com-             on or after September 28, 2011. However,        method of accounting under this paragraph
putes the amount of income that it may exclude un-
                                                            if, at the time a taxpayer files a Form         5.02 by attaching a statement to its original
der the NAE book safe harbor method by multiply-
ing the $200,000 increment to the financial statement       3115 for that year with the national of-        return for the taxable year of change (or
year-end allowance for doubtful accounts attributable       fice, and the taxpayer’s NAE method is          to an amended return if under the limited
to current year NAE-eligible accounts receivable by         an issue under consideration for a taxable      relief for a late application provided in
95%. Therefore, the amount of income that Taxpayer          year under examination, before an ap-           section 6.02(3)(d) of Rev. Proc. 2011–14,
is not required to accrue for federal income tax pur-
                                                            peals office, or before a federal court, then   or any successor). The taxpayer is not re-
poses under section 448(d)(5) for the taxable year
ending December 31, 2011, is $190,000 ($200,000 x           the audit protection of section 7 of Rev.       quired to file a copy of the statement with
95%).                                                       Proc. 2011–14 (or any successor) does           the national office under section 6.02(3)(a)
     Example 2. Recoveries. (i) On December 31,             not apply. A taxpayer’s NAE method of           of Rev. Proc. 2011–14 (or any successor).
2011, the balance sheet in Taxpayer’s applicable fi-        accounting is an issue under consideration      The statement must include the following
nancial statement includes an allowance for doubtful
                                                            for the taxable years under examination if      information:
accounts of $1,300,000, representing outstanding ac-
counts receivable that Taxpayer anticipates it will not     the taxpayer receives written notification          (i) The taxpayer’s name and taxpayer
collect in the future. During calendar year 2012, Tax-      (for example, by examination plan, infor-       identification number for each applicant;
payer collects $100,000 of accounts receivable that         mation document request, or notification            (ii) The beginning and ending dates of
had been included in its allowance for doubtful ac-         of proposed adjustment, or income tax           the year of change;
counts.
                                                            examination changes) from the examining             (iii) For each applicant, the type of ap-
     (ii) Taking into account relevant information
that is readily available, Taxpayer determines that         agent(s) specifically citing the treatment      plicable financial statement (as defined in
$60,000 of the $100,000 financial statement recov-          of the NAE method of accounting as an           section 4.02 of this revenue procedure) the
ery from the allowance for doubtful accounts is             issue under consideration.                      taxpayer uses;
attributable to recoveries of NAE-eligible accounts             .02 Change in applicable financial              (iv) A description of the method the tax-
receivable, all or a portion of which Taxpayer had
                                                            statements and allowance for doubtful           payer uses to determine its allowance for
properly excluded from income in a prior year under
the NAE rules. As required by § 1.448–2(d)(5),              accounts.                                       doubtful accounts on its applicable finan-
Taxpayer must include the recovered amount in in-               (1) In general. A change to a taxpayer’s    cial statements before and after the change;
come in the taxable year ending December 31, 2012.          method for determining its allowance for        and
The amount of additional income that Taxpayer               doubtful accounts for its applicable finan-         (v) The designated automatic account-
must include under § 1.448–2(d)(5) is equal to the
                                                            cial statements is a change in method of ac-    ing method change number 35.
amount of the recovery that Taxpayer previously
excluded from income under an NAE method. Thus,             counting to which the provisions of § 446           (b) A change under this paragraph 5.02
if in a prior year Taxpayer excluded 95% of the             and the regulations thereunder apply. A         is made on a cut-off basis and applies only
recovered $60,000 under the NAE book safe harbor            taxpayer within the scope of this revenue       to accounts receivable earned on or after
method, Taxpayer is required to include $57,000             procedure is granted the consent of the         the first day of the taxable year of change.
($60,000 x 95%) in income in the taxable year ending
                                                            Commissioner to change this method if the       A taxpayer must continue to apply its for-
December 31, 2012.
                                                            taxpayer complies with the applicable pro-      mer method to accounts receivable earned
                                                            visions of Rev. Proc. 2011–14 (or any suc-      before the taxable year of change. Accord-
                                                            cessor) and this paragraph 5.02. An adjust-


2011–42 I.R.B.                                                                 519                                             October 17, 2011
ingly, a § 481(a) adjustment is neither per-         (iv) The designated automatic account-           (Also: Part I, §§ 62, 162, 267, 274; 1.62–2, 1.162–17,
mitted nor required.                             ing method change number 35.                         1.267(a)–1, 1.274–5.)
    (4) Scope limitations. The scope lim-            (b) A change under this paragraph 5.03
itation in section 4.02(7) of Rev. Proc.         is made on a cut-off basis and applies only          Rev. Proc. 2011–47
2011–14 (or any successor) does not ap-          to accounts receivable earned on or after
ply to a change in method of accounting          the first day of the taxable year of change.
                                                                                                      SECTION 1. PURPOSE
under this section 5.02. A taxpayer that         A taxpayer must continue to apply its for-
is otherwise ineligible to file an automatic     mer method to accounts receivable earned                 This revenue procedure updates Rev.
method change because it is under exam-          before the taxable year of change. Accord-           Proc. 2010–39, 2010–42 I.R.B. 459, and
ination (as defined in section 3.08 of Rev.      ingly, a § 481(a) adjustment is neither per-         provides rules for using a per diem rate
Proc. 2011–14 (or any successor)) for any        mitted nor required.                                 to substantiate, under section 274(d) of
income tax issue may change its method               (3) Scope limitation. The scope lim-             the Internal Revenue Code and section
of accounting under this paragraph 5.02,         itation in section 4.02(7) of Rev. Proc.             1.274–5 of the Income Tax Regulations,
however, the audit protection provisions of      2011–14 (or any successor) does not apply            the amount of ordinary and necessary
section 7 of Rev. Proc. 2011–14 (or any          to a change in method of accounting under            business expenses paid or incurred while
successor) do not apply.                         this section 5.03.                                   traveling away from home. Taxpayers are
    .03 Change in method of determining                                                               not required to use a method described in
the NAE-eligible amount.                         SECTION 6. EFFECT ON OTHER
                                                                                                      this revenue procedure. A taxpayer may
    (1) In general. A change in a taxpayer’s     DOCUMENTS
                                                                                                      substantiate actual allowable expenses if
method for determining the portion of its                                                             the taxpayer maintains adequate records
applicable financial statement allowance             Rev. Proc. 2006–56 is modified and
                                                 amplified to include the NAE book safe               or other sufficient evidence.
for doubtful accounts that is attributable                                                                This revenue procedure provides rules
to current year NAE-eligible accounts re-        harbor method in the safe harbors de-
                                                 scribed in paragraphs (1), (7), and (8) of           for using a per diem rate to substantiate
ceivable (as described in section 4.01(4)                                                             the amount of an employee’s expenses for
of this revenue procedure) is a change in        section 3.01 and in section 3.02. There-
                                                 fore, a taxpayer may change to the NAE               lodging, meal, and incidental expenses,
method of accounting to which the provi-                                                              or for meal and incidental expenses only,
sions of § 446 and the regulations there-        book safe harbor method using the provi-
                                                 sions of section 14.04 of the APPENDIX               that a payor (an employer, its agent, or a
under apply. A taxpayer within the scope                                                              third party) reimburses. Employees and
of this revenue procedure is granted the         of Rev. Proc. 2011–14 (or any successor)
                                                 if the taxpayer is otherwise eligible to use         self-employed individuals that deduct un-
consent of the Commissioner to change                                                                 reimbursed expenses for travel away from
this method if the taxpayer complies with        Rev. Proc. 2011–14.
                                                                                                      home may use a per diem rate for meals
the applicable provisions of Rev. Proc.                                                               and incidental expenses, or incidental ex-
                                                 SECTION 7. EFFECTIVE DATE
2011–14 (or any successor) and this para-                                                             penses only, under this revenue procedure.
graph 5.03.                                         This revenue procedure is effective               This revenue procedure does not provide
    (2) Manner of making change.                 for taxable years ending on or after                 rules for using a per diem rate to substan-
    (a) A taxpayer makes a change in             September 28, 2011.                                  tiate the amount of lodging expenses only.
method of accounting under this paragraph                                                                 Announcement 2011–42, 2011–32
5.03 by attaching a statement to its original    SECTION 8. DRAFTING                                  I.R.B. 138, advised taxpayers that the In-
return for the taxable year of change (or        INFORMATION                                          ternal Revenue Service intends to discon-
to an amended return if under the limited                                                             tinue the high-low substantiation method.
relief for a late application provided in           The principal author of this revenue              Subsequently a number of taxpayers com-
section 6.02(3)(d) of Rev. Proc. 2011–14,        procedure is W. Thomas McElroy, Jr., of              mented that they use the high-low substan-
or any successor). The taxpayer is not re-       the Office of Associate Chief Counsel                tiation method and asked that the Service
quired to file a copy of the statement with      (Income Tax and Accounting). For further             retain it. Accordingly, this revenue proce-
the national office under section 6.02(3)(a)     information regarding this revenue pro-              dure continues to authorize the high-low
of Rev. Proc. 2011–14 (or any successor).        cedure, contact Karla M. Meola at (202)              substantiation method.
The statement must include the following         622–4930 (not a toll-free call).                         Beginning with the rates for
information:                                                                                          2011–2012, the Service will publish an
    (i) The taxpayer’s name and taxpayer                                                              annual notice that provides the special per
                                                 26 CFR 601.105: Examination of returns and claims
identification number for each applicant;        for refund, credit, or abatement; determination of   diem rates for purposes of sections 4.04,
    (ii) The beginning and ending dates of       correct tax liability.                               4.05, and 5 of this revenue procedure and
the year of change;                                                                                   the list of high-cost localities for purposes
    (iii) A description of the method the tax-                                                        of section 5 of this revenue procedure and
payer uses to determine its NAE-eligible                                                              will update this revenue procedure only as
amount before and after the change; and                                                               necessary.




October 17, 2011                                                      520                                                         2011–42 I.R.B.
SECTION 2. BACKGROUND AND                      der the arrangement. Section 62(c) fur-       31.3401(a)–4 of the Employment Tax
CHANGES                                        ther provides, however, that substantiation   Regulations.
                                               is not required for the expense to the ex-        .10 Under section 1.62–2(h)(2)
    .01 Section 162(a) allows a deduction      tent provided in regulations under section    (i)(B)(4), the Commissioner may prescribe
for ordinary and necessary expenses paid       274(d).                                       special rules for the timing of withholding
or incurred during the taxable year in car-        .07 Under section 1.62–2(c), a reim-      and paying employment taxes on per diem
rying on any trade or business, includ-        bursement or other expense allowance          allowances.
ing expenses for travel away from home.        arrangement satisfies the requirements of         .11 Section 1.274–5(j)(1) authorizes
However, under section 262, a taxpayer         section 62(c) if it meets the requirements    the Commissioner to establish a method
may not deduct personal travel or living       of business connection, substantiation, and   allowing a taxpayer to treat a specific
expenses.                                      returning amounts in excess of expenses.      amount as paid or incurred for meals while
    .02 Section 274(n) generally limits the    In that case, all amounts paid under the      traveling away from home instead of sub-
amount allowable as a deduction under          arrangement are treated as paid under an      stantiating the actual cost.
section 162 for any expense for food, bev-     accountable plan and are excluded from            .12 Section 1.274–5(j)(3) authorizes
erages, or entertainment to 50 percent of      income and wages. If an arrangement           the Commissioner to establish a method
the otherwise allowable amount. For an in-     does not meet one or more of these re-        allowing a taxpayer to treat a specific
dividual during, or incident to, a period of   quirements, all amounts paid under the        amount as paid or incurred for incidental
duty subject to the hours of service limita-   arrangement are treated as paid under a       expenses while traveling away from home
tions of the Department of Transportation,     nonaccountable plan and are included in       in lieu of substantiating the actual cost.
section 274(n)(3) provides that, for taxable   an employee’s gross income, must be re-           .13 This revenue procedure includes
years beginning in 2008 or thereafter, the     ported as wages or compensation on the        modifications to Rev. Proc. 2010–39 as
deductible percentage for these expenses is    employee’s Form W–2, and are subject to       follows:
80 percent.                                    the withholding and payment of employ-            (1) The special per diem rates are now
    .03 To deduct expenses for travel away     ment taxes.                                   published in a separate annual notice. The
from home, a taxpayer must substantiate            .08 Section 1.62–2(e)(2) provides that    notice provides (1) the special transporta-
the expenses under section 274(d), which       the amount of a business expense substan-     tion industry meal and incidental expenses
also authorizes the Secretary to prescribe     tiated under section 1.274–5(g) is treated    rates (M&IE rates), (2) the rate for the in-
that some or all of the substantiation re-     as substantiated for purposes of section      cidental expenses only deduction, and (3)
quirements do not apply to an expense that     1.62–2.                                       the rates and list of high-cost localities
does not exceed a particular amount.               .09 Under section 1.62–2(f)(2), the       for purposes of the high-low substantiation
    .04 Section 1.274–5(g) authorizes the      Commissioner may prescribe rules for          method. The Service plans to discontinue
Commissioner to prescribe rules under          treating an arrangement providing per         publishing this revenue procedure annu-
which reimbursement arrangements or            diem allowances as satisfying the re-         ally but will publish modifications as re-
per diem allowances are regarded (1) as        quirement of returning amounts in excess      quired. This revenue procedure remains in
equivalent to substantiation, by adequate      of expenses if the arrangement requires       effect until superseded.
records or other sufficient evidence, of       the employee to return amounts that re-           (2) Section 3.04 clarifies that partners
the amount of travel expenses for pur-         late to unsubstantiated travel days, even     and volunteers who receive reimburse-
poses of section 1.274–5(c), and (2) as        though the arrangement does not require       ments from payors may use the methods
satisfying the requirements of an adequate     the employee to return the portion of the     allowed under this revenue procedure to
accounting to the employer of the amount       allowance that relates to substantiated       substantiate their expenses.
of travel expenses for purposes of section     travel days but that exceeds the deemed           (3) Under section 5, taxpayers may now
1.274–5(f).                                    substantiated amount for those days. The      use the high-low substantiation method in
    .05 For purposes of determining ad-        allowance must be reasonably calculated       lieu of the meal and incidental expenses
justed gross income, section 62(a)(2)(A)       not to exceed the amount of the em-           only per diem substantiation method pro-
allows an employee to deduct business ex-      ployee’s expenses or anticipated expenses     vided in section 4.02 for travel within the
penses the employee pays or incurs in per-     and the employee must be required to re-      continental United States.
forming services under a reimbursement or      turn within a reasonable period of time           (4) Transition rules for the last 3 months
other expense allowance arrangement with       any portion of the allowance that relates     of each calendar year are moved from sec-
a payor.                                       to unsubstantiated travel days. Under         tions 3.02(1)(a) and 4.04(6) to new section
    .06 Section 62(c) provides that an ar-     section 1.62–2(h)(2)(i)(B), the portion of    4.06 and from section 5.05 to section 5.04.
rangement is not treated as a reimburse-       the allowance that relates to substantiated
ment or other expense allowance arrange-       travel days but exceeds the substantiated     SECTION 3. DEFINITIONS
ment for purposes of section 62(a)(2)(A) if    amount for those days and that the em-
it (1) does not require the employee to sub-   ployee is not required to return is subject      .01 Per diem allowance. The term “per
stantiate the expenses covered by the ar-      to withholding and payment of employ-         diem allowance” means a payment under a
rangement to the payor, or (2) allows the      ment taxes. See sections 31.3121(a)–3,        reimbursement or other expense allowance
employee to retain any amount in excess        31.3231(e)–1(a)(5), 31.3306(b)–2, and         arrangement that is —
of the substantiated expenses covered un-


2011–42 I.R.B.                                                   521                                            October 17, 2011
    (1) Paid for ordinary and necessary          can be obtained at the temporary duty           revenue procedure to substantiate their
business expenses incurred, or that the          site; and the mailing cost associated with      expenses. The rules of sections 3, 4, 5,
payor reasonably anticipates will be in-         filing travel vouchers and payment of           and 6 (except section 6.06) of this revenue
curred, by an employee for lodging, meal,        employer-sponsored charge card billings).       procedure apply to reimbursements from
and incidental expenses, or for meal and         Future changes to the definition of             payors to partners or volunteers.
incidental expenses, for travel away from        incidental expenses in the Federal Travel
home performing services as an employee          Regulations will be announced in the            SECTION 4. PER DIEM
of the employer,                                 annual notice providing the special per         SUBSTANTIATION METHOD
    (2) Reasonably calculated not to exceed      diem rates.
the amount of the expenses or the antici-            .03 Flat rate or stated schedule.               .01 Per diem allowance. If a payor pays
pated expenses, and                                  (1) In general. Except as provided in       a per diem allowance in lieu of reimburs-
    (3) Paid at or below the applicable fed-     section 3.03(2) of this revenue procedure,      ing actual lodging, meal, and incidental ex-
eral per diem rate, a flat rate or stated        an allowance is paid at a flat rate or stated   penses incurred or to be incurred by an
schedule, or in accordance with any other        schedule if it is provided on a uniform         employee for travel away from home, the
Service-specified rate or schedule.              and objective basis for the expenses de-        amount of the expenses that is deemed sub-
    .02 Federal per diem rate and federal        scribed in section 3.01(1) of this revenue      stantiated for each calendar day is equal to
M&IE rate.                                       procedure. The allowance may be paid            the lesser of the per diem allowance for
    (1) In general. The federal per diem         for the number of days away from home           that day or the amount computed at the
rate is equal to the sum of the applicable       performing services as an employee or           federal per diem rate (see section 3.02 of
federal lodging expense rate and the appli-      on any other basis that is consistently ap-     this revenue procedure) for the locality of
cable federal M&IE rate for the day and          plied and in accordance with reasonable         travel for that day (or partial day, see sec-
locality of travel.                              business practice. Thus, for example, an        tion 6.04 of this revenue procedure). See
    (a) CONUS rates. The General Ser-            hourly payment to cover meal and inci-          section 4.06(1) of this revenue procedure
vices Administration (GSA) publishes the         dental expenses paid to a pilot or flight       for transition rules.
rates for localities in the continental United   attendant who is traveling away from                .02 Meal and incidental expenses only
States (CONUS), as noted in Appendix A           home performing services as an employee         per diem allowance. If a payor pays a
to 41 C.F.R. ch. 301. The GSA rates are          is an allowance paid at a flat rate or stated   per diem allowance only for meal and in-
available on the internet at www.gsa.gov.        schedule. Likewise, a payment based on          cidental expenses in lieu of reimbursing
    (b) OCONUS rates. The rates for lo-          the number of miles traveled (such as           actual meal and incidental expenses in-
calities outside the continental United          cents per mile) to cover meal and inci-         curred or to be incurred by an employee for
States (OCONUS) are established by the           dental expenses paid to an over-the-road        travel away from home, the amount of the
Secretary of Defense (rates for non-for-         truck driver who is traveling away from         expenses that is deemed substantiated for
eign localities, including Alaska, Hawaii,       home performing services as an employee         each calendar day is equal to the lesser of
Puerto Rico, the Northern Mariana Is-            is an allowance paid at a flat rate or stated   the per diem allowance for that day or the
lands, and the possessions of the United         schedule.                                       amount computed at the federal M&IE rate
States) and by the Secretary of State (rates         (2) Limitation. An allowance that is        for the locality of travel for that day or par-
for foreign localities). These rates are pub-    computed on a basis similar to that used        tial day. A per diem allowance is treated
lished in the Per Diem Supplement to the         in computing an employee’s wages or             as paid for meal and incidental expenses
Standardized Regulations (Government             other compensation (such as the number          only if (1) the payor pays the employee for
Civilians, Foreign Areas) (updated on a          of hours worked, miles traveled, or pieces      actual expenses for lodging based on re-
monthly basis) and are available on the          produced) does not meet the business con-       ceipts submitted to the payor, (2) the payor
internet at www.defensetravel.dod.mil and        nection requirement of section 1.62–2(d),       provides the lodging in kind, (3) the payor
www.state.gov.                                   is not a per diem allowance, and is not paid    pays the actual expenses for lodging di-
    (2) Locality of travel. The term “lo-        at a flat rate or stated schedule, unless, as   rectly to the provider of the lodging, (4)
cality of travel” means the locality where       of December 12, 1989, (a) the allowance         the payor does not have a reasonable belief
an employee or self-employed individual          was identified by the payor either by mak-      that the employee will or did incur lodging
traveling away from home stops for sleep         ing a separate payment or by specifically       expenses, or (5) the allowance is computed
or rest.                                         identifying the amount of the allowance,        on a basis similar to that used in computing
    (3) Incidental expenses. The term            or (b) an allowance computed on that ba-        an employee’s wages or other compensa-
“incidental expenses has the same mean-          sis was commonly used in the industry in        tion (such as the number of hours worked,
ing as in the Federal Travel Regulations,        which the employee performed services.          miles traveled, or pieces produced). See
41 C.F.R. 300–3.1 (fees and tips given           See section 1.62–2(d)(3)(ii).                   section 4.06(1) of this revenue procedure
to porters, baggage carriers, bellhops,              .04 Partners and volunteers. Individ-       for transition rules.
hotel maids, stewards or stewardesses            uals subject to the rules of Subchapter K           .03 Method for meal and incidental ex-
and others on ships, and hotel servants in       (partners) and individuals performing ser-      penses only deduction. Instead of the ac-
foreign countries; transportation between        vices without remuneration (volunteers)         tual expense amount, employees and self-
places of lodging or business and places         who receive reimbursements from payors          employed individuals may substantiate the
where meals are taken, if suitable meals         may use the methods allowed under this          amount of deductible meal expenses by


October 17, 2011                                                    522                                                  2011–42 I.R.B.
using an amount computed at the federal         notice) for the transportation industry. A                    .05 Method for incidental expenses only
M&IE rate for the locality of travel for        payor that uses either or both of these                   deduction. Instead of using actual ex-
each calendar day or partial day the em-        special rates for an employee must use                    penses in computing the amount allow-
ployee or self-employed individual is trav-     the special rate(s) for all amounts deemed                able as a deduction for ordinary and nec-
eling away from home. This amount is            substantiated under section 4.02 of this                  essary incidental expenses paid or incurred
deemed substantiated for purposes of sec-       revenue procedure paid to that employee                   for travel away from home, employees and
tion 1.274–5T(b)(2)(i) and (c), provided        for travel away from home within CONUS                    self-employed individuals who pay or in-
the employee or self-employed individual        and/or OCONUS during the calendar year.                   cur incidental expenses but do not pay or
substantiates the elements of time, place,      Similarly, an employee or self-employed                   incur meal expenses for a calendar day
and business purpose of the travel for that     individual who uses either or both of these               or partial day of travel away from home
day or partial day in accordance with those     special rates must use the special rate(s)                may use, for each calendar day or par-
regulations. See section 6.05(1) of this        for all amounts deemed substantiated un-                  tial day the employee or self-employed in-
revenue procedure for rules related to the      der section 4.03 of this revenue procedure                dividual is away from home, an amount
application of the section 274(n) limitation    for travel away from home within CONUS                    that the Service publishes in an annual no-
to amounts determined under this section        and/or OCONUS during the calendar year.                   tice. This amount is deemed substantiated
4.03. See section 4.05 of this revenue pro-     See section 4.06(2) of this revenue proce-                for purposes of section 1.274–5T(b)(2)(i)
cedure for a method for substantiating the      dure for transition rules.                                and (c), provided the employee or self-
deductible amount of incidental expenses            (4) Periodic rule. A payor described                  employed individual substantiates the el-
that employees or self-employed individu-       in section 4.04(1) of this revenue proce-                 ements of time, place, and business pur-
als who do not pay or incur meal expenses       dure may compute the amount of an em-                     pose of the travel for that day or partial
may use. See section 4.06(1) of this rev-       ployee’s expenses that is deemed substan-                 day in accordance with those regulations.
enue procedure for transition rules.            tiated under section 4.02 of this revenue                 The method authorized by this section 4.05
   .04 Special rules for the transportation     procedure periodically (not less frequently               may not be used by payors that reimburse
industry.                                       than monthly) rather than daily by compar-                expenses under section 4.01, 4.02, or 5.01
   (1) In general. This section 4.04 ap-        ing the total per diem allowance paid for                 of this revenue procedure, or by employ-
plies to (a) a payor that pays a per diem       the period to the sum of the amounts com-                 ees or self-employed individuals who use
allowance only for meal and incidental          puted either at the federal M&IE rate(s) for              the method described in section 4.03 of
expenses for travel away from home to           the localities of travel, or at the special rate          this revenue procedure to substantiate the
an employee in the transportation indus-        described in section 4.04(3), for the days                amount of deductible meal and incidental
try and computes the amount under section       or partial days the employee is away from                 expenses. See section 6.05(5) of this rev-
4.02 of this revenue procedure, or (b) an       home during the period.                                   enue procedure for rules related to the ap-
employee or self-employed individual in             (5) Examples.                                         plication of the section 274(n) limitation
the transportation industry who computes            (a) Example 1. Taxpayer, an employee in the           to amounts determined under this section
the deductible amount for meal and inci-        transportation industry, travels away from home on        4.05.
                                                business within CONUS for 10 days during a calen-
dental expenses for travel away from home       dar month. A payor pays Taxpayer a per diem al-
                                                                                                              .06 Transition rules.
under section 4.03 of this revenue proce-       lowance for meal and incidental expenses only that            (1) In general. In applying section 4.01,
dure.                                           the payor computes using section 4.04(3) of this rev-     4.02, or 4.03 of this revenue procedure,
   (2) Transportation industry defined.         enue procedure. The CONUS special M&IE rate is            taxpayers may continue to use the CONUS
For purposes of this section 4.04, an em-       $59 per day. The amount deemed substantiated un-          rates in effect for the first 9 months of
                                                der section 4.02 of this revenue procedure is equal to
ployee or self-employed individual is in        the lesser of the total per diem allowance paid for the
                                                                                                          the calendar year, instead of the updated
the transportation industry only if the         month or $590 (10 days away from home at $59 per          GSA rates, for expenses of all CONUS
employee’s or self-employed individ-            day).                                                     travel away from home that are paid or in-
ual’s work (a) is of the type that directly         (b) Example 2. Taxpayer, a truck driver employee      curred during the last 3 months of the cal-
involves moving people or goods by air-         in the transportation industry, is paid a “cents-per-     endar year. A taxpayer must use either the
                                                mile” allowance that qualifies as an allowance paid
plane, barge, bus, ship, train, or truck, and   under a flat rate or stated schedule as defined in sec-
                                                                                                          rates for the first 9 months of the calen-
(b) involves regularly traveling away from      tion 3.03 of this revenue procedure. Taxpayer trav-       dar year or the updated rates for the period
home and stopping during a single trip          els away from home on business for 10 days. Based         October 1 through December 31 of each
at localities with differing federal M&IE       on the number of miles Taxpayer is expected to drive      calendar year consistently.
rates. For purposes of the preceding sen-       per day, Taxpayer’s employer pays an allowance of             (2) Special transportation industry
                                                $500 for the 10 days of business travel. The CONUS
tence, a payor must determine that an           special M&IE rate is $59 per day. Taxpayer actually
                                                                                                          rates. Under the calendar-year conven-
employee or a group of employees is in the      drives for 8 days, and does not drive for the other 2     tion provided in section 4.04(3) of this
transportation industry by using a method       days Taxpayer is away from home. Taxpayer is paid         revenue procedure, a taxpayer who uses
that is consistently applied and in accor-      under the periodic rule used for transportation indus-    the federal M&IE rates during the first 9
dance with reasonable business practice.        try employers and employees in accordance with sec-       months of the calendar year to substan-
                                                tion 4.04(4) of this revenue procedure. The amount
   (3) Rates. A taxpayer described in           deemed substantiated is the full $500 because that
                                                                                                          tiate the amount of an individual’s travel
section 4.04(1) of this revenue procedure       amount does not exceed $590 (10 days away from            expenses under sections 4.02 or 4.03 of
may use the CONUS and OCONUS spe-               home at $59 per day).                                     this revenue procedure may not use, for
cial M&IE rates (published in an annual                                                                   that individual, the special transportation


2011–42 I.R.B.                                                         523                                                   October 17, 2011
industry rates published in an annual no-      per diem substantiation method described                     SECTION 6. LIMITATIONS AND
tice until January 1 of the next calendar      in section 4.01 of this revenue procedure,                   SPECIAL RULES
year. Similarly, a taxpayer who uses the       or the meal and incidental expenses only
special transportation industry rates dur-     per diem substantiation method described                        .01 In general. The federal per diem
ing the first 9 months of the calendar year    in section 4.02 of this revenue proce-                       rate and the federal M&IE rate described
to substantiate the amount of an individ-      dure) to reimburse that employee for any                     in section 3.02 of this revenue procedure
ual’s travel expenses may not use, for that    OCONUS travel away from home.                                for the locality of travel apply in the same
individual, the federal M&IE rates until          .04 Transition rules. For travel in the                   manner as they apply under the Federal
January 1 of the next calendar year.           last 3 months of a calendar year—                            Travel Regulations, 41 C.F.R. Part 301, ex-
                                                  (1) A payor must continue to use the                      cept as provided in sections 6.02 through
SECTION 5. HIGH-LOW                            same method (per diem method under sec-                      6.04 of this revenue procedure.
SUBSTANTIATION METHOD                          tions 4.01 or 4.02 of this revenue proce-                       .02 Federal per diem rate. A receipt
                                               dure, or high-low method) for an employee                    for lodging expenses is not required in de-
    .01 In general. A payor that pays a per    as the payor used during the first 9 months                  termining the amount of expenses deemed
diem allowance in lieu of reimbursing ac-      of the calendar year; and                                    substantiated at the federal per diem rate
tual expenses an employee pays or incurs          (2) A payor may use either the rates and                  (including lodging, meal, and incidental
or will pay or incur for travel away from      high-cost localities in effect for the first 9               expenses in one rate) under section 4.01
home may use the high-low substantiation       months of the calendar year or the updated                   or 5.01. See section 7.01 of this revenue
method described in this section 5 in lieu     rates and high-cost localities in effect for                 procedure for the requirement that an em-
of the per diem substantiation method de-      the last 3 months of the calendar year if                    ployee substantiate the time, place, and
scribed in section 4.01 of this revenue pro-   the payor uses the same rates and localities                 business purpose of the expense.
cedure or the meal and incidental expenses     consistently for all employees reimbursed                       .03 Meals provided in kind. A payor is
only method described in section 4.02 of       under the high-low method.                                   not required to reduce the federal per diem
this revenue procedure. If a payor uses           .05 Examples.                                             rate or the federal M&IE rate for the lo-
the high-low substantiation method, the             (1) Example 1. Employer pays a per diem al-             cality of travel for meals provided in kind,
amount of the expenses that is deemed sub-     lowance for lodging, meal, and incidental expenses           provided the payor has a reasonable belief
                                               to Employee for travel away from home using the
stantiated for each calendar day is equal to                                                                that the employee incurred or will incur
                                               high-low substantiation method. Employee travels
the lesser of the actual per diem allowance    away from home for 5 full days to City A within              meal and incidental expenses during each
for that day or the amount computed un-        CONUS. City A is listed as a high-cost locality. Em-         day of travel.
der section 5.02 of this revenue procedure.    ployer reimburses employee at a rate of $225 per day            .04 Proration of the federal per diem
Employees and self-employed individuals        for each of employee’s 5 days of travel. The per             or M&IE rate. Under the Federal Travel
                                               diem rate for a high-cost locality is $250. The amount
may not use the high-low substantiation                                                                     Regulations, in determining the federal per
                                               deemed substantiated under section 5 of this revenue
method in lieu of the meal and incidental      procedure is $225 per day (the lesser of the per diem        diem rate or the federal M&IE rate for the
expenses only deduction method described       allowance for each day ($225) or the per diem rate for       locality of travel, the full applicable fed-
in section 4.03 of this revenue procedure.     a high-cost locality ($250)).                                eral M&IE rate is available for a full day
    .02 Application of high-low method.             (2) Example 2. Employer pays a per diem al-             of travel from 12:01 a.m. to 12:00 mid-
                                               lowance for meal and incidental expenses only to Em-
Under the high-low substantiation method,                                                                   night. A taxpayer must use the method de-
                                               ployee for travel away from home using the high-low
a high rate applies to localities desig-       substantiation method. Employee travels away from            scribed in section 6.04(1) of this revenue
nated as high-cost localities and a low        home to City B (within CONUS) each month of Year             procedure for purposes of determining the
rate applies to every other locality within    1. For all of Year 1, Employer reimburses Employee           amount deemed substantiated for meal and
CONUS (one high rate and one low rate          at a rate of $50 per day for meal and incidental ex-         incidental expenses or for incidental ex-
                                               penses only. For the first 9 months of Year 1, City B
for lodging, meal, and incidental expenses                                                                  penses only under section 4.03, 4.05, or 5
                                               is listed as a high-cost locality. The M&IE rate is $60
and one high rate and one low rate for         for a high-cost locality and $45 for all other localities.   of this revenue procedure for partial days
meal and incidental expenses only). The        For the last 3 months of Year 1, City B is not listed        of travel away from home. For purposes
high or low rates, as appropriate, apply as    as a high-cost locality, and the M&IE rate for City B        of determining the amount deemed sub-
if they were the federal per diem rate or      is $48. Employer chooses to use the rates and list of        stantiated for a reimbursement for lodging,
                                               high-cost localities in effect during the first 9 months
the federal M&IE rate for the locality of                                                                   meal, and incidental expenses under sec-
                                               of Year 1 for the last 3 months of Year 1 (instead of
travel. The high and low rates, amounts        the updated rates for the last 3 months of Year 1). If       tion 4.01, 4.02, or 5 of this revenue pro-
treated as meal expenses for purposes of       Employer uses the rates and high-cost localities in ef-      cedure for partial days of travel away from
§ 274(n), and a list of high-cost localities   fect during the first 9 months of Year 1 for the last 3      home, a payor may use either of the follow-
are published in an annual notice.             months of Year 1 consistently for all employees, the         ing methods to prorate the federal M&IE
                                               amount deemed substantiated for Employee’s travel
    .03 Limitation. A payor that uses the                                                                   rate to determine the federal per diem rate
                                               to City B during the last 3 months of Year 1 is $50,
high-low substantiation method for an          the lesser of the M&IE rate for a high-cost locality         or the federal M&IE rate for the partial
employee must use that method for all          ($60) or the employee’s per diem allowance for each          days of travel:
amounts paid to that employee for travel       day ($50).                                                      (1) The rate may be prorated using the
away from home within CONUS during                                                                          method prescribed by the Federal Travel
the calendar year. The payor may use any                                                                    Regulations for meal and incidental ex-
permissible method (actual expenses, the                                                                    penses for partial days, see 41 C.F.R.


October 17, 2011                                                       524                                                         2011–42 I.R.B.
301–11.101, by allocating three-fourths of       the amount of the allowance, as an expense     SECTION 7. APPLICATION
the applicable rate to each partial day of       for food or beverages; or
travel; or                                           (b) Treat an amount equal to 40 percent        .01 An employee satisfies the adequate
    (2) The rate may be prorated using any       of the allowance as an expense for food or     accounting and substantiation require-
method that is consistently applied and is       beverages.                                     ments of section 1.274–5(c) and (f)(4) and
consistent with reasonable business prac-            (5) None of the amount for incidental      section 1.274–5T(c) if—
tice. For example, if an employee trav-          expenses computed under section 4.05 of            (1) The employee uses this revenue
els away from home from 9 a.m. one day           this revenue procedure is subject to limita-   procedure to substantiate to a payor the
to 5 p.m. the next day, a method of pro-         tion under section 274(n).                     amount of the employee’s travel expenses,
ration that results in an amount equal to            .06 No double reimbursement or de-         and
two times the federal M&IE rate is con-          duction. If a payor pays a per diem al-            (2) Within a reasonable period of time,
sistent with reasonable business practice        lowance in lieu of reimbursing actual lodg-    the employee also substantiates to the
(even though the Federal Travel Regula-          ing, meal, and incidental expenses, or meal    payor the elements of time, place, and
tions allow only one and a half times the        and incidental expenses only, under sec-       business purpose of the travel in accor-
federal M&IE rate).                              tion 4 or 5 of this revenue procedure, and     dance with section 1.274–5T(b)(2) and (c)
    .05 Application of the appropriate sec-      the amount is treated as paid under an         and section 1.274–5(c) (other than section
tion 274(n) limitation on meal expenses.         accountable plan, any additional payment       1.274–5(c)(2)(iii)(A)).
Except as provided in section 6.05(5) of         for those expenses is treated as paid un-          .02 An arrangement providing per diem
this revenue procedure, all or part of the       der a nonaccountable plan, is included in      allowances is treated as satisfying the re-
amount of an expense deemed substanti-           an employee’s gross income, is reported        quirement of section 1.62–2(f)(2) of re-
ated under this revenue procedure is sub-        as wages or other compensation on the          turning amounts in excess of expenses if
ject to the appropriate limitation under sec-    employee’s Form W–2, and is subject to         an employee is required to return within
tion 274(n) (see section 2.02 of this rev-       withholding and payment of employment          a reasonable period of time (as defined
enue procedure) on the deductibility of          taxes. Similarly, if an employee or self-      in section 1.62–2(g)) any portion of the
food and beverage expenses.                      employed individual computes the amount        allowance that relates to unsubstantiated
    (1) A taxpayer must treat the entire         allowable as a deduction for meal and inci-    travel days, even though the arrangement
amount computed for meal and incidental          dental expenses for travel away from home      does not require the employee to return
expenses under section 4.03 of this rev-         under section 4.03 or 4.04 of this revenue     the portion of the allowance that relates
enue procedure as an expense for food and        procedure, no other deduction is allowed       to substantiated travel days and that ex-
beverages.                                       to the employee or self-employed individ-      ceeds the amount of the employee’s ex-
    (2) If a per diem allowance is paid for      ual for those expenses. For example, an        penses deemed substantiated. For exam-
meal and incidental expenses only, a payor       employee receives a per diem allowance         ple, a payor provides an employee an ad-
must treat an amount equal to the lesser of      from a payor for meal and incidental ex-       vance per diem allowance for meal and in-
the allowance or the federal M&IE rate for       penses incurred while traveling away from      cidental expenses of $250, based on an an-
the locality of travel for each day or partial   home and the amount is treated as paid un-     ticipated 5 days of business travel at $50
day (see section 6.04 of this revenue pro-       der an accountable plan. During that trip,     per day to a locality for which the fed-
cedure) as an expense for food and bever-        the employee pays for dinner for the em-       eral M&IE rate is $46, and the employee
ages.                                            ployee and two business associates. The        substantiates 3 full days of business travel.
    (3) If a per diem allowance is paid for      payor reimburses as a business entertain-      The requirement to return excess amounts
lodging, meal, and incidental expenses for       ment meal expense the meal expense for         is treated as satisfied if the employee is re-
each calendar day or partial day an em-          the employee and the two business asso-        quired to return within a reasonable period
ployee is away from home at a rate equal         ciates. Because the payor also pays the        of time (as defined in section 1.62–2(g))
to or in excess of the federal per diem rate     employee a per diem allowance for meal         the portion of the allowance that is attribut-
for the locality of travel, a payor must treat   and incidental expenses, the amount paid       able to the 2 unsubstantiated days of travel
an amount equal to the federal M&IE rate         for the employee’s portion of the business     ($100), even though the employee is not
for the locality of travel for each calendar     entertainment meal expense is treated as       required to return the portion of the al-
day or partial day as an expense for food        paid under a nonaccountable plan, is re-       lowance ($12) that exceeds the amount of
or beverages.                                    ported as wages or other compensation on       the employee’s expenses deemed substan-
    (4) If a per diem allowance is paid for      the employee’s Form W–2, and is subject        tiated under section 4.02 of this revenue
lodging, meal, and incidental expenses for       to withholding and payment of employ-          procedure ($138) for the 3 substantiated
each calendar day or partial day an em-          ment taxes.                                    days of travel. However, the $12 excess
ployee is away from home at a rate less              .07 Related parties. Sections 4.01 and     portion of the allowance is treated as paid
than the federal per diem rate for the lo-       5 of this revenue procedure do not apply if    under a nonaccountable plan as discussed
cality of travel, a payor must:                  a payor and an employee are related within     in section 7.04 of this revenue procedure.
    (a) Treat an amount equal to the federal     the meaning of section 267(b), but for this        .03 An employee is not required to in-
M&IE rate for the locality of travel for         purpose the percentage of ownership inter-     clude in gross income the portion of a per
each calendar day or partial day or, if less,    est referred to in section 267(b)(2) is 10     diem allowance received from a payor that
                                                 percent.                                       is less than or equal to the amount deemed


2011–42 I.R.B.                                                     525                                             October 17, 2011
substantiated under the rules provided in        claiming a deduction that is equal to or less   plan and is subject to withholding and pay-
section 4 or 5 of this revenue procedure         than the amount computed under section          ment of employment taxes. See section
if the employee substantiates the business       4.03 of this revenue procedure minus the        1.62–2(h)(2)(i)(B).
travel expenses covered by the per diem al-      amount deemed substantiated under sec-             .02 In the case of a per diem allowance
lowance in accordance with section 7.01          tions 4.02 and 7.01 of this revenue proce-      paid as a reimbursement, the excess de-
of this revenue procedure. See section           dure. The itemized deduction is subject to      scribed in section 8.01 of this revenue pro-
1.274–5T(f)(2)(i). If the remaining re-          the appropriate limitation (see section 2.02    cedure is subject to withholding and pay-
quirements for an accountable plan pro-          of this revenue procedure) on meal and en-      ment of employment taxes in the payroll
vided in section 1.62–2 are satisfied, that      tertainment expenses in section 274(n) and      period in which a payor reimburses the ex-
portion of the allowance is treated as paid      the 2-percent floor on miscellaneous item-      penses for the days of travel substantiated.
under an accountable plan, is not reported       ized deductions in section 67.                  See section 1.62–2(h)(2)(i)(B)(2).
as wages or other compensation on the em-            .06 An employee who pays or incurs             .03 In the case of a per diem allowance
ployee’s Form W–2, and is exempt from            meal expenses and does not receive a per        paid as an advance, the excess described
the withholding and payment of employ-           diem allowance for meal and incidental ex-      in section 8.01 of this revenue procedure
ment taxes. See section 1.62–2(c)(2) and         penses may deduct an amount computed            is subject to withholding and payment of
(c)(4).                                          under section 4.03 of this revenue proce-       employment taxes no later than the first
    .04 An employee is required to in-           dure only as an itemized deduction. This        payroll period following the payroll period
clude in gross income only the portion of        itemized deduction is subject to the ap-        in which the days of travel for which the
the per diem allowance received from a           propriate limitation on meal and entertain-     advance was paid are substantiated. See
payor that exceeds the amount deemed             ment expenses in section 274(n) and the         section 1.62–2(h)(2)(i)(B)(3). If an em-
substantiated under the rules provided in        2-percent floor on miscellaneous itemized       ployee does not substantiate some or all
section 4 or 5 of this revenue procedure         deductions in section 67.                       of the days of travel for which the ad-
if the employee substantiates the business           .07 An employee who does not pay or         vance was paid within a reasonable pe-
travel expenses covered by the per diem          incur amounts for meal expenses and does        riod of time or does not return the por-
allowance in accordance with section 7.01        not receive a per diem allowance for in-        tion of the allowance that relates to those
of this revenue procedure. See section           cidental expenses may deduct an amount          days within a reasonable period of time,
1.274–5T(f)(2)(ii). In addition, the excess      computed under section 4.05 of this rev-        the portion of the allowance that relates
portion of the allowance is treated as paid      enue procedure only as an itemized deduc-       to those days is subject to withholding
under a nonaccountable plan, is reported         tion. This itemized deduction is subject to     and payment of employment taxes no later
as wages or other compensation on the            the 2-percent floor on miscellaneous item-      than the first payroll period following the
employee’s Form W–2, and is subject to           ized deductions in section 67.                  end of the reasonable period. See section
withholding and payment of employment                .08 A self-employed individual who          1.62–2(h)(2)(i)(A).
taxes. See section 1.62–2(c)(3)(ii), (c)(5),     pays or incurs meal expenses for a cal-            .04 In the case of a per diem allowance
and (h)(2)(i)(B).                                endar day or partial day of travel away         only for meal and incidental expenses for
    .05 If the amount of the expenses that is    from home may deduct an amount com-             travel away from home paid to an em-
deemed substantiated under the rules pro-        puted under section 4.03 of this revenue        ployee in the transportation industry by a
vided in section 4.01, 4.02, or 5 of this rev-   procedure in determining adjusted gross         payor that uses the rule in section 4.04(4)
enue procedure is less than the amount of        income under section 62(a)(1), subject          of this revenue procedure, the excess of
an employee’s business expenses for travel       to the appropriate limitation on meal and       the per diem allowance paid for the pe-
away from home, an employee may claim            entertainment expenses in section 274(n).       riod over the amount deemed substantiated
an itemized deduction for the amount by              .09 A self-employed individual who          for the period under section 4.02 of this
which the business travel expenses exceed        does not pay or incur meal expenses for a       revenue procedure (after applying section
the amount that is deemed substantiated,         calendar day or partial day of travel away      4.04(4) of this revenue procedure), is sub-
provided the employee substantiates all the      from home may deduct an amount com-             ject to withholding and payment of em-
business travel expenses (not just the ex-       puted under section 4.05 of this revenue        ployment taxes no later than the first pay-
cess over the federal per diem rate), in-        procedure in determining adjusted gross         roll period following the payroll period in
cludes on Form 2106, “Employee Business          income under section 62(a)(1).                  which the excess is computed. See section
Expenses,” the deemed substantiated por-                                                         1.62–2(h)(2)(i)(B)(4).
tion of the per diem allowance received          SECTION 8. WITHHOLDING AND                         .05 For example, an employer pays an
from the payor, and includes in gross in-        PAYMENT OF EMPLOYMENT TAXES                     employee a per diem allowance under an
come the portion (if any) of the per diem                                                        arrangement that otherwise meets the re-
allowance received from the payor that ex-          .01 The portion of a per diem al-            quirements of an accountable plan to cover
ceeds the amount deemed substantiated.           lowance, if any, that relates to the days       business expenses for meals and lodging
See section 1.274–5T(f)(2)(iii). However,        of business travel substantiated and that       for travel away from home at a rate of 120
for purposes of claiming this itemized de-       exceeds the amount deemed substanti-            percent of the federal per diem rate for
duction for meal and incidental expenses,        ated for those days under section 4.01,         the localities to which the employee trav-
substantiation of the amount of the ex-          4.02, or 5 of this revenue procedure is         els. The employer does not require the em-
penses is not required if the employee is        treated as paid under a nonaccountable          ployee to return the 20 percent by which


October 17, 2011                                                    526                                                 2011–42 I.R.B.
the reimbursement for those expenses ex-      SECTION 10. EFFECT ON OTHER                             Section 20.2053–1(d)(5)(i) provides in
ceeds the federal per diem rate. The em-      DOCUMENTS                                           part that a protective claim for refund may
ployee substantiates 6 days of travel away                                                        be filed at any time before the expira-
from home: 2 days in a locality where the         Rev. Proc. 2010–39 is modified and              tion of the period of limitation prescribed
federal per diem rate is $150 and 4 days      amplified and, as modified and amplified,           in section 6511(a) to preserve the estate’s
in a locality where the federal per diem      is superseded.                                      right to claim a refund in the case of a
rate is $130. The employer reimburses                                                             claim or expense that might not be paid
the employee $984 for the 6 days of travel    DRAFTING INFORMATION                                or might not otherwise meet the require-
away from home (2 x (120% x $150) + 4 x                                                           ments of deductibility under section 2053
(120% x $130)), and does not require the          The principal author of this revenue            and the corresponding regulations until af-
employee to return the excess payment of      procedure is Eric D. Brauer of the Office           ter the expiration of the period of limita-
$164 (2 days x $30 ($180-$150) + 4 days       of Associate Chief Counsel (Income Tax              tion for filing a claim for refund. Such a
x $26 ($156-$130)). For the payroll pe-       & Accounting). For further information              claim for refund is referred to herein as
riod in which the employer reimburses the     regarding this revenue procedure, con-              a “section 2053 protective claim for re-
expenses, the employer must withhold and      tact Mr. Brauer at (202) 622–4970 (not a            fund.” Section 20.2053–1(d)(5)(i) further
pay employment taxes on $164. See sec-        toll-free call) or the individual identified        provides that a protective claim must iden-
tion 8.02 of this revenue procedure.          in the most recent annual per diem notice.          tify the outstanding claim or expense that
   .06 All payments to an employee under                                                          would have been deductible under section
a per diem allowance arrangement are          26 CFR 601.105. Examination of returns and claims   2053(a) or (b) if such item already had
treated as paid under a nonaccountable        for refund, credit or abatement; determination of   been paid, and must describe the reasons
plan if the reimbursement arrangement         correct tax liability.                              and contingencies delaying the actual pay-
                                              (Also Part I, §§ 2053, 6402; 20.2053–1;
evidences a pattern of abuse. An arrange-                                                         ment of the claim or expense. When the
                                              301.6402–2.)
ment evidences a pattern of abuse if, for                                                         contingencies delaying actual payment are
example, it has no process to determine       Rev. Proc. 2011–48                                  resolved, § 20.2053–1(d)(5)(i) requires the
when an allowance exceeds the amount                                                              fiduciary acting on behalf of the estate
that may be deemed substantiated and the                                                          to notify the Service within a reasonable
arrangement routinely pays allowances in      SECTION 1. PURPOSE                                  period that the contingency has been re-
excess of the amount that may be deemed                                                           solved and that the amount deductible un-
substantiated without requiring actual sub-      This revenue procedure provides guid-            der § 20.2053–1 has been established. A
stantiation or repayment of the excess        ance related to the filing and subsequent           deduction will be allowed to the extent the
amount, or treating the excess allowances     resolution of a protective claim for refund         claim or expense that was the subject of the
as wages for employment tax purposes.         of estate tax that is based on a deduction          protective claim satisfies the requirements
See section 62(c), section 1.62–2(k), and     for a claim or expense under section 2053           for deductibility under § 2053 and the cor-
Rev. Rul. 2006–56, 2006–2 C.B. 874.           of the Internal Revenue Code (Code) and             responding regulations, subject to any ap-
Thus, these payments are included in the      the corresponding regulations.                      plicable limitations in § 20.2053–1.
employee’s gross income, are reported                                                                 Commentators responding to proposed
as wages or other compensation on the         SECTION 2. BACKGROUND                               regulations issued under section 2053 of
employee’s Form W–2, and are subject to                                                           the Code (published in the Federal Reg-
withholding and payment of employment            Final regulations (T.D. 9468, 2009–44            ister on April 23, 2007 (72 FR 20080))
taxes. See sections 1.62–2(c)(3), (c)(5),     I.R.B. 570) under section 2053 of the Code          requested detailed guidance on protec-
and (h)(2).                                   were published in the Federal Register              tive claim for refund procedures. Section
                                              on October 20, 2009 (74 FR 53652) to                20.2053–1(d)(5)(i) provides that a pro-
SECTION 9. EFFECTIVE DATE                     provide guidance in determining the de-             tective claim for refund shall be made in
                                              ductible amount of a claim against a dece-          accordance with guidance that may be
   This revenue procedure is effective for    dent’s estate under section 2053. The fi-           provided from time to time by publica-
per diem allowances for lodging, meal and     nal regulations provide, with certain ex-           tion in the Internal Revenue Bulletin (see
incidental expenses, or for meal and inci-    ceptions, that the amount deductible for            § 601.601(d)(2)(ii)(b)).
dental expenses only that are paid to an      a section 2053 claim or expense is lim-
employee on or after October 1, 2011, for     ited to the amount actually paid in settle-         SECTION 3. SCOPE
travel away from home on or after Octo-       ment or satisfaction of that claim or ex-
ber 1, 2011. For purposes of computing the    pense (subject to any applicable limita-               This revenue procedure applies only to
amount allowable as a deduction for travel    tions in § 20.2053–1). For amounts that             section 2053 protective claims for refund.
away from home, this revenue procedure is     are not paid or otherwise deductible at the         Section 4 of this revenue procedure sets
effective for meal and incidental expenses    time of filing the United States Estate (and        forth procedures for filing a section 2053
or for incidental expenses only paid or in-   Generation-Skipping Transfer) Tax Return            protective claim for refund, and Section 5
curred on or after October 1, 2011.           (Form 706), § 20.2053–1(d)(5)(i) of the             of this revenue procedure sets forth proce-
                                              Estate Tax Regulations permits the filing           dures for notifying the Service that a sec-
                                              of a protective claim for refund.                   tion 2053 protective claim for refund is


2011–42 I.R.B.                                                    527                                               October 17, 2011
ready for consideration. A taxpayer that        cedure for satisfying these requirements        for refund must be filed using the method
files a protective claim for refund and pro-    with respect to a section 2053 protective       described in paragraph (b). If a taxpayer
vides notification for consideration to the     claim for refund requires that the protec-      has made a filing prior to the issuance of
Service in accordance with the procedures       tive claim for refund identify and describe     this revenue procedure in an effort to make
set forth in this revenue procedure will sat-   in detail the claim or expense for which a      a protective claim for refund under section
isfy the generally applicable procedural re-    deduction may be claimed under section          2053, and if the taxpayer has any concern
quirements for claiming a refund as well        2053 of the Code and otherwise comply           as to whether the prior filing meets the re-
as the procedural requirements specific to      with the procedures in this section.            quirements of this revenue procedure, or if
section 2053 for claiming a refund. A tax-          .03 Who can file a protective claim         the taxpayer wants the benefit of section
payer that chooses not to follow or fails       for refund. A protective claim for refund       4.06 of this revenue procedure, the tax-
to comply with the procedures set forth in      must be accompanied by documentary              payer may replace the initial filing with a
this revenue procedure for a section 2053       evidence, including certified copies of the     timely filing in accordance with this sec-
protective claim for refund is subject to       letters testamentary, letters of administra-    tion 4.04.
all of the generally applicable provisions      tion, or other similar evidence, to establish       (a) Schedule PC with Form 706. A sec-
governing claims for refund as well as to       the legal authority of a fiduciary or other     tion 2053 protective claim for refund may
the specific section 2053 provisions re-        person to file and pursue a protective          be filed by attaching one or more com-
lating to claims for refund, and will not       claim for refund on behalf of the estate        pleted Schedules PC to the estate’s Form
have the benefit of the limited review de-      of a decedent. See § 301.6402–2(e) of           706 at the time of filing that return. Sched-
scribed in Notice 2009–84, 2009–44 I.R.B.       the Procedure and Administration Regu-          ule PC is expected to be first available as
592, and section 5.01 of this revenue pro-      lations. In the estate tax context, proof of    part of the 2012 Form 706. The Form 706
cedure. See §§ 6402, 6511, and 6514;            legal authority typically is established at     should indicate that one or more Sched-
§ 20.2053–1(d)(5).                              the time of filing the Federal Estate (and      ules PC are being filed with the return in
                                                Generation-Skipping Transfer) Tax Return        order to facilitate the proper processing of
SECTION 4. PROCEDURE                            (Form 706). Accordingly, if the fiduciary       Schedule(s) PC, in accordance with the in-
— FILING A SECTION 2053                         or other person filing the protective claim     structions for that schedule.
PROTECTIVE CLAIM FOR REFUND                     for refund on behalf of a decedent’s estate         (b) Form 843. A section 2053 protec-
                                                is the same fiduciary or other person who       tive claim for refund may be filed by fil-
    .01 Time period for filing a protective     filed the decedent’s Form 706, the protec-      ing a Form 843 where the Form 706 for
claim for refund. A section 2053 protec-        tive claim for refund need only include a       the decedent’s estate was previously filed
tive claim for refund must be filed before      statement affirming that the fiduciary or       (currently, at the Cincinnati campus), with
the expiration of the period of limitation      other person filing the protective claim for    the notation “Protective Claim for Refund
prescribed in section 6511(a) for the filing    refund also filed the Form 706 and that         under Section 2053” entered across the top
of a claim for refund. Section 6511(a) pro-     such fiduciary or other person is still act-    of page 1 of the form. For filing a sec-
vides, in relevant part, that a claim for re-   ing in a representative capacity on behalf      tion 2053 protective claim for refund, the
fund shall be filed by the taxpayer within      of the estate. If the fiduciary or other per-   address for the “Cincinnati campus” is:
3 years from the time the return was filed      son filing the protective claim for refund      Department of Treasury, Internal Revenue
or 2 years from the time the tax was paid,      on behalf of a decedent’s estate is not the     Service Center, 300 Madison Avenue, Stop
whichever of such periods expires later,        same fiduciary or other person who filed        823G, Covington, KY 41011, or as oth-
or if no return was filed by the taxpayer,      the decedent’s Form 706, the protective         erwise specified in the instructions to the
within 2 years from the time the tax was        claim for refund must be accompanied            form.
paid. Only if a protective claim for refund     by the necessary documentary evidence               (2) Separate protective claim for refund
was timely filed may the Internal Revenue       establishing proof of legal authority. See      for each section 2053 claim or expense. To
Service (Service) refund overpaid estate        section 5.04 of this revenue procedure for      be properly filed under this revenue pro-
taxes in those situations where the amount      guidance on the authority of a transferee       cedure, a separate section 2053 protective
deductible under § 20.2053–1 is not es-         or other person to represent the estate in      claim for refund must be filed as described
tablished until after the expiration of the     pursuing a section 2053 claim for refund.       in section 4.04(1) of this revenue proce-
period of limitation. See §§ 6511(b) and            .04 Manner of filing a section 2053 pro-    dure for each claim or expense for which
6514(a).                                        tective claim for refund.                       a deduction may be claimed in the future
    .02 Generally applicable regulatory re-         (1) Methods of filing. To be properly       under section 2053 (section 2053 claim or
quirements for a claim for refund. Under        filed under this revenue procedure, sec-        expense). Specifically, a Form 706 may in-
§ 301.6402–2 of the Procedure and Ad-           tion 2053 protective claims for refund that     clude more than one Schedule PC. In ad-
ministration Regulations, a claim for re-       are filed for decedents dying on or after       dition, a section 2053 protective claim for
fund must set forth, in a written decla-        January 1, 2012, must be filed using any        refund must not include any claim for re-
ration that is executed under penalties of      method described in paragraph (a) or (b).       fund not based on a deduction under sec-
perjury, each ground upon which a refund        For those section 2053 protective claims        tion 2053. Each section 2053 protective
is claimed and facts sufficient to apprise      for refund filed for decedents dying after      claim for refund should indicate whether
the Commissioner of the exact basis of the      October 19, 2009, and before January 1,         other protective claims for refund are be-
claim. The method under this revenue pro-       2012, the section 2053 protective claims


October 17, 2011                                                   528                                                 2011–42 I.R.B.
ing filed or were previously filed and the      and the amount of the deduction is subject           .06 Period after filing the section 2053
approximate date on which each was filed.       to any applicable limitations.                   protective claim for refund.
    .05 Identification of the claim or ex-          (3) Claims against the estate involv-            (1) Initial processing of section 2053
pense.                                          ing contested matters. To satisfy the re-        claim for refund by the Service. Although
    (1) General rule. In order for a sec-       quirements of this section, each section         the Service generally will not engage in a
tion 2053 protective claim for refund to        2053 protective claim for refund involving       substantive review of a section 2053 pro-
be properly filed under this revenue pro-       a contested claim against the estate must        tective claim for refund until the amount
cedure, the outstanding claim or expense        notify the Service of the contested mat-         of the section 2053 claim or expense has
that forms the basis of a potential deduc-      ter and the potential liability of the estate.   been established, when a section 2053 pro-
tion under section 2053 must be clearly         Identification of all of the following facts,    tective claim for refund is received by the
identified so that the Service has notice of    as applicable, generally will be sufficient      Service, the Service may reject the claim
each claim or expense for which a deduc-        to appropriately identify a claim against        if it appears that one or more preliminary
tion under section 2053 will be claimed. In     the estate involving a contested matter: the     procedural requirements for a valid claim
addition, as provided in § 20.2053–1(d)(5),     name or names of the claimant(s), the ba-        for refund have not been satisfied. For
proper identification of the claim or ex-       sis of the claim or other description of the     example, the Service may reject a claim
pense must include an explanation of the        subject matter of the contested matter, the      that (a) is not timely filed by a fiduciary
reasons and contingencies delaying the ac-      extent or amount of the liability claimed,       or other person having legal authority to
tual payment to be made in satisfaction of      and a brief statement reporting the status of    file a claim for refund on behalf of the es-
the claim or expense. Finally, except as        the contested matter at the time the protec-     tate, (b) does not include a properly exe-
provided in section 4.05(2) of this revenue     tive claim for refund is filed with the Ser-     cuted penalty of perjury statement, or (c)
procedure, claims or expenses related to        vice. For a contested matter that is being       does not adequately describe a claim or ex-
but separate from a particular section 2053     litigated, attaching a copy of the relevant      pense that, if substantiated at a later time,
claim or expense must be separately iden-       pleadings and making reference thereto on        would support a deduction under section
tified. The use of vague or broad language      the section 2053 protective claim for re-        2053. For those section 2053 protective
that does not describe a specific claim or      fund generally will be sufficient to identify    claims for refund that are not initially re-
expense that would be deductible under          appropriately the claim.                         jected by the Service, the Service will ac-
section 2053 does not provide clear identi-         (4) Claims or expenses for which de-         knowledge in written correspondence that
fication of a section 2053 claim or expense     ductions under § 20.2053–1(d)(4) or              the claim has been received. Note, how-
for purposes of this revenue procedure.         § 20.2053–4(b) or (c) are claimed on Form        ever, that the Service’s written acknowl-
    (2) Related ancillary expenses. A sec-      706. Subject to applicable limitations, an       edgement that the claim has been received
tion 2053 claim or expense that has been        estate may preserve the estate’s right to        does not constitute a determination that the
adequately identified in a protective claim     claim a refund based on the amount of            preliminary procedural requirements for a
for refund (in accordance with this sec-        any section 2053 claim or expense that           valid protective claim for refund have been
tion) will be deemed to include, without        is in addition to the amount claimed as a        satisfied. Accordingly, upon consideration
the need for any further identification, cer-   deduction for that claim or expense under        of the claim once the amount of the sec-
tain related and ancillary expenses relat-      § 20.2053–1(d)(4) or § 20.2053–4(b) or           tion 2053 claim or expense has been estab-
ing to resolving, defending, or satisfying      (c) on Form 706, if the additional amount        lished, the Service nevertheless may deter-
the identified claim or expense as well as      might not be paid or might not meet the          mine that one or more procedural require-
certain expenses relating to pursuing the       requirements of § 20.2053–1(d)(4) until          ments are not satisfied and the claim for
claim for refund for the identified claim       after the expiration of the period of limita-    refund then may be denied.
or expense. For instance, attorneys’ fees,      tion prescribed in section 6511(a) for the           (2) Contacting the Service when no
court costs, appraisal fees, and accounting     filing of a claim for refund. To be prop-        communication received.          Although a
fees, may be considered as part of the claim    erly filed under this revenue procedure, a       timely-filed section 2053 protective claim
for refund to which it relates, without the     protective claim for refund that is based        for refund will be timely filed even if the
need for separate identification of those re-   upon the potential deductibility of such         Service does not acknowledge its receipt
lated administration or litigation expenses.    an additional amount must satisfy all of         and/or process the protective claim, the
Note, however, that although no separate        the procedural, identification, and other        fiduciary or other person filing the form
identification for certain related and ancil-   requirements of this revenue procedure,          on behalf of the estate promptly should
lary expenses is required under the proce-      as applicable. In addition, however, the         contact the Service at (866) 699–4083 (or
dures in this revenue procedure, this proce-    estate must disclose the amount of the           other appropriate number) to inquire into
dure shall not be construed to concede that     deduction already claimed on Form 706            the Service’s receipt and processing of
the expenses are deductible under section       for the subject claim or expense and must        that protective claim for refund if the es-
2053 in all events. A claim or expense that     reference the regulatory provision under         tate does not receive from the Service the
is the subject of a section 2053 claim for      which the deduction was claimed in or-           written acknowledgement of receipt de-
refund must meet the substantive require-       der to identify properly the section 2053        scribed in section 4.06(1) of this revenue
ments of section 2053 and the correspond-       claim or expense on a protective claim for       procedure within 180 days of filing a sec-
ing regulations in order to be deductible       refund.                                          tion 2053 protective claim for refund on
                                                                                                 a Schedule PC attached to the Form 706,


2011–42 I.R.B.                                                     529                                              October 17, 2011
or within 60 days of filing a section 2053        tunity to cure the inadequate identification     executed under penalty of perjury, within
protective claim for refund on a Form 843.        of the section 2053 protective claim for re-     the time period described in section 5.02
A certified mail receipt or other evidence        fund after the expiration of the period of       of this revenue procedure, by the fiduciary
of delivery to the Service is not sufficient      limitation prescribed in section 6511(a).        or other person having legal authority to
to ensure and confirm the Service’s receipt           (4) Effect of section 2053 protective        file and pursue the claim for refund. The
and processing of the protective claim for        claim for refund on examination of Form          notification generally should describe the
purposes of this revenue procedure. See           706. When a fiduciary or other person            relevant facts that support, and provide ev-
section 4.06(3) of this revenue procedure         having authority to file a Form 706 on           idence to substantiate, a deduction under
regarding the possible consequences of            behalf of an estate also files a section 2053    section 2053 and should claim a refund
not contacting the Service within 30 days         protective claim for refund on behalf of         of the overpayment of tax based on the
after the expiration of these periods.            the estate, generally the Service will not       deduction under section 2053 and the re-
    (3) Opportunity to cure an inadequately       suspend the substantive review and exam-         sulting recomputation of the estate tax
identified section 2053 protective claim for      ination of the Form 706 and will not delay       liability.
refund. A section 2053 protective claim           issuing a closing letter on the basis that a         .02 Time period for providing notifica-
for refund must satisfy the timely-filing re-     protective claim for refund has been filed       tion for consideration of a section 2053
quirement set forth in section 4.01 of this       in that estate. Instead, the Form 706 will       protective claim for refund.
revenue procedure. The failure of a section       be processed and examined by the Service             (1) General rule.                 Under
2053 protective claim for refund to sat-          in accordance with the regular processing        § 20.2053–1(d)(5)(i), a fiduciary or other
isfy certain other preliminary procedural         and examination procedures followed for          person having legal authority to pursue
requirements for a valid claim for refund,        estate tax returns.                              the claim for refund must notify the
including the penalty of perjury statement                                                         Service within a reasonable period that
requirement set forth in section 4.02 of          SECTION 5. PROCEDURE                             the reason or contingency delaying the
this revenue procedure, may be cured be-          — NOTIFICATION FOR                               actual payment of the section 2053 claim
fore the expiration of the period of limita-      CONSIDERATION OF A SECTION                       or expense has been resolved and/or that
tion prescribed in section 6511(a). How-          2053 PROTECTIVE CLAIM FOR                        the amount deductible under § 20.2053–1
ever, the failure of a section 2053 protec-       REFUND                                           has been established. For purposes of
tive claim for refund to satisfy the identifi-                                                     this revenue procedure, this requirement
cation requirement set forth in section 4.05          .01 In general. The Service will re-         is satisfied when the fiduciary or other
of this revenue procedure may be cured, as        fund overpaid estate tax if the Service          person having legal authority to pursue
further described below, after the expira-        determines there is an overpayment of tax        the claim for refund on behalf of the
tion of the period of limitation prescribed       in connection with a timely-filed section        estate notifies the Service within 90 days
in section 6511(a), as long as the section        2053 protective claim for refund, even           after the date the claim or expense is paid
2053 protective claim for refund as orig-         though the claim or expense that is the          or 90 days after the date on which the
inally filed was timely and properly exe-         subject of the claim for refund does not be-     amount of the claim or expense becomes
cuted under the penalty of perjury. To cure       come deductible under section 2053 until         certain and is no longer subject to any
the section 2053 protective claim for re-         after the expiration of the period of limita-    contingency, whichever occurs later.
fund, the fiduciary or other person must          tion prescribed in section 6511(a) for the       When the notification to the Service by
adequately identify the section 2053 claim        filing of a claim for credit or refund. In ac-   the fiduciary or other person occurs after
or expense in accordance with section 4.05        cordance with Notice 2009–84, 2009–44            the expiration of that 90-day period, the
of this revenue procedure by submitting a         I.R.B. 592, in determining whether there         fiduciary or other person should provide
corrected (and signed) protective claim for       is an overpayment of tax based on a              an explanation sufficient to establish that
refund before the expiration of the period        timely-filed section 2053 protective claim       there is reasonable cause for the delay.
of limitation prescribed in section 6511(a)       for refund that becomes ready for consid-        The methods by which a fiduciary or other
or within 45 days after the date of the Ser-      eration after the expiration of the period       person having legal authority to file and
vice’s notice, if any, to the fiduciary or        of limitation on assessment prescribed in        pursue the claim for refund must notify the
other person of the defect, whichever oc-         section 6501, generally the Service will         Service under this revenue procedure are
curs later. If the Service fails to provide the   limit its review of the Form 706 to the          described in section 5.03 of this revenue
written acknowledgement of receipt de-            deduction under section 2053 that was            procedure.
scribed in section 4.06(1) of this revenue        the subject of the protective claim. When            (2) Multiple or recurring payments.
procedure and the fiduciary or other per-         the section 2053 claim or expense that           For a section 2053 claim or expense in-
son who filed the section 2053 protective         was the subject of the timely-filed section      volving multiple payments or a series
claim for refund fails to contact the Service     2053 protective claim for refund meets           of recurring payments, the payment of
within 30 days after the applicable time          the requirements for deductibility under         which is necessary to claim a deduction
period described in section 4.06(2) of this       § 20.2053–1, a taxpayer must provide a           based on that claim or expense (such
revenue procedure to confirm the Service’s        notification to the Service that the claim       as a contingent obligation described in
receipt and processing of that section 2053       for refund is ready for consideration as         § 20.2053–4(d)(6)(ii) of the Estate Tax
protective claim for refund, the fiduciary        described in section 5.03 of this revenue        Regulations), the 90-day period described
or other person will not have the oppor-          procedure, and such notification must be         in section 5.02(1) of this revenue proce-


October 17, 2011                                                     530                                                  2011–42 I.R.B.
dure will begin with regard to the entire       section 2053 claim or expense that has         der § 20.2053–1 is established and the sec-
amount of the claim or expense on the           become deductible. The notation “Sup-          tion 2053 protective claim for refund is
date of the last and final payment. Thus,       plemental Information — Notification for       ready for consideration, one or more per-
the fiduciary or other person having legal      Consideration of Section 2053 Protective       sons that are transferees of the probate or
authority to file and pursue the claim for      Claim(s) for Refund filed on [DATE OF          nonprobate estate may establish under ap-
refund may notify the Service within 90         PROTECTIVE CLAIM]” must be entered             plicable local law that person’s legal au-
days after the date the liability for the       across the top of page 1 of Form 706. In       thority to pursue the claim for refund on
claim or expense is fully satisfied, regard-    addition, a copy of the originally-filed       behalf of the estate. For purposes of this
less of the amount of time over which           section 2053 protective claim(s) for refund    provision, any transferee or other person
the earlier, partial payments were made.        (filed as described in section 4.04(1) of      having established legal authority to pur-
Notwithstanding the preceding sentence,         this revenue procedure) that identifies the    sue the claim for refund shall be deemed
however, the fiduciary or other person          section 2053 claims or expenses that now       to have the authority to pursue the claim
having legal authority to file and pursue       have become deductible must be attached        for refund on behalf of all such transferees
the claim for refund may notify the Ser-        to the Form 706.                               or other persons. The transferee or other
vice in accordance with section 5.02(1) of          (b) Form 843. A notification for consid-   person must attach to the notification for
this revenue procedure, but not more often      eration of a section 2053 protective claim     consideration of a section 2053 protective
than annually (except in the case of a final    for refund may be filed by filing, at the      claim for refund (filed as described in sec-
payment) of all payments made since the         same location where the section 2053 pro-      tion 5.03 of this revenue procedure) doc-
last notification for consideration, if any,    tective claim for refund was previously        umentary evidence that substantiates that
in partial satisfaction of a liability for a    filed, one or more updated (and signed)        person’s assertion of authority to pursue
section 2053 claim or expense, and may          Forms 843 with the notation “Notification      the claim. Depending on applicable local
thereby claim a partial refund attributable     for Consideration of Section 2053 Protec-      law, the evidence requirement may be sat-
to such payment(s).                             tive Claim for Refund filed on [DATE OF        isfied by providing one or more of the fol-
    .03 Manner of notifying the Service for     PROTECTIVE CLAIM]” entered across              lowing: a certified copy of the final ac-
consideration of a section 2053 claim for       the top of page 1 of the form(s). A copy of    counting of the estate showing the source
refund.                                         the originally-filed section 2053 protective   of the initial tax payment; relevant testa-
    (1) Methods of filing. To meet the no-      claim(s) for refund (filed as described in     mentary instruments of the decedent such
tification requirements under this revenue      section 4.04(1) of this revenue procedure)     as a will or trust instrument; an affidavit
procedure, whether with regard to the en-       that identifies the section 2053 claims or     executed under penalties of perjury by the
tire claim or expense or to partial payments    expenses that now have become deductible       executor or other appropriate party confer-
as made, a notification for consideration       must be attached to the Form(s) 843.           ring the authority or the right to pursue the
of a section 2053 protective claim for re-          (2) Separate notifications for consider-   refund to one or more transferees or other
fund that is to be filed for a decedent dying   ation for each section 2053 claim or ex-       persons; and such other evidence as may
on or after January 1, 2012, must be filed      pense. To be properly filed under this rev-    be requested by the Service. The Service
using any method described in paragraph         enue procedure, a separate notification for    will pay the refund of tax to the person or
(a) or (b). For a notification for consid-      consideration of a section 2053 protective     individual who paid the tax, as required by
eration of a section 2053 protective claim      claim for refund must be filed as described    section 6402(a) and subject to regulations
for refund that is to be filed for a dece-      in section 5.03(1) of this revenue proce-      under that section.
dent dying after October 19, 2009, and          dure for each section 2053 claim or ex-            .05 Consequences of a section 2053
before January 1, 2012, a notification for      pense for which a section 2053 protective      claim for refund on the marital and char-
consideration of a section 2053 protective      claim for refund was filed. Specifically,      itable deduction. Because of the applica-
claim for refund must be filed using            an updated Form 706 may include more           tion of section 20.2053–1(d)(5)(ii), neither
the method described in paragraph (b).          than one updated Schedule PC. In addition,     the charitable deduction nor the marital
A notification for consideration of a           a notification for consideration of a sec-     deduction is reduced by the amount of any
section 2053 protective claim for refund        tion 2053 protective claim for refund must     claim or expense that may be the subject
additionally must meet the applicable           not include any claim not based on a de-       of a section 2053 protective claim for re-
requirements in section 5.01 and 5.02 of        duction under section 2053. Each notifi-       fund until the claim or expense has met
this revenue procedure.                         cation for consideration of a section 2053     the requirements for a deduction under
    (a) Supplemental Form 706. A notifi-        protective claim for refund should indicate    section 2053. The computation of the
cation for consideration of a section 2053      whether other notifications for considera-     amount to be refunded under section 2053,
protective claim for refund may be filed by     tion are being filed contemporaneously or      as required on Form 843 or a supplemental
filing, at the same location where the sec-     were previously filed and the approximate      Form 706, should identify any necessary
tion 2053 protective claim for refund was       date of each such filing.                      adjustment to the marital and charitable
previously filed, an updated (and signed)           .04 Authority of a transferee or other     deductions claimed by the estate, as well
Form 706, including each schedule af-           person to represent the estate in pursuit      as any other arithmetic adjustments that
fected by the allowance of the deduction(s)     of a claim for refund. If a fiduciary is       result from the allowance of the deduction.
whose amount has been established and           no longer acting on behalf of the estate
including an updated Schedule PC for each       at the time that the amount deductible un-


2011–42 I.R.B.                                                    531                                             October 17, 2011
SECTION 6. EFFECTIVE DATE                      that the relevant sections of the Code are   (Passthroughs & Special Industries). For
                                               applicable to the decedent’s estate.         further information regarding this revenue
    This revenue procedure is applicable                                                    procedure, contact Karlene M. Lesho at
with respect to protective claims for refund   SECTION 7. DRAFTING                          (202) 622–3090 (not a toll free call).
filed on behalf of estates of decedents dy-    INFORMATION
ing on or after October 20, 2009, the date
final regulations (T.D. 9468) under section       The principal author of this rev-
2053 were published in the Federal Reg-        enue procedure is Karlene M. Lesho of
ister (74 FR 53652), but only to the extent    the Office of Associate Chief Counsel




October 17, 2011                                                532                                               2011–42 I.R.B.
Part IV. Items of General Interest
Withdrawal of Notice of                       Washington, DC, or sent electroni-              published in the Federal Register (72 FR
Proposed Rulemaking; Notice                   cally via the Federal eRulemaking Por-          41243) on July 27, 2007. The proposed
of Proposed Rulemaking and                    tal at http://www.regulations.gov/ (IRS         regulations provide that a cost is fully
                                              REG–128224–06). The public hearing              deductible to the extent that the cost is
Notice of Public Hearing                      will be held in the IRS Auditorium,             unique to an estate or trust. If a cost is not
                                              Internal Revenue Building,         1111         unique to an estate or trust, such that an in-
Section 67 Limitations on                     Constitution Avenue, NW, Washington,            dividual could have incurred the expense,
Estates or Trusts                             DC.                                             then that cost is subject to the 2-percent
                                                                                              floor. For this purpose, the proposed regu-
REG–128224–06                                 FOR       FURTHER         INFORMATION           lations clarify that it is the type of product
                                              CONTACT: Concerning the proposed                or service provided to the estate or trust
AGENCY: Internal Revenue Service              regulations, Jennifer N. Keeney, (202)          in exchange for the cost, rather than the
(IRS), Treasury.                              622–3060; concerning submissions of             description of the cost of that product or
                                              comments, the hearing, or to be placed on       service, that is tested to determine the
ACTION: Withdrawal of notice of pro-
                                              the building access list to attend the hear-    uniqueness of the cost. The proposed reg-
posed rulemaking; notice of proposed rule-
                                              ing, Richard A. Hurst, (202) 622–7180           ulations also address costs subject to the
making and notice of public hearing
                                              (not toll-free numbers).                        2-percent floor that are included as part
SUMMARY: This document with-                                                                  of a comprehensive commission or fee
draws the notice of proposed rulemak-         SUPPLEMENTARY INFORMATION:                      paid to the trustee or executor (“Bundled
ing (REG–128224–06, 2007–2 C.B.                                                               Fiduciary Fee”).
                                              Background                                          Written comments were received in re-
551 [72 FR 41243]) that was published
in the Federal Register on July 27,                                                           sponse to the notice of proposed rulemak-
                                                 This document contains proposed reg-         ing. A public hearing was held on Novem-
2007, providing guidance on which
                                              ulations amending 26 CFR Part 1 under           ber 14, 2007, at which several commenta-
costs incurred by estates or trusts other
                                              section 67 of the Internal Revenue Code         tors offered comments on the notice of pro-
than grantor trusts (non-grantor trusts)
                                              (Code) by adding §1.67–4 regarding which        posed rulemaking.
are subject to the 2-percent floor for
                                              costs incurred by an estate or a non-grantor        On January 16, 2008, the Supreme
miscellaneous      itemized     deductions
                                              trust are subject to the 2-percent floor for    Court of the United States issued its de-
under section 67(a).       This document
                                              miscellaneous itemized deductions under         cision in Michael J. Knight, Trustee of
contains proposed regulations that provide
                                              section 67(a).                                  the William L. Rudkin Testamentary Trust
guidance on which costs incurred by
                                                 Section 67(a) of the Code provides           v. Commissioner, 552 U.S. 181, 128 S.
estates or trusts other than grantor trusts
                                              that, for an individual taxpayer, miscel-       Ct. 782 (2008), holding that fees paid to
(non-grantor trusts) are subject to the
                                              laneous itemized deductions are allowed         an investment advisor by a non-grantor
2-percent floor for miscellaneous itemized
                                              only to the extent that the aggregate of        trust or estate generally are subject to the
deductions under section 67(a).        The
                                              those deductions exceeds 2 percent of           2-percent floor for miscellaneous item-
regulations affect estates and non-grantor
                                              adjusted gross income. Section 67(b) ex-        ized deductions under section 67(a). The
trusts. This document also provides notice
                                              cludes certain itemized deductions from         Court reached this decision on a reading
of a public hearing on these proposed
                                              the definition of “miscellaneous itemized       of section 67(e) that differed from that in
regulations.
                                              deductions.” Section 67(e) provides that,       the proposed regulations. The Court held
DATES: Written and electronic comments        for purposes of section 67, the adjusted        that the proper reading of the language
must be received by December 7, 2011.         gross income of an estate or trust shall be     in section 67(e), which asks whether the
Outlines of topics to be discussed at the     computed in the same manner as in the           expense “would not have been incurred if
public hearing scheduled for December 19,     case of an individual. However, section         the property were not held in such trust or
2011 must be received by December 7,          67(e)(1) provides that the deductions for       estate,” requires an inquiry into whether
2011.                                         costs paid or incurred in connection with       a hypothetical individual who held the
                                              the administration of the estate or trust       same property outside of a trust “custom-
ADDRESSES: Send submissions to                that would not have been incurred if the        arily” or “commonly” would incur such
CC:PA:LPD:PR         (REG–128224–06),         property were not held in such estate or        expenses. Expenses that are “customarily”
Room 5203, Internal Revenue Service, PO       trust shall be treated as allowable in arriv-   or “commonly” incurred by individuals
Box 7604, Ben Franklin Station, Wash-         ing at adjusted gross income. Therefore,        are subject to the 2-percent floor.
ington, DC 20044. Submissions may be          deductions described in section 67(e)(1)            Following the Supreme Court’s deci-
hand-delivered Monday through Friday          are not subject to the 2-percent floor for      sion in Knight, the Internal Revenue Ser-
between the hours of 8 a.m. and 4 p.m.        miscellaneous itemized deductions under         vice (IRS) and the Treasury Department is-
to CC:PA:LPD:PR (REG–128224–06),              section 67(a).                                  sued Notice 2008–32, 2008–12 I.R.B. 593
Courier’s Desk, Internal Revenue Ser-            A notice of proposed rulemaking              (March 24, 2008) to provide interim guid-
vice, 1111 Constitution Avenue, NW,           (REG–128224–06, 2007–2 C.B. 551) was


2011–42 I.R.B.                                                   533                                             October 17, 2011
ance on the treatment of Bundled Fidu-         uncommon (or unusual, or unlikely) for          well as a specific description and rationale
ciary Fees. The notice provided that tax-      such a hypothetical individual” holding         for any such charges.
payers will not be required to determine       the same property to incur (emphasis in             Many of the comments received in re-
the portion of a Bundled Fiduciary Fee         original). In applying this interpretation of   sponse to Notice 2008–32 highlighted the
that is subject to the 2-percent floor un-     the statute to investment advisory fees in-     legislative intent of the provision imposing
der section 67 for any taxable year be-        curred by a trust, the Court held that such     the 2-percent floor for miscellaneous item-
ginning before January 1, 2008. In the         fees generally are not uncommonly in-           ized deductions. The commentators noted
notice, the IRS and the Treasury Depart-       curred by individual investors and thus are     that the intent was to simplify recordkeep-
ment reopened the comment period on the        subject to the 2-percent floor. The Court       ing, reduce taxpayer errors, ease admin-
proposed regulations with regard to possi-     noted, however, that it is conceivable “that    istrative burdens for the IRS, and reduce
ble factors on which to base safe harbors      a trust may have an unusual investment          taxpayer errors in distinguishing between
for the allocation of a Bundled Fiduciary      objective, or may require a specialized bal-    nondeductible personal expenditures and
Fee between costs subject to the 2-percent     ancing of the interests of various parties,     deductible miscellaneous itemized deduc-
floor and those exempt from the applica-       such that a reasonable comparison with          tions. The IRS and the Treasury Depart-
tion of that floor. Written comments were      individual investors would be improper.”        ment recognize the administrative diffi-
received in response to the notice. The        The Court went on to provide that, “in          culty of determining whether every type
IRS and the Treasury Department subse-         such a case, the incremental cost of expert     of cost incurred by a trust or estate is the
quently issued Notice 2008–116, 2008–52        advice beyond what would normally be            type of cost that would be incurred com-
I.R.B. 1372 (December 29, 2008) extend-        required for the ordinary taxpayer would        monly or customarily by individuals own-
ing the interim guidance provided in No-       not be subject to the 2-percent floor.” The     ing the same property. Therefore, the pro-
tice 2008–32 to taxable years that begin       Court held that the investment advisory         posed regulations provide simplified rules
before January 1, 2009, Notice 2010–32,        fees of the trust in Knight properly were       for the application of section 67(e).
2010–16 I.R.B. 594 (April 19, 2010) ex-        subject to the 2-percent floor, and that the        Several commentators questioned the
tending the interim guidance provided in       trustee did not assert any such unusual         authority of the IRS and the Treasury De-
Notice 2008–116 and Notice 2008–32 to          facts that would have brought this cost         partment to require the unbundling of fidu-
taxable years that begin before January 1,     within the exception.                           ciary commissions. However, the Knight
2010, and Notice 2011–37, 2011–20 I.R.B.           These proposed regulations reflect the      decision posited just such an unbundling in
785 (May 16, 2011) extending the existing      reasoning and holding in Knight and pro-        the case of investment advisory costs ren-
interim guidance to taxable years that be-     vide guidance relating to the limited por-      dered for certain services, the cost of which
gin before the publication of final regula-    tion of the cost of investment advice that      exceeds the costs charged to an individual
tions in the Federal Register.                 is not subject to the 2-percent floor. To the   investor. In determining whether a cost is
    All comments were considered and are       extent that a portion (if any) of an invest-    subject to the 2-percent floor, the relevant
available for public inspection. Many of       ment advisory fee exceeds the fee gener-        cost at issue under section 67(e)(1) should
the comments recommended that the pro-         ally charged to an individual investor, and     be defined by reference to the products or
posed regulations be withdrawn and that        that excess is attributable to an unusual in-   services that were provided in exchange
new proposed regulations be issued to al-      vestment objective of the trust or estate       for that cost, rather than the label that is
low the public to comment on the impact        or to a specialized balancing of the inter-     given to the cost. Therefore, if a fidu-
of the Knight decision on the regulations to   ests of various parties such that a reason-     ciary is performing services that are com-
be issued under section 67(e). After con-      able comparison with individual investors       monly or customarily performed by an in-
sideration of all of the comments received     would be improper, that excess is not sub-      vestment advisor retained by an individual
since the issuance of the proposed regula-     ject to the 2-percent floor. Thus, where        investor, then the costs attributable to those
tions, the proposed regulations published      the costs charged to the trust do not exceed    services are subject to the 2-percent floor.
on July 27, 2007, are withdrawn and this       the costs charged to an individual investor,        Many of the comments received in re-
document contains new proposed regula-         the cost attributable to taking into account    sponse to Notice 2008–32 objected to a
tions.                                         the varying interests of current beneficia-     rule that would require any unbundling
                                               ries and remaindermen is included in the        of a unitary fee due to the cost and ad-
Explanation of Provisions                      usual investment advisory fees and is not       ministrative difficulty of implementing a
                                               the type of cost that is excluded from the      process to track which portions of a sin-
In General                                     2-percent floor under this narrow excep-        gle fee are subject to the 2-percent floor.
                                               tion. Individual investors commonly have        Some commentators anticipated that such
   In Knight, the Supreme Court held           investment objectives that may require a        a rule would require corporate trustees to
that the deductibility of an expense under     balance between investing for income and        invest in expensive software to track and
section 67(e)(1) depends upon whether          investing for growth and/or a specialized       measure the value of the various types of
the cost is “commonly” or “customarily”        approach for particular assets. Comments        services provided on a trust-by-trust and
incurred when such property is held in-        are requested on the types of incremen-         year-by-year basis.
stead by an individual. In other words,        tal charges, as described in this paragraph,        These proposed regulations do not re-
section “67(e)(1) excepts from the 2-per-      that may be incurred by trusts or estates, as   quire the allocation described in the July
cent floor only those costs that it would be                                                   2007 proposed regulations. Instead, the


October 17, 2011                                                  534                                                  2011–42 I.R.B.
proposed regulations apply section 67(e)          be based, and on the related substantiation     Regulatory Flexibility Act (5 U.S.C. chap-
as interpreted by the Supreme Court in            that will be needed to satisfy the reason-      ter 6) does not apply. Pursuant to section
Knight, while also addressing the Govern-         able method standard proposed in these          7805(f), the notice of proposed rulemak-
ment’s and taxpayers’ interests in reduc-         regulations. Specifically, the IRS and          ing preceding these regulations was sub-
ing the administrative burden of comply-          the Treasury Department are interested          mitted to the Chief Counsel for Advocacy
ing with the tax law. The proposed regula-        in methods for reasonably estimating the        of the Small Business Administration for
tions limit the costs that are subject to allo-   portion of a bundled fee that is attributable   comment on its impact on small business.
cations pursuant to section 67(e) and allow       to investment advice. For methods based
the use of any reasonable method to per-          in whole or in part on time devoted to          Comments and Public Hearing
form such allocations.                            providing investment advice, the IRS and
                                                                                                      Before these proposed regulations are
    Specifically, the proposed regulations        Treasury Department ask for suggestions
                                                                                                  adopted as final regulations, consideration
provide that the portion of a bundled fee         for alternatives to contemporaneous time
                                                                                                  will be given to any written (a signed origi-
attributable to investment advice (includ-        records for specific activities that could
                                                                                                  nal and eight (8) copies) or electronic com-
ing any related services that would be pro-       be used to substantiate the reasonableness
                                                                                                  ments that are submitted timely to the IRS.
vided to any individual investor as part of       of the allocation. The IRS and Treasury
                                                                                                  The IRS and the Treasury Department also
the investment advisory fee) will be sub-         Department have considered comments
                                                                                                  request comments on the clarity of the pro-
ject to the 2-percent floor. In addition, the     regarding possible numerical or percent-
                                                                                                  posed rules and how they can be made eas-
proposed regulations provide that, except         age safe harbors in response to Notice
                                                                                                  ier to understand. All comments will be
for the portion so allocated to investment        2008–32. Commentators noted that, in
                                                                                                  available for public inspection and copy-
advice, a fiduciary fee not computed on an        many cases, fiduciaries could not rely on
                                                                                                  ing.
hourly basis is fully deductible with cer-        safe harbors because their fiduciary du-
                                                                                                      A public hearing has been scheduled for
tain exceptions. The exceptions are pay-          ties would require them to make a more
                                                                                                  December 19, 2011, beginning at 10 a.m.
ments made to third parties out of the bun-       accurate estimate so as to not harm the
                                                                                                  in the IRS Auditorium, Internal Revenue
dled fee that would have been subject to          trust or their beneficiaries. In addition,
                                                                                                  Building, 1111 Constitution Avenue, NW,
the 2-percent floor if they had been paid         safe harbors could increase complexity
                                                                                                  Washington, DC. Due to building security
directly by the non-grantor trust or estate,      by requiring complicated anti-abuse rules.
                                                                                                  procedures, visitors must enter at the Con-
and any payments for expenses separately          Therefore, comments are requested on
                                                                                                  stitution Avenue entrance. In addition, all
assessed (in addition to the usual or ba-         methods other than numerical or percent-
                                                                                                  visitors must present photo identification
sic fiduciary fee or commission) by the           age safe harbors.
                                                                                                  to enter the building. Because of access re-
fiduciary or other service provider that are
                                                                                                  strictions, visitors will not be admitted be-
commonly or customarily incurred by an            Effective Applicability Dates
                                                                                                  yond the Internal Revenue Building lobby
individual owner of such property. An ex-
                                                                                                  more than 30 minutes before the hearing
ample of such a separately assessed ex-              Notice 2011–37 provides that taxpayers
                                                                                                  starts. For information about having your
pense subject to the 2-percent floor might        will not be required to determine the por-
                                                                                                  name placed on the building access list to
be an additional fee charged by the fidu-         tion of a Bundled Fiduciary Fee that is sub-
                                                                                                  attend the hearing, see the “FOR FUR-
ciary for managing rental real estate owned       ject to the 2-percent floor under section 67
                                                                                                  THER INFORMATION CONTACT” sec-
by the non-grantor trust or estate.               for taxable years beginning before the date
                                                                                                  tion of this preamble.
    The proposed regulations allow the            that these regulations are published as final
                                                                                                      The rules of 26 CFR 601.601(a)(3) ap-
fiduciary and/or return preparer to use           regulations in the Federal Register.
                                                                                                  ply to the hearing. Persons who wish to
any reasonable method to make these al-
                                                                                                  present oral comments at the hearing must
locations. However, the amount of each            Availability of IRS Documents
                                                                                                  submit written or electronic comments by
payment (if any) out of the fiduciary’s
                                                                                                  December 7, 2011 and submit an outline
fee or commission to a third party for ex-           The IRS notices cited in the preamble
                                                                                                  of the topics to be discussed and the time
penses subject to the 2-percent floor, and        are published in the Cumulative Bulletin
                                                                                                  to be devoted to each topic (signed orig-
of each separately assessed expense that          and are available at http://www.irs.gov.
                                                                                                  inal and eight (8) copies) by December 7,
is commonly or customarily incurred by
                                                                                                  2011. A period of 10 minutes will be allot-
an individual owner of such property, is          Special Analyses
                                                                                                  ted to each person for making comments.
readily identifiable without any discretion
                                                                                                  An agenda showing the schedule of speak-
on the part of the fiduciary. Therefore,              It has been determined that this Trea-
                                                                                                  ers will be prepared after the deadline for
the reasonable method standard does not           sury decision is not a significant regula-
                                                                                                  receiving outlines has passed. Copies of
apply to these amounts that are to be de-         tory action as defined in Executive Order
                                                                                                  the agenda will be available free of charge
ducted from the portion of the bundled            12866. Therefore, a regulatory assessment
                                                                                                  at the hearing.
fiduciary fee that is not subject to the          is not required. It has also been determined
2-percent floor.                                  that section 553(b) of the Administrative       Drafting Information
    Comments are requested on the types           Procedure Act (5 U.S.C. chapter 5) does
of methods for making a reasonable allo-          not apply to these regulations, and because        The principal author of these regula-
cation, including possible factors on which       these regulation do not impose a collec-        tions is Jennifer N. Keeney, Office of the
a reasonable allocation is most likely to         tion of information on small entities, the      Associate Chief Counsel (Passthroughs


2011–42 I.R.B.                                                       535                                             October 17, 2011
and Special Industries). However, other         costs described in paragraphs (b)(2), (3)         tributable to an unusual investment objec-
personnel from the IRS and the Treasury         and (4) of this section, costs that are in-       tive or the need for a specialized balanc-
Department participated in their develop-       curred commonly or customarily by indi-           ing of the interests of various parties (be-
ment.                                           viduals also include expenses that do not         yond the usual balancing of the varying in-
                                                depend upon the identity of the payor (in         terests of current beneficiaries and remain-
                  *****
                                                particular, whether the payor is an individ-      dermen), in each case such that a reason-
Withdrawal of Notice of Proposed                ual or instead is an estate or trust). Such       able comparison with individual investors
Rulemaking                                      commonly or customarily incurred costs            would be improper.
                                                include, but are not limited to, costs in-            (c) Bundled fees—(1) In general. If an
   Accordingly, under the authority of          curred in defense of a claim against the es-      estate or a non-grantor trust pays a single
26 U.S.C. 7805, the notice of proposed          tate, the decedent, or the non-grantor trust      fee, commission, or other expense (such as
rulemaking amending 26 CFR parts 1 and          that are unrelated to the existence, validity,    a fiduciary’s commission, attorney’s fee,
301 that was published in the Federal           or administration of the estate or trust.         or accountant’s fee) for both costs that are
Register on July 27, 2007, 72 FR 41243              (2) Ownership costs. Ownership costs          subject to the 2-percent floor and costs (in
(REG–128224–06), is withdrawn.                  are costs that are chargeable to or incurred      more than a de minimus amount) that are
                                                by an owner of property simply by reason          not, then the single fee, commission, or
Proposed Amendments to the                      of being the owner of the property, such as       other expense (bundled fee) must be allo-
Regulations                                     condominium fees, real estate taxes, insur-       cated, for purposes of computing the ad-
                                                ance premiums, maintenance and lawn ser-          justed gross income of the trust or estate
   Accordingly, 26 CFR part 1 is proposed       vices, automobile registration and insur-         in compliance with section 67(e), between
to be amended as follows:                       ance costs, and partnership costs deemed          the costs subject to the 2-percent floor and
                                                to be passed through to and reportable by         those that are not. Out-of-pocket expenses
PART 1—INCOME TAXES
                                                a partner. For purposes of section 67(e),         billed to the trust or estate are treated as
   Paragraph 1. The authority citation for      ownership costs are commonly or custom-           separate from the bundled fee.
part 1 continues to read in part as follows:    arily incurred by a hypothetical individual           (2) Exception. If a bundled fee is not
   Authority: 26 U.S.C. 7805 * * *              owner of such property.                           computed on an hourly basis, only the por-
   Par. 2. Section 1.67–4 is added to read          (3) Tax preparation fees. The applica-        tion of that fee that is attributable to in-
as follows:                                     tion of the 2-percent floor to the cost of        vestment advice is subject to the 2-percent
                                                preparing tax returns on behalf of the es-        floor; the remaining portion is not subject
§1.67–4 Costs paid or incurred by estates       tate, decedent, or non-grantor trust will de-     to that floor. In addition, payments made
or non-grantor trusts.                          pend upon the particular tax return. All          from the bundled fee to third parties that
                                                estate and generation-skipping transfer tax       would have been subject to the 2-percent
    (a) In general. Section 67(e) provides      returns, fiduciary income tax returns, and        floor if they had been paid directly by the
an exception to the 2-percent floor on mis-     the decedent’s final individual income tax        non-grantor trust or estate are subject to
cellaneous itemized deductions for costs        returns are not subject to the 2-percent          the 2-percent floor, as are any fees or ex-
that are paid or incurred in connection with    floor. The costs of preparing other indi-         penses separately assessed by the fiduciary
the administration of an estate or a trust      vidual income tax returns, gift tax returns,      or other payee of the bundled fee (in addi-
not described in §1.67–2T(g)(1)(i) (a non-      and tax returns for a sole proprietorship or      tion to the usual or basic bundled fee) for
grantor trust) and which would not have         a retirement plan, for example, are costs         services rendered to the trust or estate that
been incurred if the property were not held     commonly and customarily incurred by in-          are commonly or customarily incurred by
in such estate or trust. A cost is subject to   dividuals and thus are subject to the 2-per-      an individual.
the 2-percent floor to the extent that it is    cent floor.                                            Example. A corporate trustee charges a percent-
included in the definition of miscellaneous         (4) Investment advisory fees. Fees for        age of the value of the trust income and corpus as
                                                                                                  its annual commission. In addition, the trustee bills
itemized deductions under section 67(b), is     investment advice (including any related          a separate amount to the trust each year as compen-
incurred by an estate or non-grantor trust,     services that would be provided to any            sation for leasing and managing the trust’s rental
and commonly or customarily would be in-        individual investor as part of an invest-         real estate. The separate real estate management fee
curred by a hypothetical individual hold-       ment advisory fee) are incurred commonly          is subject to the 2-percent floor because it is a fee
ing the same property.                          or customarily by a hypothetical individ-         commonly or customarily incurred by an individual
                                                                                                  owner of rental real estate.
    (b) “Commonly” or “Customarily” In-         ual investor and therefore are subject to
                                                                                                      (3) Reasonable Method. Any reason-
curred—(1) In general. In analyzing a cost      the 2-percent floor. However, certain in-
                                                                                                  able method may be used to allocate a
to determine whether it commonly or cus-        cremental costs of investment advice be-
                                                                                                  bundled fee between those costs that are
tomarily would be incurred by a hypotheti-      yond the amount that normally would be
                                                                                                  subject to the 2-percent floor and those
cal individual owning the same property, it     charged to an individual investor are not
                                                                                                  costs that are not, including without lim-
is the type of product or service rendered to   subject to the 2-percent floor. For this pur-
                                                                                                  itation the allocation of a portion of a
the estate or non-grantor trust in exchange     pose, such an incremental cost is a special,
                                                                                                  fiduciary commission that is a bundled
for the cost, rather than the description of    additional charge added solely because the
                                                                                                  fee to investment advice. The reason-
the cost of that product or service, that is    investment advice is rendered to a trust or
                                                                                                  able method standard does not apply to
determinative. In addition to the types of      estate instead of to an individual, that is at-


October 17, 2011                                                    536                                                      2011–42 I.R.B.
determine the portion of the bundled fee                       ACTION: Notice of proposed rulemak-
attributable to payments made to third par-                    ing.                                             Comments received by the Depart-
ties for expenses subject to the 2-percent                                                                   ment of Labor will be posted without
floor or to any other separately assessed                      SUMMARY: This document contains               change to http://www.regulations.gov and
expense commonly or customarily in-                            proposed regulations regarding disclosure     http://www.dol.gov/ebsa, and available for
curred by an individual, because those                         of the summary of benefits and coverage       public inspection at the Public Disclosure
payments and expenses are readily iden-                        and the uniform glossary for group health     Room, N–1513, Employee Benefits Se-
tifiable without any discretion on the part                    plans and health insurance coverage in the    curity Administration, 200 Constitution
of the fiduciary or return preparer.                           group and individual markets under the        Avenue, NW, Washington, DC 20210.
    (d) Effective/applicability date. These                    Patient Protection and Affordable Care           Department of Health and Human Ser-
regulations apply to taxable years begin-                      Act. This document implements the dis-        vices. In commenting, please refer to file
ning on or after the date that these regula-                   closure requirements to help plans and        code CMS–9982–P. Because of staff and
tions are published as final regulations in                    individuals better understand their health    resource limitations, we cannot accept
the Federal Register.                                          coverage, as well as other coverage op-       comments by facsimile (FAX) transmis-
                                                               tions. The templates and instructions to      sion.
                              Steven T. Miller,                be used in making these disclosures are          You may submit comments in one of
                     Deputy Commissioner for                   being issued separately in today’s Federal    four ways (please choose only one of the
                     Services and Enforcement.                 Register.                                     ways listed):
                                                                                                                1. Electronically. You may submit
(Filed by the Office of the Federal Register on September 6,   DATE: Comment date. Comments are due          electronic comments on this regulation to
2011, 8:45 a.m., and published in the issue of the Federal
Register for September 7, 2011, 76 F.R. 55322)
                                                               on or before October 21, 2011.                http://www.regulations.gov. Follow the
                                                               ADDRESSES: Written comments may be            instructions under the “More Search Op-
                                                               submitted to any of the addresses specified   tions” tab.
                                                               below. Any comment that is submitted to          2. By regular mail. You may mail
DEPARTMENT OF THE                                                                                            written comments to the following address
                                                               any Department will be shared with the
TREASURY                                                       other Departments. Please do not submit       ONLY:
Internal Revenue Service                                       duplicates.                                     Centers for Medicare &
26 CFR Parts 54 and 602                                           All comments will be made available            Medicaid Services,
                                                               to the public. WARNING: Do not in-              Department of Health and
                                                               clude any personally identifiable informa-
DEPARTMENT OF LABOR                                                                                              Human Services,
                                                               tion (such as name, address, or other con-      Attention: CMS–9982–P,
Employee Benefits Security                                     tact information) or confidential business      P.O. Box 8016,
Administration                                                 information that you do not want publicly       Baltimore, MD 21244–1850.
29 CFR Part 2590                                               disclosed. All comments are posted on the
                                                               Internet exactly as received, and can be
                                                               retrieved by most Internet search engines.       Please allow sufficient time for mailed
DEPARTMENT OF HEALTH
                                                               No deletions, modifications, or redactions    comments to be received before the close
AND HUMAN SERVICES                                             will be made to the comments received, as     of the comment period.
45 CFR Part 147                                                they are public records. Comments may be         3. By express or overnight mail. You
                                                               submitted anonymously.                        may send written comments to the follow-
Notice of Proposed                                                Department of Labor. Comments to the       ing address ONLY:
                                                               Department of Labor, identified by RIN
Rulemaking                                                                                                     Centers for Medicare &
                                                               1210–AB52, by one of the following meth-
                                                               ods:                                             Medicaid Services,
Summary of Benefits and                                                                                        Department of Health and
Coverage and the Uniform                                       •   Federal       eRulemaking      Portal:       Human Services,
                                                                   http://www.regulations.gov.   Follow        Attention: CMS–9982–P,
Glossary                                                           the instructions for submitting com-        Mail Stop C4–26–05,
                                                                   ments.                                      7500 Security Boulevard,
REG–140038–10                                                  •   Email: E-OHPSCA2715.EBSA@dol.gov.           Baltimore, MD 21244–1850.
                                                               •   Mail or Hand Delivery: Office of
AGENCIES: Internal Revenue Service,                                Health Plan Standards and Compliance         4. By hand or courier. If you prefer,
Department of the Treasury; Employee                               Assistance, Employee Benefits Secu-       you may deliver (by hand or courier) your
Benefits Security Administration, Depart-                          rity Administration, Room N–5653,         written comments before the close of the
ment of Labor; Centers for Medicare &                              U.S. Department of Labor, 200 Con-        comment period to either of the following
Medicaid Services, Department of Health                            stitution Avenue NW, Washington, DC       addresses:
and Human Services.                                                20210, Attention: RIN 1210–AB52.             a. For delivery in Washington, DC—



2011–42 I.R.B.                                                                   537                                          October 17, 2011
    Centers for Medicare &                                          Comments received timely will also                           Hotline at 1–866–444–EBSA (3272) or
     Medicaid Services,                                         be available for public inspection as they                       visit the Department of Labor’s web-
    Department of Health and                                    are received, generally beginning ap-                            site (http://www.dol.gov/ebsa).    In ad-
     Human Services,                                            proximately three weeks after publication                        dition, information from HHS on pri-
    Room 445-G, Hubert H.                                       of a document, at the headquarters of                            vate health insurance for consumers can
     Humphrey Building,                                         the Centers for Medicare & Medicaid                              be found on the Centers for Medicare
    200 Independence Avenue, SW,                                Services, 7500 Security Boulevard, Balti-                        & Medicaid Services (CMS) website
    Washington, DC 20201.                                       more, Maryland 21244, Monday through                             (http://www.cms.hhs.gov/HealthInsRe-
                                                                Friday of each week from 8:30 a.m. to                            formforConsume/01_Overview.asp) and
    (Because access to the interior of the                      4 p.m. EST. To schedule an appoint-                              information on health reform can be found
Hubert H. Humphrey Building is not read-                        ment to view public comments, phone                              at http://www.healthcare.gov.
ily available to persons without Federal                        1–800–743–3951.
government identification, commenters                               Internal Revenue Service. Comments                           SUPPLEMENTARY INFORMATION:
are encouraged to leave their comments                          to the IRS, identified by REG–140038–10,
                                                                                                                                 I. Background
in the CMS drop slots located in the main                       by one of the following methods:
lobby of the building. A stamp-in clock is                                                                                           The Patient Protection and Affordable
available for persons wishing to retain a                       •     Federal       eRulemaking      Portal:
                                                                                                                                 Care Act, Pub. L. 111–148, was enacted
proof of filing by stamping in and retain-                            http://www.regulations.gov.   Follow
                                                                                                                                 on March 23, 2010; the Health Care and
ing an extra copy of the comments being                               the instructions for submitting com-
                                                                                                                                 Education Reconciliation Act, Pub. L.
filed.)                                                               ments.
                                                                                                                                 111–152, was enacted on March 30, 2010
    b. For delivery in Baltimore, MD—
                                                                •     Mail:                 CC:PA:LPD:PR                         (these are collectively known as the “Af-
                                                                      (REG–140038–10), room 5205, Inter-                         fordable Care Act”). The Affordable Care
    Centers for Medicare &
                                                                      nal Revenue Service, P.O. Box 7604,                        Act reorganizes, amends, and adds to the
     Medicaid Services,
                                                                      Ben Franklin Station, Washington, DC                       provisions of part A of title XXVII of the
    Department of Health and
                                                                      20044.                                                     Public Health Service Act (PHS Act) re-
     Human Services,
                                                                                                                                 lating to group health plans and health in-
    7500 Security Boulevard,
    Baltimore, MD 21244–1850.
                                                                •     Hand or courier delivery: Mon-                             surance issuers in the group and individual
                                                                      day through Friday between the                             markets. The term “group health plan” in-
                                                                      hours of 8 a.m. and 4 p.m. to:                             cludes both insured and self-insured group
    If you intend to deliver your comments
                                                                      CC:PA:LPD:PR (REG–140038–10),                              health plans.1 The Affordable Care Act
to the Baltimore address, please call (410)
                                                                      Courier’s Desk, Internal Revenue                           adds section 715(a)(1) to the Employee
786–7195 in advance to schedule your ar-
                                                                      Service, 1111 Constitution Avenue,                         Retirement Income Security Act (ERISA)
rival with one of our staff members.
                                                                      NW, Washington, DC 20224.                                  and section 9815(a)(1) to the Internal Rev-
    Comments mailed to the addresses in-
                                                                                                                                 enue Code (the Code) to incorporate the
dicated as appropriate for hand or courier
                                                                   All submissions to the IRS will be open                       provisions of part A of title XXVII of
delivery may be delayed and received after
                                                                to public inspection and copying in room                         the PHS Act into ERISA and the Code,
the comment period.
                                                                1621, 1111 Constitution Avenue, NW,                              and make them applicable to group health
    Submission of comments on paperwork
                                                                Washington, DC from 9 a.m. to 4 p.m.                             plans, and health insurance issuers provid-
requirements. You may submit comments
                                                                                                                                 ing health insurance coverage in connec-
on this document’s paperwork require-                           FOR FURTHER INFORMATION                                          tion with group health plans. The PHS
ments by following the instructions at the                      CONTACT: Amy Turner or Heather                                   Act sections incorporated by this reference
end of the “Collection of Information Re-                       Raeburn, Employee Benefits Security                              are sections 2701 through 2728. PHS Act
quirements” section in this document.                           Administration, Department of Labor, at                          sections 2701 through 2719A are substan-
    Inspection of Public Comments: All                          (202) 693–8335; Karen Levin, Internal                            tially new, though they incorporate some
comments received before the close of                           Revenue Service, Department of the Trea-                         provisions of prior law. PHS Act sections
the comment period are available for                            sury, at (202) 622–6080; Jennifer Libster                        2722 through 2728 are sections of prior
viewing by the public, including any                            or Padma Shah, Centers for Medicare &                            law renumbered, with some, mostly minor,
personally identifiable or confidential                         Medicaid Services, Department of Health                          changes.
business information that is included in                        and Human Services, at (301) 492–4252.                               Subtitles A and C of title I of the Af-
a comment. We post all comments re-
                                                                                                                                 fordable Care Act amend the requirements
ceived before the close of the comment                          CUSTOMER SERVICE
                                                                                                                                 of title XXVII of the PHS Act (changes
period on the following website as soon                         INFORMATION:
                                                                                                                                 to which are incorporated into ERISA
as possible after they have been received:                      Individuals interested in obtaining infor-
                                                                                                                                 by section 715). The preemption provi-
http://www.regulations.gov. Follow the                          mation from the Department of Labor
                                                                                                                                 sions of ERISA section 731 and PHS Act
search instructions on that Web site to                         concerning employment-based health cov-
view public comments.                                           erage laws may call the EBSA Toll-Free
1 1 The term “group health plan” is used in title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, and is distinct from the term “health plan,” as used in other provisions
of title I of the Affordable Care Act. The term “health plan” does not include self-insured group health plans.



October 17, 2011                                                                          538                                                                    2011–42 I.R.B.
section 27242 (implemented in 29 CFR                           II. Overview of the Proposed                                    that include a recommended template for
2590.731(a) and 45 CFR 146.143(a)) ap-                         Regulations                                                     the SBC (with instructions and samples to
ply so that the requirements of part 7 of                                                                                      be used in completing the template) and a
ERISA and title XXVII of the PHS Act,                          A. Summary of Benefits and Coverage                             recommended uniform glossary.4
as amended by the Affordable Care Act,                                                                                             These regulations generally propose
                                                               1. In General
are not to be “construed to supersede any                                                                                      standards for group health plans (and their
provision of State law which establishes,                         Section 2715 of the PHS Act, added                           plan administrators), and health insurance
implements, or continues in effect any                         by the Affordable Care Act, directs the                         issuers offering group or individual health
standard or requirement solely relating                        Departments to develop standards for use                        insurance coverage, that will govern who
to health insurance issuers in connection                      by a group health plan and a health insur-                      provides an SBC, who receives an SBC,
with group or individual health insurance                      ance issuer in compiling and providing a                        when the SBC will be provided, and how it
coverage except to the extent that such                        summary of benefits and coverage (SBC)                          will be provided. The Departments invite
standard or requirement prevents the ap-                       that “accurately describes the benefits                         comment on the standards of the proposed
plication of a requirement” of provisions                      and coverage under the applicable plan                          regulations.
added to the PHS Act by the Affordable                         or coverage.” The statute directs the De-                           In conjunction with these proposed
Care Act. Accordingly, State laws with                         partments, in developing such standards,                        regulations, the Departments are publish-
stricter health insurance issuer require-                      to “consult with the National Association                       ing a document today that provides the
ments than those imposed by the PHS                            of Insurance Commissioners” (referred                           proposed template for the SBC (with pro-
Act will not be superseded by those pro-                       to in this preamble as the “NAIC”), “a                          posed instructions and sample language
visions. Preemption and State flexibility                      working group composed of representa-                           for completing the template) and the pro-
under PHS Act section 2715 are discussed                       tives of health insurance-related consumer                      posed uniform glossary that are identical
more fully below under section II.D.                           advocacy organizations, health insurance                        to the documents that were developed and
    The Departments of Health and Human                        issuers, health care professionals, patient                     agreed to by the entire NAIC working
Services (HHS), Labor, and the Treasury                        advocates including those representing                          group and then voted on and approved by
(the Departments) are taking a phased ap-                      individuals with limited English profi-                         the full NAIC. Instead of proposing possi-
proach to issuing regulations implement-                       ciency, and other qualified individuals.”                       ble changes to the NAIC’s proposed SBC
ing the revised PHS Act sections 2701                          The NAIC convened a working group                               template and related materials, the docu-
through 2719A and related provisions of                        (NAIC working group) comprised of a                             ment published today incorporates all of
the Affordable Care Act. These proposed                        diverse group of stakeholders. This work-                       the NAIC working group’s recommended
regulations propose standards for imple-                       ing group met frequently each month for                         materials (with the exception of a sample
menting PHS Act section 2715. As dis-                          over one year while developing its rec-                         coverage example5) and invites public
cussed more fully below, templates and in-                     ommendations.3 Throughout the process,                          comment. The Departments recognize
structions for meeting the disclosure re-                      NAIC working group draft documents                              that changes to the SBC template may be
quirements of PHS Act section 2715 are                         and meeting notes were displayed on the                         appropriate to accommodate various types
being issued separately in today’s Federal                     NAIC’s website for public review, and                           of plan and coverage designs, to provide
Register.                                                      several interested parties filed formal com-                    additional information to individuals, or
                                                               ments. In addition to participation from                        to improve the efficacy of the disclosures
                                                               the NAIC working group members, con-                            recommended by the NAIC. In addition,
                                                               ference calls and in-person meetings were                       the SBC template and related documents
                                                               open to other interested parties and indi-                      were drafted by the NAIC primarily for
                                                               viduals and provided an opportunity for                         use by health insurance issuers.6
                                                               non-member feedback. The Departments                                In general, the Departments have heard
                                                               have received transmittals from the NAIC                        concerns about the potential redundancies


2Code section 9815 incorporates the preemption provisions of PHS Act section 2724. Prior to the Affordable Care Act, there were no express preemption provisions in chapter 100 of the
Code.
3 In developing its recommendations, the NAIC considered the results of various consumer testing sponsored by both insurance industry and consumer associations. Specifically,
the draft SBC template, including the coverage examples, and the draft uniform glossary underwent consumer testing to assist in determining adjustments to ensure the final product
was consumer friendly. Summaries of this testing are available at: http://www.naic.org/documents/committees_b_consumer_information_101012_ahip_focus_group_summary.pdf;
http://www.naic.org/documents/committees_b_consumer_information_110603_ahip_bcbsa_consumer_testing.pdf;           http://www.naic.org/documents/committees_b_consumer_informa-
tion_101014_consumers_union.pdf (a more detailed summary of which is accessible at: http://prescriptionforchange.org/pdf/CU_Consumer_Testing_Report_Dec_2010.pdf); and
http://www.naic.org/documents/committees_b_consumer_information_110603_consumers_union_testing.pdf.
4 Information on the NAIC working group, including drafts of SBC materials and other supporting documents developed for compliance with PHS Act section 2715, working group member-
ship lists, and meeting minutes, is available at: http://www.naic.org/committees_b_consumer_information.htm.
5 The Appendices do not include a sample coverage example calculation for breast cancer in the individual market that was transmitted by the NAIC. Upon review, it appeared that some of
the data in the example might be subject to copyright protection. Moreover, the sample coverage example provided by NAIC was limited to breast cancer in the individual market and did not
address the other two coverage examples — maternity coverage and diabetes. Finally, particular coding information and pricing information included in the sample would change annually,
which would result in the data included in the sample becoming outdated relatively quickly. Accordingly, HHS is publishing on its website (at http://cciio.cms.gov), the coding and pricing
information necessary to perform coverage example calculations for all three coverage examples. HHS will update this information annually.
6National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010 Letter to the Secretaries. Available at http://www.naic.org/documents/com-
mittees_b_consumer_information_ppaca_letter_to_sebelius.pdf.



2011–42 I.R.B.                                                                           539                                                            October 17, 2011
and additional cost associated with ele-                         2. Providing the SBC                                             erage (see section II.A.2.c. of this pream-
ments of the SBC requirement — includ-                                                                                            ble, below, for a discussion of this pro-
ing the uniform glossary and the coverage                           Paragraph (a) of the proposed regula-                         posal). Under this proposal, the SBC must
facts labels — particularly for those plans                      tions implements the general disclosure re-                      be provided as soon as practicable follow-
and group health insurance issuers that al-                      quirement and sets forth the proposed stan-                      ing the request, but in no event later than
ready provide a Summary Plan Descrip-                            dards for who provides an SBC, to whom,                          seven days following the request. If an
tion (SPD) under 29 CFR 2520.104b–2.                             and when. PHS Act section 2715 gener-                            SBC is provided upon request for infor-
Comments are solicited on whether the                            ally sets forth that an SBC be provided                          mation about health coverage and the plan
SBC should be allowed to be provided                             to applicants, enrollees, and policyhold-                        subsequently applies for health coverage,
within an SPD if the SBC is intact and                           ers or certificate holders. PHS Act section                      a second SBC will be provided automati-
prominently displayed at the beginning of                        2715(d)(3) places the responsibility to pro-                     cally only if the information in the SBC has
the SPD (for example, immediately after a                        vide an SBC on “(A) a health insurance is-                       changed. If there is a change to the infor-
cover page and table of contents), and if                        suer (including a group health plan that is                      mation in the SBC before the coverage is
the timing requirements for providing the                        not a self-insured plan) offering health in-                     offered, or before the first day of coverage,
SBC (described in paragraph (a) of the pro-                      surance coverage within the United States;                       the issuer must update and provide a cur-
posed regulations) are satisfied. The De-                        or (B) in the case of a self-insured group                       rent SBC to the plan no later than the date
partments also welcome further comments                          health plan, the plan sponsor or designated                      of the offer (or no later than the first day of
on ways the SBC might be coordinated                             administrator of the plan (as such terms                         coverage, as applicable). The Departments
with other group health plan disclosure                          are defined in section 3(16) of ERISA).”7                        recognize that often the only change to the
materials (e.g., application and open sea-                       Accordingly, these proposed regulations                          SBC is a final premium quote (usually in
son materials) to communicate effectively                        would interpret PHS Act section 2715 to                          the individual health insurance market or
with participants and beneficiaries about                        apply to both group health plans and health                      the small group market). The Departments
their coverage and make it easy for them                         insurance issuers offering group or indi-                        request comments on whether, in such cir-
to compare coverage options while also                           vidual health insurance coverage. In addi-                       cumstances, premium information can be
avoiding undue cost or burden on plans                           tion, consistent with the statute, these pro-                    provided in another way that is easily un-
and group health insurance issuers.                              posed regulations would make a plan ad-                          derstandable and useful to plan sponsors
   Consistent with the goals of balancing                        ministrator of a group health plan respon-                       and individuals, other than by sending a
effective communication and ease of com-                         sible for providing an SBC. Under the pro-                       new, full SBC.
parison for individuals with minimization                        posed regulations, the SBC would be pro-                             An issuer also must provide a new
of cost and duplication, other sections of                       vided in writing free of charge.                                 SBC if and when the policy, certificate,
this preamble outline and invite comment                            In general, the proposed rules direct                         or contract (for simplicity, referred to col-
on potential approaches to major elements                        that the SBC be provided when a plan or                          lectively as a “policy” in the remainder of
of the SBC — the statutorily-required uni-                       individual is comparing health coverage                          this preamble) is renewed or reissued. In
form glossary and the coverage examples                          options. If the information in the SBC                           the case of renewal or reissuance, if the is-
— in the interest of streamlining standards                      changes between the time of application,                         suer requires written application materials
and making implementation of these com-                          when the coverage is offered, and when                           for renewal (in either paper or electronic
ponents as helpful and user-friendly for in-                     a policy is issued (often the case only for                      form), it must provide the SBC no later
dividuals, and as workable and efficient as                      individual market coverage), the proposal                        than the date the materials are distributed.
possible.                                                        would require that an updated SBC be pro-                        If renewal or reissuance is automatic, the
   As discussed below, PHS Act section                           vided. If the information is unchanged,                          SBC must be provided no later than 30
2715 generally directs group health plans                        the SBC does not need to be provided                             days prior to the first day of the new policy
and health insurance issuers to comply                           again, except upon request. This general                         year.
with the SBC requirements beginning on                           approach is explained more fully below.
or after March 23, 2012. Comments are                                                                                             b. Provision of the SBC Automatically
requested regarding factors that may affect                      a. Provision of the SBC Automatically by                         by a Plan or Issuer to Participants and
the feasibility of implementation within                         an Issuer to a Plan                                              Beneficiaries
this time frame. After the public comment
                                                                                                                                     Under paragraph (a)(1)(ii) of the pro-
period on these documents, the Depart-                              Paragraph (a)(1)(i) of the proposed reg-
                                                                                                                                  posed regulations, a group health plan
ments will finalize the SBC template and                         ulations provides that a health insurance is-
                                                                                                                                  (including the plan administrator), and
instructions. Consistent with PHS Act                            suer offering group health insurance cov-
                                                                                                                                  a health insurance issuer offering group
section 2715(c), the Departments will                            erage provide the SBC to a group health
                                                                                                                                  health insurance coverage, must provide
periodically review and update the docu-                         plan (including, for this purpose, its spon-
ments as appropriate, taking into account                        sor) upon an application or request for in-
public comments.                                                 formation by the plan about the health cov-


7ERISA section 3(16) defines an administrator as: (i) the person specifically designated by the terms of the instrument under which the plan is operated; (ii) if an administrator is not so
designated, the plan sponsor; or (iii) in the case of a plan for which an administrator is not designated and plan sponsor cannot be identified, such other person as the Secretary of Labor may
by regulation prescribe.



October 17, 2011                                                                           540                                                                     2011–42 I.R.B.
an SBC to a participant or beneficiary8                          policyholders, and certificate holders. The                      ipant’s last known address, a separate SBC
with respect to each benefit package of-                         Departments believe that this provision                          must be provided to the beneficiary at the
fered for which the participant or ben-                          recognizes that plans and individuals may                        beneficiary’s last known address.
eficiary is eligible.9 The SBC must be                           need or desire the information provided                              Finally, to further reduce unnecessary
provided as part of any written application                      in the SBC at times other than those set                         duplication with respect to a group health
materials that are distributed by the plan or                    forth in the statute to ensure that the plans                    plan that offers multiple benefit packages,
issuer for enrollment. If the plan does not                      and individuals have continuous access                           in connection with renewal, the plan and
distribute written application materials for                     to coverage and cost information to make                         issuer only need to automatically provide a
enrollment, the SBC must be distributed                          informed choices about health coverage.11                        new SBC with respect to the benefit pack-
no later than the first date the participant                     In addition, while the “upon request”                            age in which a participant or beneficiary is
is eligible to enroll in coverage for the                        provision may result in some additional                          enrolled. SBCs are not required to be pro-
participant and any beneficiaries. If there                      administrative work for plans and issuers,                       vided automatically with respect to ben-
is any change to the information required                        the Departments have used discretion else-                       efit packages in which the participant or
to be in the SBC before the first day of                         where in these proposed regulations to                           beneficiary is not enrolled. However, if a
coverage, the plan or issuer must update                         create special rules for avoiding duplica-                       participant or beneficiary requests an SBC
and provide a current SBC to a participant                       tion and also propose to reduce burden                           with respect to another benefit package for
or beneficiary no later than the first day of                    by facilitating electronic transmittal of the                    which the participant or beneficiary is eli-
coverage.                                                        SBC, where appropriate. Accordingly,                             gible, the SBC must be provided as soon as
   The plan or issuer must also provide                          the Departments have sought to balance                           practicable, but in no event later than seven
the SBC to special enrollees within seven                        providing consumer access to SBCs with                           days following the request.
days of a request for enrollment pursuant                        minimizing burdens on employers and
to a special enrollment period.10 Addition-                      insurers.                                                        e. Provision of the SBC by an Issuer
ally, the plan or issuer must provide a new                                                                                       Offering Individual Market Coverage
SBC if and when the coverage is renewed.                         d. Special Rules to Prevent Unnecessary
                                                                 Duplication With Respect to Group Health                            Under these regulations, the Secretary
Specifically, if written application materi-
                                                                 Coverage                                                         of HHS sets forth proposed standards
als are required for renewal (in either paper
                                                                                                                                  applicable to individual health insurance
or electronic form), the SBC must be pro-
                                                                     The Departments propose, in paragraph                        coverage for who provides an SBC, to
vided no later than the date the materials
                                                                 (a)(1)(iii), three rules to streamline provi-                    whom, and when. The intent is to parallel
are distributed. If renewal is automatic, the
                                                                 sion of the SBC and prevent unnecessary                          the proposed group market requirements
proposed rules provide that the SBC must
                                                                 duplication with respect to group health                         described above, with only those changes
be provided no later than 30 days prior to
                                                                 plan coverage. First, the requirement to                         necessary to reflect the differences be-
the first day of coverage in the new plan
                                                                 provide an SBC will be considered satis-                         tween the two markets. For example,
year.
                                                                 fied for all entities if the SBC is provided                     individual policyholders and dependents
c. Provision of the SBC Upon Request                             by any entity, so long as all timing and con-                    in the individual market are comparable
                                                                 tent requirements are also satisfied. For                        to group health plan participants and ben-
   The regulations propose that a health                         example, if a health insurance issuer offer-                     eficiaries. Accordingly, an issuer offering
insurance issuer offering group health in-                       ing group health insurance coverage pro-                         individual health insurance coverage must
surance coverage provide the SBC to a                            vides a complete, timely SBC to the plan’s                       provide an SBC as soon as practicable
group health plan (and a plan or issuer                          participants and beneficiaries, the plan’s                       after receiving a request for application or
must provide the SBC to a participant or                         requirement to provide the SBC will be                           a request for information, but in no event
beneficiary) upon request, as soon as prac-                      satisfied.                                                       later than seven days after receipt of the
ticable, but in no event later than seven                            Second, if a participant and any bene-                       request. If an individual later applies for
days following the request. Although PHS                         ficiaries are known to reside at the same                        the same policy, a second SBC is required
Act section 2715 does not specifically                           address, providing a single SBC to that ad-                      to be provided only if the information in
reference furnishing SBCs on request,                            dress will satisfy the obligation to provide                     the SBC has changed.
PHS Act section 2715(a) authorizes the                           the SBC for all individuals residing at that                        An issuer that makes an offer of cover-
Departments to develop standards for pro-                        address. However, if a beneficiary’s last                        age must provide an updated SBC only if it
viding the SBC to applicants, enrollees,                         known address is different than the partic-                      has modified the terms of coverage for the

8 ERISA section 3(7) defines a participant as: any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become
eligible to receive a benefit of any type from an employee benefit plan which covers employees or members of such organization, or whose beneficiaries may be eligible to receive any such
benefit. ERISA section 3(8) defines a beneficiary as: a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.
9 With respect to insured group health plan coverage, PHS Act section 2715 generally places the obligation to provide an SBC on both a plan and issuer. As discussed below, under section
II.A.2.d., “Special Rules to Prevent Unnecessary Duplication With Respect to Group Health Coverage”, if either the issuer or the plan provides the SBC, both will have satisfied their obliga-
tions. As they do with other notices required of both plans and issuers under Part 7 of ERISA, Title XXVII of the PHS Act, and Chapter 100 of the Code, the Departments expect plans and
issuers to make contractual arrangements for sending SBCs. Accordingly, the remainder of this preamble generally refers to requirements for plans or issuers.
10   Regulations regarding special enrollment can be found at 26 CFR 54.9801–6, 29 CFR 2590.701–6, and 45 CFR 146.117.
11Moreover, this provision is consistent with requirements under ERISA section 104(b)(4), which requires ERISA-covered group health plans to provide to participants and beneficiaries,
upon request, copies of the instruments under which the plan is established or operated.



2011–42 I.R.B.                                                                             541                                                             October 17, 2011
individual (including as a result of med-                   on recognized clinical practice guide-                The Departments have included these
ical underwriting) that are required to be                  lines;                                            elements in the proposed regulation con-
reflected in the SBC. Similarly, when an               g. A statement about whether the plan                  sistent with the NAIC’s recommendations.
individual accepts the offer of coverage, if                provides minimum essential coverage               PHS Act section 2715(a) requires the De-
any terms are modified before the first day                 as defined under section 5000A(f) of              partments to develop regulations for pro-
of coverage, an updated SBC must again                      the Code, and whether the plan’s or               vision of an SBC that accurately describes
be provided no later than the first day of                  coverage’s share of the total allowed             benefits and coverage, which includes the
coverage. A health insurance issuer will                    costs of benefits provided under the              statutory content elements listed above,
provide an SBC annually at renewal, no                      plan or coverage meets applicable re-             but the Departments believe they are not
later than 30 days before the start of the                  quirements;                                       limited to them. The statute also requires
new policy year, reflecting any changes ef-            h. A statement that the SBC is only a                  the Departments to consult with the NAIC
fective for the new policy year.                            summary and that the plan document,               on the development of the standards for
   Finally, similar to the group health cov-                policy, or certificate of insurance               the SBC, which includes content. The
erage rules, for individual health insurance                should be consulted to determine the              Departments’ proposal includes all of the
coverage that covers more than one indi-                    governing contractual provisions of               NAIC’s recommendations, including the
vidual (or an application for coverage that                 the coverage; and                                 additional content, and the Departments
is being made for more than one individ-               i. A contact number to call with ques-                 invite comments on this approach and the
ual), if all those individuals are known to                 tions and an Internet web address                 four additional SBC content elements. For
reside at the same address, a single SBC                    where a copy of the actual individual             example, with respect to the requirement
may be provided to that address. This sin-                  coverage policy or group certificate              to include an Internet address that may be
gle SBC will satisfy the requirement to                     of coverage can be reviewed and ob-               used to obtain a copy of the uniform glos-
provide the SBC for all individuals resid-                  tained.                                           sary, the Departments invite comments
ing at that address. However, if an individ-           The proposed regulations generally paral-              on whether the SBC also should disclose
ual’s last known address is different than             lel the content elements set forth in the              the option to receive a paper copy of the
the last known address of the individual re-           statute. As discussed above, the Depart-               uniform glossary upon request.
questing coverage, the policyholder, or a              ments are issuing a document that pro-                     The NAIC instructions provide that
dependent of either, a separate SBC must               poses to use the NAIC’s recommended                    the premium generally is the premium
be provided to that individual at the indi-            SBC template and instructions to satisfy               as charged by the issuer (which may be
vidual’s last known address.                           the SBC content and appearance require-                evidenced in a rate table attached to the
                                                       ments of PHS Act section 2715.                         SBC),12 or the cost of coverage in the
3. Content                                                A few of the content elements included              case of self-insured plans. The NAIC in-
                                                       in the NAIC’s recommendations warrant                  structions further provide that, in the case
   PHS Act section 2715(b)(3) generally
                                                       further explanation and discussion. The                of a group health plan, a participant or
provides that the SBC must include:
                                                       template developed by the NAIC work-                   beneficiary should consult the employer
a.   Uniform definitions of standard insur-            ing group and transmitted to the Depart-               for information regarding the actual cost
     ance terms and medical terms so that              ments includes four elements not speci-                of coverage net of any employer subsidy.
     consumers may compare health cov-                 fied in the statute. Consistent with the De-           This raises issues regarding the ability to
     erage and understand the terms of (or             partments’ approach of including all of the            compare premium or cost information be-
     exceptions to) their coverage;                    NAIC’s recommended materials, the pro-                 tween coverage options. The Departments
b.   A description of the coverage, includ-            posed regulations include these additional             request comments regarding whether the
     ing cost sharing, for each category               recommended elements. The four addi-                   SBC should include premium or cost in-
     of benefits identified by the Depart-             tional elements are: (1) for plans and is-             formation and if so, the extent to which
     ments;                                            suers that maintain one or more networks               such information should reflect the actual
c.   The exceptions, reductions, and limi-             of providers, an Internet address (or similar          cost to an individual net of any employer
     tations on coverage;                              contact information) for obtaining a list of           contribution, as well as the extent to which
d.   The cost-sharing provisions of the                the network providers; (2) for plans and is-           the cost information should include costs
     coverage, including deductible, coin-             suers that maintain a prescription drug for-           for different tiers of coverage (for exam-
     surance, and copayment obligations;               mulary, an Internet address where an in-               ple, self-only, family). The Departments
e.   The renewability and continuation of              dividual may find more information about               also request comments on how this in-
     coverage provisions;                              the prescription drug coverage under the               formation can be provided in a way that
f.   A coverage facts label that includes              plan or coverage; (3) an Internet address              allows individuals and plan sponsors to
     examples to illustrate common ben-                where an individual may review and ob-                 make meaningful comparisons about the
     efits scenarios (including pregnancy              tain the uniform glossary; and (4) premi-              cost of their coverage options.
     and serious or chronic medical condi-             ums (or cost of coverage for self-insured                  With respect to the definitions, the De-
     tions) and related cost sharing based             group health plans).                                   partments propose to follow an approach

12 See page 4 of the NAIC Draft Instruction Guide for Group Policies (available at http://www.naic.org/documents/committees_b_consumer_information_hhs_dol_submis-
sion_1107_inst_grp.pdf).



October 17, 2011                                                             542                                                         2011–42 I.R.B.
consistent with the recommendations re-                            At the same time, these generic glossary                     essential coverage statement),15 because
ceived from the NAIC.13 Specifically,                           definitions, alone, would not necessarily                       this content is not relevant until other el-
PHS Act section 2715(b)(3)(A) requires                          help consumers understand what terms                            ements of the Affordable Care Act are
plans and issuers to include in the SBC                         mean under a given plan or policy, nor                          implemented, this statement is not in the
“uniform definitions” of common health                          would they support meaningful compar-                           NAIC recommendations. For the same
insurance terms that are consistent with                        ison of coverage options under PHS Act                          reason, these proposed regulations pro-
the standards developed under section                           section 2715(b)(3)(A) because the generic                       vide that the minimum essential coverage
2715(g). PHS Act section 2715(g) directs                        terms used in the glossary are not plan-                        statement is not required to be in the SBC
the Departments to “provide for the de-                         or policy-specific and would not enable                         until the plan or coverage is required to
velopment of standards for the definitions                      consumers to understand what the terms                          provide an SBC with respect to coverage
of terms used in health insurance cover-                        actually mean in the context of a specific                      beginning on or after January 1, 2014.16
age,” including specified insurance-related                     contract. Therefore, in addition to the uni-                       Starting in 2014, certain individuals
terms and medical terms, as well as other                       form glossary, the NAIC working group                           who purchase health insurance coverage
terms the Departments determine are im-                         also developed a “Why this Matters” col-                        through the new Affordable Insurance Ex-
portant to define.                                              umn for the draft SBC template (with                            changes (“Exchanges”) may be eligible
    The NAIC working group adopted a                            instructions for plans and issuers to use                       for a premium tax credit to help pay for the
two-part approach to the definitions. First,                    in completing the SBC template).14 The                          cost of that coverage. In general, individ-
it drafted a consumer-friendly uniform                          instructions specify how plans and issuers                      uals offered affordable minimum essential
glossary, which includes definitions of                         must describe each coverage component                           coverage under an employer-sponsored
health coverage terminology, to be pro-                         in the SBC. For example, the instructions                       plan will not be eligible to receive a pre-
vided in connection with the SBC. The                           indicate what information must be pro-                          mium tax credit. Correctly establishing
NAIC’s uniform glossary provides simple,                        vided about a plan’s out-of-pocket limit                        whether an employer is offering affordable
general, descriptive definitions designed                       on cost sharing, including whether copay-                       minimum essential coverage is important
to help consumers understand terms and                          ments, out-of-network coinsurance, and                          to individuals, employers, and Exchanges
concepts commonly used in health cover-                         deductibles are subject to this limit.                          and necessitates the verification of certain
age. For example, “out-of-pocket limit”                            In the Departments’ proposal, the “Why                       information about employer coverage, in-
is defined in the NAIC’s uniform glossary                       this Matters” column in the SBC template,                       cluding the information in the minimum
as:                                                             together with the instructions for complet-                     essential coverage statement. The De-
    The most you pay during a policy pe-                        ing this column, constitute the definitions                     partments are exploring several reporting
    riod (usually a year) before your health                    required to be provided under PHS Act                           options under the Affordable Care Act and
    insurance or plan begins to pay 100 %                       section 2715(b)(3)(A). This approach al-                        other applicable statutory authorities17
    of the allowed amount. This limit never                     lows plans and issuers flexibility in how                       to determine how information about em-
    includes your premium, balance-billed                       they design benefits and coverage features,                     ployer-provided coverage can be provided
    charges or health care your health in-                      but proposes that benefits and features be                      and verified in a manner that limits the
    surance or plan doesn’t cover. Some                         described in a consistent way so that in-                       burden on individuals, employers, and
    health insurance or plans don’t count                       dividuals and employers will understand                         Exchanges. Because the statutory SBC
    all of your co-payments, deductibles,                       them and appreciate differences from one                        elements include the information in the
    co-insurance payments, out-of-network                       plan or policy to the next.                                     minimum essential coverage statement,
    payments or other expenses toward this                         With respect to the element of the SBC                       the Departments invite comments on how
    limit.                                                      regarding a statement about whether a                           employers might provide this information
In these proposed regulations, and as de-                       plan or coverage provides minimum es-                           to employees and the Exchanges in a man-
scribed more fully below under section                          sential coverage (as defined under section                      ner that minimizes duplication and burden.
II.C. of this preamble under the heading                        5000A(f) of the Code) and whether the                           The Departments also recognize that some
“Uniform Glossary”, the Departments pro-                        plan’s or coverage’s share of the total al-                     of the plan level information that is re-
pose that the NAIC uniform glossary be                          lowed costs of benefits provided under                          quired to be provided in the SBC is also
used to satisfy the requirements of PHS                         the plan or coverage meets applicable                           required to be provided under section 6056
Act 2715(g).                                                    minimum value requirements (minimum                             of the Code (requiring employers to report

13National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010 Letter to the Secretaries. Available at http://www.naic.org/documents/com-
mittees_b_consumer_information_ppaca_letter_to_sebelius.pdf.
14National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010, Final Package of Attachments. Available at http://www.naic.org/docu-
ments/committees_b_consumer_information_ppaca_final_materials.pdf.
15PHS Act section 2715(b)(3)(G) provides that this statement must indicate whether the plan or coverage (1) provides minimum essential coverage (as defined under section 5000A(f) of the
Code) and (2) ensures that the plan’s or coverage’s share of the total allowed costs of benefits provided under the plan or coverage is not less than 60 percent of such costs.
16 The minimum essential coverage and minimum value requirements are part of a larger set of health coverage reforms that take effect on January 1, 2014. The Departments’ proposal
recognizes this effective date and the need for additional guidance with respect to these requirements and is consistent with the recommendation in the transmittal letter from the NAIC. The
NAIC will continue to work to develop a recommendation for this SBC requirement and will submit it to the Departments at a later date.
17In addition to section 2715 of the PHS Act, these authorities include, but are not limited to, section 6056 of the Code, as added by section 1514 of the Affordable Care Act (requiring
employers to report to the Internal Revenue Service specific information related to employer-sponsored health coverage provided to employees); and section 18B of the Fair Labor Standards
Act, as added by section 1512 of the Affordable Care Act (requiring employers to disclose to employees information regarding Exchange coverage options).



2011–42 I.R.B.                                                                            543                                                             October 17, 2011
to the IRS specific information related to                     plan or policy for specified benefits scenar-                  issuers, with coverage examples required
employer-sponsored health coverage pro-                        ios.19                                                         to be provided for all benefits packages
vided to employees) and are coordinating                          These proposed regulations provide                          in later years. Comments are invited on
their efforts to determine how and whether                     that the Departments may identify up to six                    these issues.
the same data can be used for multiple                         coverage examples that may be required                            Comments are also requested on
purposes. To help develop a simple, effi-                      in an SBC. A maximum of six coverage                           whether it would be feasible or desir-
cient system for employers, the Treasury                       examples was discussed by the NAIC                             able to permit plans and issuers to in-
Department and the IRS intend to request                       working group, so that consumers may                           put plan- or policy-specific information
comments on employer information re-                           easily read, understand, and compare how                       into a central Internet portal, such as
porting required under section 6056 of the                     benefits are provided for different com-                       the Federal health care reform website
Code.                                                          mon medical conditions. In future years,                       (www.healthcare.gov), that would use
    The last SBC content item that mer-                        the SBC may include coverage examples                          the information to generate the coverage
its further discussion is the coverage facts                   in addition to the three proposed now. The                     examples for each plan or policy. The
label. The statute requires that an SBC                        Departments propose to limit the number                        examples would then be available on the
contain a “coverage facts label.” For ease                     of coverage examples to no more than six                       Internet portal for access by individuals.
of reference, the regulations propose to                       to limit the burden on plans and issuers                       Alternatively, some have suggested
use “coverage examples,” the term rec-                         and to ensure that there is adequate space                     that plans and issuers might provide
ommended by the NAIC, in place of the                          in the SBC to present coverage examples                        individuals, in a convenient format in
statutory term. As specified in the statute,                   in a manner that is easy to read and useful                    the SBC, the several items of plan- or
the proposed regulations provide that the                      for individuals. A document published                          policy-specific information necessary to
coverage examples illustrate benefits pro-                     contemporaneously with these proposed                          generate the coverage examples and a
vided under the plan or coverage for com-                      regulations adopts a phase-in approach                         reference to the Internet portal, so that
mon benefits scenarios, including preg-                        to the coverage examples, and uses the                         individuals could input the information
nancy and serious or chronic medical con-                      three coverage examples recommended by                         into the Internet portal to generate the
ditions. The coverage example would esti-                      NAIC for inclusion first - having a baby                       coverage examples for the plan or policy.
mate what proportion of expenses under an                      (normal delivery), treating breast cancer,                     The Departments note that the NAIC
illustrative benefits scenario might be cov-                   and managing diabetes.20                                       considered and rejected the idea of a
ered by a given plan or policy. Consumers                         The Departments invite comments on                          “cost calculator” or similar tool. The
then could use this information to compare                     the proposed coverage examples, whether                        Departments solicit comments on the
their share of the costs of care under dif-                    additional benefits scenarios would be                         cost and benefits of these alternatives,
ferent plan or coverage options to make an                     helpful and, if so, what those examples                        including whether such approaches would
informed purchasing decision.                                  should be. The Departments also invite                         provide an efficient and effective method
    Under the proposed regulations, con-                       comments on the benefits and costs asso-                       for individuals, plans, and issuers to
sistent with the recommendations of the                        ciated with developing multiple coverage                       generate or access the coverage examples
NAIC working group, a benefits scenario                        examples, as well as how multiple cover-                       and how any such approaches could
is a hypothetical situation, consisting of a                   age examples might promote or hinder the                       adequately serve individuals who do not
sample treatment plan for a specified med-                     ability to understand and compare terms                        have regular access to the Internet (for
ical condition during a specific period of                     of coverage. It is anticipated that any                        example, by disclosing in the SBC the
time, based on recognized clinical prac-                       additional coverage examples will only                         option to obtain paper copies of coverage
tice guidelines available through the Na-                      be required to be provided prospectively,                      examples generated by the plan or issuer).
tional Guideline Clearinghouse. 18A ben-                       and that plans and issuers will be pro-
efits scenario would include the informa-                      vided with adequate time for compliance.                       4. Appearance.
tion needed to simulate how claims would                       Additionally, the Departments invite com-
                                                                                                                                 Section 2715 of the PHS Act sets forth
be processed under the scenario to gener-                      ments on whether and how to phase in
                                                                                                                              the appearance for the SBC. Specifically,
ate an estimate of cost sharing a consumer                     the implementation of the requirement to
                                                                                                                              the statute provides that the SBC is to be
could expect to pay under the benefit pack-                    provide coverage examples. For example,
                                                                                                                              presented in a uniform formaţ utilizing ter-
age. The document published contempo-                          one option would provide that in 2012,
                                                                                                                              minology understandable by the average
raneously with these proposed regulations                      coverage examples would only need to
                                                                                                                              plan enrollee, that does not exceed four
includes specific instructions and an HHS                      be provided for the SBCs with respect to
                                                                                                                              pages in length, and does not include print
website with specific information neces-                       a subset of all benefits packages offered
                                                                                                                              smaller than 12-point font. The proposed
sary to simulate benefits covered under the                    by group health plans or health insurance
                                                                                                                              regulations, consistent with the NAIC
18The National Guideline Clearinghouse, within the Agency for Healthcare Research and Quality (AHRQ), publishes systematically developed statements to assist practitioner and patient
decisions about appropriate health care for specific clinical circumstances, available at http://www.guideline.gov/.
19 A general instruction guide for completing the coverage examples portion of the SBC, which is identical to that transmitted by the NAIC, is included in the document published today by
the Departments. These instructions, together with specific assumptions for coding data and reimbursement rates published today on HHS’s website comprise the Departments’ instructions
for completing the coverage examples portion of the SBC. See http://cciio.cms.gov. http://www.naic.org/documents/committees_b_consumer_information_hhs_dol_submission_1107_tem-
plate_blank.xls. The coding and reimbursement rate assumptions were developed by HHS and are also open for public comment.
20   See http://www.naic.org/documents/committees_b_consumer_information_final_coverage_ex.pdf.



October 17, 2011                                                                        544                                                                  2011–42 I.R.B.
recommendation, interpret the four-page                         provisions governing electronic disclosure                      ments on whether it might be appropriate
limitation as four double-sided pages.21                        in the individual health insurance market                       to allow issuers to fulfill an individual’s re-
The Departments’ view is that this ap-                          (described below) are met.                                      quest in electronic form, unless the indi-
proach will enable group health plans,                             With respect to an SBC provided by                           vidual requests a paper form.
participants and beneficiaries, and indi-                       an issuer to a plan, the SBC may be                                 Under this proposed rule, an issuer may
viduals in the individual insurance market                      provided in paper form or electronically                        provide an SBC (and any subsequent SBC)
to receive enough information to shop for,                      (such as email transmittal or an Inter-                         in electronic form (such as through an In-
compare, and make informed decisions re-                        net posting on the issuer’s website or                          ternet posting or via electronic mail) if an
garding various coverage options that may                       on www.healthcare.gov). For electronic                          individual requests information or requests
be available to them.22 The Departments                         forms, the format must be readily                               an application for coverage electronically;
seek comments on this approach.                                 accessible by the plan; the SBC must be                         or, if an individual submits an application
    Consistent with the NAIC recommen-                          provided in paper form free of charge                           for coverage electronically.
dations provided to the Departments,23 un-                      upon request; and for Internet postings,                            To ensure actual receipt of an SBC pro-
der these proposed regulations, a group                         the plan must be notified by paper or                           vided in electronic form, these proposed
health plan or a health insurance issuer will                   email that the documents are available on                       regulations would set forth certain safe-
provide the SBC as a stand-alone docu-                          the Internet, and given the web address.                        guards for electronic disclosure in the in-
ment in the form authorized by the Depart-                      The Departments invite comments on                              dividual market. Under the proposed reg-
ments and completed in accordance with                          whether any clarifications are needed                           ulations, an issuer that provides the SBC
the instructions and guidance for complet-                      with respect to the “readily accessible”                        electronically must:
ing the SBC that are authorized by the De-                      standard (for example, whether the
partments. As noted earlier in this pream-                      requirements for passwords or special
                                                                                                                                •     Request that an individual acknowl-
                                                                                                                                      edge receipt of the SBC;
ble, comments are invited on whether and                        software create a sufficient burden that the
how the SBC might best be coordinated                           documents are not “readily accessible”).
                                                                                                                                •     Make the SBC available in an elec-
                                                                                                                                      tronic format that is readily usable by
with the SPD and other group health plan                        The Departments also invite comment
                                                                                                                                      the general public;
disclosure materials.                                           on whether modifications or adaptations
                                                                of the SBC are necessary to facilitate or
                                                                                                                                •     If the SBC is posted on the Internet,
5. Form and Manner                                                                                                                    display the SBC in a location that is
                                                                improve electronic disclosure.
                                                                                                                                      prominent and readily accessible to the
a. Group health plan coverage                                   b. Individual health insurance coverage                               individual and provide timely notice,
                                                                                                                                      in electronic or non-electronic form, to
   To facilitate faster and less burdensome                        With respect to the individual market,                             each individual who requests informa-
disclosure of the SBC, and consistent with                      the proposed regulations set forth the cir-                           tion about, or an application for, cov-
PHS Act section 2715(d)(2), the proposed                        cumstances in which an issuer offering in-                            erage, that apprises the individual the
regulations set forth rules to facilitate elec-                 dividual health insurance coverage may                                SBC is available on the Internet and in-
tronic transmittal of the SBC, where ap-                        provide an SBC in either paper or elec-                               cludes the applicable Internet address;
propriate. Specifically, an SBC provided                        tronic form. Specifically, under these pro-                     •     Promptly provide a paper copy of the
by a plan or issuer to a participant or ben-                    posed regulations, unless specified other-                            SBC upon request without charge,
eficiary may be provided in paper form.                         wise by an individual, an issuer would                                penalty, or the imposition of any other
Alternatively, for plans and issuers sub-                       be required to provide an SBC (and any                                condition or consequence, and provide
ject to ERISA or the Code, the SBC may                          subsequent SBC) in paper form if, upon                                the individual with the ability to re-
be provided electronically if the require-                      the individual’s request for information or                           quest a paper copy of the SBC both
ments of the Department of Labor’s elec-                        request for an application, the individual                            by using the issuer’s Web site (such as
tronic disclosure safe harbor at 29 CFR                         makes the request in person, by phone or                              by clicking on a clearly identified box
2520.104b–1(c) are met.24 For non-Fed-                          by fax, or by U.S. mail or courier ser-                               to make the request) and by calling a
eral governmental plans, the regulations                        vice; or if, when submitting an applica-                              readily available telephone line, the
propose that the SBC may be provided                            tion, the individual completes the applica-                           number for which is prominently dis-
electronically if either the substance of the                   tion for coverage by hand, by phone or by                             played on the issuer’s Web site, policy
provisions of the Department of Labor’s                         fax, or by U.S. mail or courier service. As                           documents, and other marketing mate-
electronic disclosure rule are met, or if the                   an alternative, the Departments seek com-

21 PHS Act section 2715(b)(1) does not prescribe whether the four pages are four single-sided pages or four double-sided pages. The SBC template transmitted by NAIC exceeded four
single-sided pages. After considering the extent of statutorily-required content in PHS Act section 2715(b)(3), as well as the appearance and language requirements of PHS Act sections
2715(b)(1) and (2), the Departments are interpreting four pages to be four double-sided pages, in order to ensure that this information is presented in an understandable and meaningful way.
22 PHS Act sections 2715(b)(3)(A) and (g)(2) clearly reference consumers comparing coverage and PHS Act section 2715(b)(1) requires a uniform format, to enable shopping and comparing
health coverage options.
23National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010 Letter to the Secretaries. Available at http://www.naic.org/documents/com-
mittees_b_consumer_information_ppaca_letter_to_sebelius.pdf.
24 On April 7, 2011, the Department of Labor published a Request for Information regarding electronic disclosure at 76 FR 19285. In it, the Department of Labor stated that it is reviewing
the use of electronic media by employee benefit plans to furnish information to participants and beneficiaries covered by employee benefit plans subject to ERISA. Because these regulations
adopt the ERISA electronic disclosure rules by cross-reference, any changes that may be made to 29 CFR 2520.104b–1 in the future would also apply to the SBC.



2011–42 I.R.B.                                                                            545                                                             October 17, 2011
       rials related to the policy and clearly                   siding in the county is literate only in the                   fication, within the meaning of section 102
       identified as to purpose; and                             same non-English language, as determined                       of ERISA, includes any modification to the
•      Ensure an SBC provided in electronic                      in guidance. The Departments welcome                           coverage offered under a plan or policy
       form is provided in accordance with                       comments on whether and how to provide                         that, independently, or in conjunction with
       the appearance, content, and language                     written translations of the SBC in these                       other contemporaneous modifications or
       requirements of this section.                             non-English languages. (Note, nothing                          changes, would be considered by an aver-
                                                                 in these proposed regulations should be                        age plan participant (or in the case of in-
The Departments welcome comments as                              construed as limiting an individual’s rights                   dividual market coverage, an average indi-
to whether these or other safeguards are                         under Federal or State civil rights statutes,                  vidual covered under a policy) to be an im-
appropriate.                                                     such as Title VI of the Civil Rights Act of                    portant change in covered benefits or other
   Finally, consistent with the standards                        1964 (Title VI) which prohibits recipients                     terms of coverage under the plan or pol-
for electronic disclosure, these proposed                        of Federal financial assistance, including                     icy.27 A material modification could be an
regulations seek to reduce the burden of                         issuers participating in Medicare Advan-                       enhancement of covered benefits or ser-
providing an SBC to individuals shopping                         tage, from discriminating on the basis of                      vices or other more generous plan or pol-
for coverage. Specifically, these proposed                       race, color, or national origin. To ensure                     icy terms. It includes, for example, cover-
regulations provide that a health insurance                      non-discrimination on the basis of national                    age of previously excluded benefits or re-
issuer that complies with the requirements                       origin, recipients are required to take rea-                   duced cost-sharing. A material modifica-
set forth at 45 CFR 159.120 (75 FR 24470)                        sonable steps to ensure meaningful access                      tion could also be a material reduction in
for reporting to the Federal health care                         to their programs and activities by lim-                       covered services or benefits, as defined in
reform insurance Web portal would be                             ited English proficient persons. For more                      29 CFR 2520.104b–3(d)(3), or more strin-
deemed to comply with the requirement                            information, see, “Guidance to Federal                         gent requirements for receipt of benefits.
to provide the SBC to an individual re-                          Financial Assistance Recipients Regard-                        As a result, it also includes changes or
questing information about coverage prior                        ing Title VI Prohibition Against National                      modifications that reduce or eliminate ben-
to submitting an application. Any SBC                            Origin Discrimination Affecting Limited                        efits, increase premiums and cost-sharing,
furnished at the time of application or sub-                     English Proficient Persons,” available                         or impose a new referral requirement.
sequently, however, would be required to                         at http://www.hhs.gov/ocr/civilrights/re-                          PHS Act section 2715 and these pro-
be provided in a form and manner consis-                         sources/specialtopics/lep/policyguidance-                      posed regulations describe the timing for
tent with the rules described above.                             document.html.)                                                when a notice of material modification
                                                                                                                                must be provided in situations other than
6. Language                                                      B. Notice of Modifications                                     upon renewal at the end of a plan or pol-
                                                                                                                                icy year when a new SBC is provided
    PHS Act section 2715(b)(2) provides                              Section 2715(d)(4) of the PHS Act di-                      under the rules of paragraph (a) of the
that standards shall ensure that the SBC “is                     rects that a group health plan or health in-                   proposed rules. To the extent a plan or
presented in a culturally and linguistically                     surance issuer offering group or individual                    policy implements a mid-year change that
appropriate manner.” These proposed reg-                         health insurance coverage to provide no-                       is a material modification, that affects
ulations provide that, to satisfy the require-                   tice of a material modification if it makes                    the content of the SBC, and that occurs
ment to provide the SBC in a culturally and                      a material modification (as defined under                      other than in connection with a renewal or
linguistically appropriate manner, a plan                        ERISA section 102, 29 U.S.C. 1022) in                          reissuance of coverage, paragraph (b) of
or issuer follows the rules for providing                        any of the terms of the plan or coverage                       the proposed regulations would require a
appeals notices in a culturally and lin-                         involved that is not reflected in the most                     notice of modifications to be provided 60
guistically appropriate manner under PHS                         recently provided SBC. The proposed reg-                       days in advance of the effective date of
Act section 2719, and paragraph (e) of its                       ulations interpret the statutory reference to                  the change. This notice could be satisfied
implementing regulations.25 In general,                          the SBC to mean that only a material mod-                      either by a separate notice describing the
those rules provide that, in specified coun-                     ification that would affect the content of                     material modification or by providing an
ties of the United States, plans and issuers                     the SBC would require plans and issuers                        updated SBC reflecting the modification.
must provide interpretive services, and                          to provide this notice. In these circum-                       For ERISA-covered group health plans
must provide written translations of the                         stances, the notice must be provided to en-                    subject to PHS Act section 2715, this
SBC upon request in certain non-English                          rollees (or, in the individual market, pol-                    notice is in advance of the timing under
languages. In addition, in such counties,                        icyholders) no later than 60 days prior to                     the Department of Labor’s regulations set
English versions of the SBC must disclose                        the date on which such change will be-                         forth at 29 CFR 2520.104b–3 that require
the availability of language services in                         come effective, if it is not reflected in                      the provision of a summary of material
the relevant language.26 The counties in                         the most recent SBC provided and occurs                        modification (SMM) (generally not later
which this must be done are those in which                       other than in connection with a renewal or                     than 210 days after the close of the plan
at least ten percent of the population re-                       reissuance of coverage. A material modi-                       year in which the modification or change

25   See 75 FR 43330 (July 23, 2010), as amended by 76 FR 37208 (June 24, 2011).
26   The SBC template, as recommended by the NAIC, does not include this statement; however, these proposed regulations would require that plans and issuers include it.
27   See DOL Information Letter, Washington Star/Washington-Baltimore Newspaper Guild to Munford Page Hall, II, Baker & McKenzie (February 8, 1985).



October 17, 2011                                                                          546                                                                 2011–42 I.R.B.
was adopted, or, in the case of a material                   in-network co-payment, medically nec-                        D. Preemption
reduction in covered services or benefits,                   essary, network, out-of-network co-insur-
not later than 60 days after the date of                     ance, plan, preauthorization, prescription                      Section 2715 of the PHS Act is in-
adoption of the modification or change).                     drugs, primary care physician, primary                       corporated into ERISA section 715, and
In situations where a complete notice is                     care provider, provider, reconstructive                      Code section 9815, and is subject to the
provided in a timely manner under PHS                        surgery, specialist, and urgent care. The                    preemption provisions of ERISA sec-
Act section 2715(d)(4), of course, an                        uniform glossary proposed by the De-                         tion 731 and PHS Act section 2724 (im-
ERISA-covered plan will also satisfy the                     partments is being issued in a document                      plemented in 29 CFR 2590.731(a) and
requirement to provide an SMM under                          published elsewhere in today’s Federal                       45 CFR 146.143(a)). These provisions
Part 1 of ERISA. The Departments in-                         Register.                                                    apply so that the requirements of part
vite comments on this expedited notice                           The Departments invite comments on                       7 of ERISA and part A of title XXVII
requirement, including whether there are                     the uniform glossary, including the content                  of the PHS Act, as amended by the
any circumstances where 60-day advance                       of the definitions and whether there are ad-                 Affordable Care Act, are not to be
notice might be difficult. The Depart-                       ditional terms that are important to include                 “construed to supersede any provision of
ments also solicit comments on the format                    in the uniform glossary so that individuals                  State law which establishes, implements,
of the notice of modification, particularly                  and employers may understand and com-                        or continues in effect any standard or
for plans and issuers not subject to ERISA.                  pare the terms of coverage and the extent                    requirement solely relating to health
                                                             of medical benefits (or exceptions to those                  insurance issuers in connection with group
C. Uniform Glossary                                          benefits). For example, the Departments                      or individual health insurance coverage
                                                             are considering whether glossary defini-                     except to the extent that such standard or
    Section 2715(g)(2) of the PHS Act di-                                                                                 requirement prevents the application of
                                                             tions of any of the following terms would
rects the Departments to develop standards                                                                                a requirement” of part A of title XXVII
                                                             be helpful: claim, external review, ma-
for definitions for at least the following                                                                                of the PHS Act. Accordingly, State laws
                                                             ternity care, preexisting condition, preex-
insurance-related terms: co-insurance,                                                                                    that impose on health insurance issuers
                                                             isting condition exclusion period, or spe-
co-payment, deductible, excluded ser-                                                                                     requirements that are stricter than those
                                                             cialty drug. It is anticipated that any addi-
vices, grievance and appeals, non-pre-                                                                                    imposed by the Affordable Care Act will
                                                             tional terms would be included in the uni-
ferred provider, out-of-network co-pay-                                                                                   not be superseded by the Affordable Care
                                                             form glossary prospectively, and that plans
ments, out-of-pocket limit, preferred                                                                                     Act. Moreover, PHS Act section 2715(e)
                                                             and issuers would be provided adequate
provider, premium, and UCR (usual, cus-                                                                                   provides that the standards developed
                                                             time for compliance.
tomary and reasonable) fees. Section                                                                                      under PHS Act section 2715(a), “shall
                                                                 The proposed regulations direct a plan
2715(g)(3) of the PHS Act directs the                                                                                     preempt any related State standards
                                                             or issuer to make the uniform glossary
Departments to develop standards for def-                                                                                 that require [an SBC] that provides
                                                             available upon request within seven days.
initions for at least the following medical                                                                               less information to consumers than that
                                                             The timing of disclosure is intended to be
terms: durable medical equipment, emer-                                                                                   required to be provided under this section,
                                                             generally consistent with the proposed re-
gency medical transportation, emergency                                                                                   as determined by the [Departments].”
                                                             quirement, described in section II.A.2.c of
room care, home health care, hospice                                                                                         Reading these two preemption provi-
                                                             this preamble. A plan or issuer may sat-
services, hospital outpatient care, hospi-                                                                                sions together, these proposed regulations
                                                             isfy this disclosure requirement by provid-
talization, physician services, prescription                                                                              would not prevent States from imposing
                                                             ing an Internet address where an individual
drug coverage, rehabilitation services, and                                                                               separate, additional disclosure require-
                                                             may review and obtain the uniform glos-
skilled nursing care. Additionally, the                                                                                   ments on health insurance issuers. The
                                                             sary, as described in section II.A.3 of this
statute directs the Departments to develop                                                                                Departments recognize the need to balance
                                                             preamble. This Internet address may be a
standards for such other terms that will                                                                                  States’ interest in information disclosure
                                                             place the document can be found on the
help consumers understand and compare                                                                                     regarding insurance coverage with the
                                                             plan’s or issuer’s website. It may also be
the terms of coverage and the extent of                                                                                   primary objective of PHS Act section
                                                             a place the document can be found on the
medical benefits (including any excep-                                                                                    2715 (as stated in the section title) of pro-
                                                             website of either the Department of Labor
tions and limitations).                                                                                                   viding for the development and use of a
                                                             or HHS. However, a plan or issuer must
    The NAIC working group recom-                                                                                         short, uniform explanation of coverage
                                                             make a paper copy of the glossary avail-
mended,28 and the Departments are                                                                                         document so that consumers may make
                                                             able upon request. Group health plans and
proposing to adopt for this purpose, in-                                                                                  apples-to-apples comparisons of plan and
                                                             health insurance issuers will provide the
clusion of the following additional terms                                                                                 coverage options.
                                                             uniform glossary in the appearance autho-
in the uniform glossary: allowed amount,
                                                             rized by the Departments, so that the glos-
balance billing, complications of preg-                                                                                   E. Failure to Provide
                                                             sary is presented in a uniform format and
nancy, emergency medical condition,
                                                             uses terminology understandable by the                          PHS Act section 2715(f), incorporated
emergency services, habilitation services,
                                                             average plan enrollee or individual cov-                     into ERISA section 715 and Code section
health insurance, in-network co-insurance,
                                                             ered under an individual policy.                             9815, provides that a group health plan (in-

28National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010 Letter to the Secretaries. Available at http://www.naic.org/documents/com-
mittees_b_consumer_information_ppaca_letter_to_sebelius.pdf.



2011–42 I.R.B.                                                                       547                                                          October 17, 2011
cluding its administrator), and a health in-       The Secretary of HHS has direct en-          2715(f) as incorporated by section 715
surance issuer offering group or individual     forcement authority for violations by           of ERISA. In accordance with ERISA
health insurance coverage, that “willfully      non-Federal governmental plans, and will        502(b)(3), 29 U.S.C. 1132(b)(3), the Sec-
fails to provide the information required       use the appropriate penalty for violations      retary of Labor is not authorized to assess
under this section shall be subject to a fine   of section 2715, depending on whether           this fine against a health insurance issuer.
of not more than $1,000 for each such fail-     the violation is willful. Proposed para-
ure.” In addition, under PHS Act section        graph (e) of the HHS regulations cross          b. Department of the Treasury
2715(f), a separate fine may be imposed         references the enforcement regulations at
                                                                                                    If a group health plan (other than a plan
for each individual or entity for whom          45 CFR 150.101 et seq., and states that
                                                                                                maintained by a governmental entity) fails
there is a failure to provide an SBC. Due       they relate to any failure, regardless of
                                                                                                to comply with the requirements of chap-
to the different enforcement jurisdictions      intent, by a health insurance issuer or
                                                                                                ter 100 of the Code, an excise tax is im-
of the Departments, as well as their differ-    non-Federal governmental plan, to comply
                                                                                                posed under section 4980D of the Code.
ent underlying enforcement structures, the      with any requirement of section 2715 of
                                                                                                The excise tax is generally $100 per day
mechanisms for imposing the new penalty         the PHS Act.
                                                                                                per individual for each day that the plan
may vary slightly, as discussed below.
                                                2. Departments of Labor and the Treasury        fails to comply with chapter 100 with re-
                                                                                                spect to that individual. Numerous rules
1. Department of HHS
                                                    The Department of Labor enforces the        under section 4980D reduce the amount of
                                                requirements of part 7 of ERISA and the         the excise tax for failures due to reason-
    Enforcement of Part A of Title XXVII
                                                Department of the Treasury enforces the         able cause and not to willful neglect. Spe-
of the PHS Act, including section 2715,
                                                requirements of chapter 100 of the Code         cial rules apply for church plans. Taxpay-
is generally governed by PHS Act sec-
                                                with respect to group health plans main-        ers subject to the excise tax under section
tion 2723 and corresponding regulations
                                                tained by an entity that is not a governmen-    4980D are required to report the failures
at 45 C.F.R. 150.101 et seq. Under those
                                                tal entity. Generally the enforcement au-       under chapter 100 and the amount of the
provisions, a State has the discretion
                                                thority under these provisions applies to all   excise tax on IRS Form 8928. See 26 CFR
to enforce the provisions against health
                                                nongovernmental group health plans, but         54.4980D–1, 54.6011–2, and 54.6151–1.
insurance issuers in the first instance, and
                                                the Department of Labor does not enforce            Section 2715(f) of the PHS Act sub-
the Secretary of HHS only enforces a
                                                the requirements of part 7 of ERISA with        jects a plan sponsor or designated admin-
provision after the Secretary determines
                                                respect to church plans.                        istrator to a fine of not more than $1,000
that a State has failed to substantially
                                                    On April 21, 1999, pursuant to section      for each failure to provide an SBC. Unless
enforce the provision. If a State enforces a
                                                104 of the Health Insurance Portability         and until future guidance provides other-
provision such as PHS Act section 2715, it
                                                and Accountability Act of 1996 (HIPAA),         wise, group health plans subject to chap-
uses its own enforcement mechanisms. If
                                                Pub. L. 104–191, the Secretaries entered        ter 100 of the Code should continue to re-
the Secretary enforces, the statute provides
                                                into a memorandum of understanding29            port the excise tax of section 4980D on IRS
for penalties of up to $100 per day for each
                                                that, among other things, established a         Form 8928 with respect to failures to com-
affected individual.
                                                mechanism for coordinating enforcement          ply with PHS Act section 2715. The Sec-
    PHS Act section 2715(f) provides that
                                                and avoiding duplication of effort for          retaries of Labor and the Treasury will co-
an entity that willfully fails to provide the
                                                shared jurisdiction. The memorandum             ordinate to determine appropriate cases in
information required under PHS Act sec-
                                                of understanding applies, as appropriate,       which the fine of section 2715(f) should be
tion 2715 shall be subject to a fine of not
                                                to health legislation enacted after April       imposed on group health plans that are not
more than $1,000 for each such failure.
                                                21, 1999 over which at least two of             maintained by a governmental entity.
Such failure with respect to each enrollee
                                                the Departments share jurisdiction,
constitutes a separate offense. This penalty                                                    F. Applicability
                                                including section 2715 of the PHS Act as
can only be imposed by the Secretary.
                                                incorporated into ERISA and the Code.
    Paragraph (e) of the regulations pro-                                                          PHS Act section 2715 directs that the
                                                Therefore, in enforcing PHS Act section
posed by HHS clarifies that States have                                                         requirement for group health plans and
                                                2715, the Departments of Labor and
primary enforcement authority over health                                                       health insurance issuers to provide an SBC
                                                the Treasury will coordinate to avoid
insurance issuers for any violations,                                                           “prior to any enrollment restriction” ap-
                                                duplication in the case of group health
whether willful or not, using their own                                                         plies not later than 24 months after the
                                                plans that are not church plans and that are
remedies. These proposed regulations also                                                       date of enactment (i.e., beginning on or
                                                not maintained by a governmental entity.
clarify that PHS Act section 2715 does not
limit the Secretary’s authority to impose       a. Department of Labor
penalties for willful violations regardless
of State enforcement. However, the Secre-          The Department of Labor will issue
tary intends to use enforcement discretion      separate regulations in the future describ-
if the Secretary determines that the State is   ing the procedures for assessment of the
adequately addressing willful violations.       civil fine provided under PHS Act section

29   See 64 FR 70164 (December 15, 1999).



October 17, 2011                                                   548                                                 2011–42 I.R.B.
after March 23, 2012).30 As noted ear-                          time, in the Department of HHS’s in-                           tial benefits and the costs associated with
lier, the statute also directs the Depart-                      terim final regulations relating to medical                    this proposed regulation. The Depart-
ments to consult with the NAIC in devel-                        loss ratio (MLR) provisions published at                       ments invite comment on this assessment.
oping the SBC standards. The Depart-                            75 FR 74864, a special rule was included
ments are appreciative of the detailed and                      for expatriate insurance policies. The                         1. Current Regulatory Framework
valuable work the NAIC and its working                          Departments invite comments on whether
                                                                                                                                   Health plan sponsors and issuers do not
group has performed in developing recom-                        any adjustments are needed under PHS
                                                                                                                               currently uniformly disclose information
mended standards and materials, including                       Act section 2715 for expatriate plans and,
                                                                                                                               to consumers about benefits and coverage
the NAIC’s extensive efforts to involve nu-                     if so, for what types of coverage.
                                                                                                                               in a simple and consistent way. ERISA-
merous stakeholder groups in that process
                                                                III. Economic Impact and Paperwork                             covered group health plan sponsors are re-
for over a year and to provide drafts of its
                                                                Burden                                                         quired to describe important plan informa-
evolving materials to the Departments pe-
                                                                                                                               tion concerning eligibility, benefits, and
riodically. Accordingly, as noted, the De-
                                                                A. Executive Orders 12866 and                                  participant rights and responsibilities in a
partments are appending to the document
                                                                13563–Department of Labor and                                  summary plan description (SPD). But as
accompanying these proposed regulations
                                                                Department of Health and Human                                 these documents have increased in size and
the NAIC’s SBC work product for public
                                                                Services                                                       complexity — for example, due to the in-
comment.
                                                                                                                               sertion of more legalistic language that is
    The NAIC transmitted its final materi-
                                                                    Executive Orders 12866 and 13563                           designed to mitigate the employer’s risk of
als to the Departments on July 29, 2011.
                                                                direct agencies to assess all costs and ben-                   litigation — they have become more dif-
In recognition of existing disclosure re-
                                                                efits of available regulatory alternatives                     ficult for participants and beneficiaries to
quirements under 29 CFR 2520.104b–2 for
                                                                and, if regulation is necessary, to select                     understand.31 Indeed, a recent analysis of
those group health plans that already pro-
                                                                regulatory approaches that maximize net                        SPDs from 40 employer health plans from
vide SPDs to participants and concerns
                                                                benefits (including potential economic,                        across the United States (varying based on
raised about providing SBCs by the statu-
                                                                environmental, public health and safety                        geography, firm size, and industry sector)
tory deadline, comments are solicited on
                                                                effects; distributive impacts; and equity).                    found that, on average, SPDs are generally
whether and, if so, how practical consid-
                                                                Executive Order 13563 emphasizes the                           written at a first year college reading level
erations might affect the timing of imple-
                                                                importance of quantifying both costs and                       (with readability ranging from 9th grade
mentation. In coordination with the re-
                                                                benefits, of reducing costs, of harmonizing                    reading level to nearly a college gradu-
quest for comment elsewhere in this pre-
                                                                rules, and of promoting flexibility. This                      ate reading level).32 Moreover, the formats
amble on a potential phase-in of the im-
                                                                rule has been designated a “significant                        of existing SPDs are not standardized; for
plementation of the requirement to provide
                                                                regulatory action” under section 3(f) of                       example, while these documents could be
coverage examples, comments are invited
                                                                Executive Order 12866. Accordingly, the                        dozens of pages long, there is no require-
also on how any potential phase-in of those
                                                                rule has been reviewed by the Office of                        ment that they include an executive sum-
requirements could or should be coordi-
                                                                Management and Budget.                                         mary. Additionally, group health plans not
nated with the timing of the effectiveness
                                                                    A regulatory impact analysis (RIA)                         covered by ERISA, such as plans spon-
of the general SBC standards.
                                                                must be prepared for major rules with eco-                     sored by State and local governments, are
    The Departments also request com-
                                                                nomically significant effects ($100 million                    not required to comply with such disclo-
ments on whether any special rules are
                                                                or more in any 1 year). As discussed                           sure requirements.
necessary to accommodate expatriate
                                                                below, the Departments have concluded                              In the individual market, health insur-
plans. The Departments note that, in the
                                                                that these proposed regulations would not                      ance issuers are subject to various, diverse
context of group health plan coverage,
                                                                have economic impacts of $100 million or                       State disclosure laws. For example, States
section 4(b)(4) of ERISA provides that a
                                                                more in any one year or otherwise meet                         like Massachusetts,33 New York,34 Rhode
plan maintained outside the United States
                                                                the definition of an “economically signif-                     Island,35 Utah36 and Vermont37 have es-
primarily for the benefit of persons sub-
                                                                icant rule” under Executive Order 12866.                       tablished minimum standards for disclo-
stantially all of whom are nonresident
                                                                Nonetheless, consistent with Executive                         sure of health insurance information but
aliens is exempt from ERISA title I, in-
                                                                Orders 12866 and 13563, the Departments                        even within such States, consumer disclo-
cluding ERISA section 715. At the same
                                                                have provided an assessment of the poten-                      sures vary widely with respect to their re-

30   Section 2715 is applicable to both grandfathered and non-grandfathered health plans. See 26 CFR 54.9815–1251(d), 29 CFR 2590.715–1251(d), and 45 CFR 147.120(d).
31 ERISA Advisory Council. Report of the Working Group on health and Welfare Benefit Plans’ Communication. November 2005. Available at: http://www.dol.gov/ebsa/publica-
tions/AC_1105c_report.html.
32 “How Readable Are Summary Plan Descriptions For Health Care Plans?” Employee Benefit Research Institute (EBRI) Notes. October 2006, Vol. 27, No. 10. Available at:
http://www.ebri.org/pdf/notespdf/EBRI_Notes_10–20061.pdf.
33   M.G.L.A. 176Q § 5 (2010).
34   NY Ins. Law § 3217–a (2010).
35   Office of the Health Insurance Commissioner Regulation 5: Standards for Readability of Health Insurance Forms, State of Rhode Island and Providence Plantations, August 21, 2010.
36   Utah Code § 31A–22–613.5 (2010).
37   Division of Health Care Administration, Rule 10.000: Quality Assurance Standards and Consumer Protections for Managed care Plans, State of Vermont, September 20, 1997.



2011–42 I.R.B.                                                                           549                                                            October 17, 2011
quired content. Additionally, some State                              Given this difficulty in obtaining rel-                         understand the coverage they have and al-
disclosure laws are limited to current en-                         evant information, consumers may not                               low consumers choosing coverage to more
rollees, so that individuals shopping for                          always make informed purchase decisions                            easily compare coverage options. As a re-
coverage do not receive information about                          that best meet the health and financial                            sult, consumers may make better cover-
health insurance coverage options. Other                           needs of themselves, their families, or                            age decisions, which more closely match
State disclosure requirements only extend                          their employees. Similarly, workers may                            their preferences with respect to benefit
to managed care organizations, and not to                          overestimate or underestimate the value of                         design, level of financial protection, and
other segments of the market.38                                    employer-sponsored health benefits, and                            cost. The Departments believe that such
                                                                   thus their total compensation; and health                          improvements will result in a more effi-
2. Need for Regulatory Action                                      insurance issuers and employers may face                           cient, competitive market. These proposed
                                                                   less pressure to compete on price, benefits,                       regulations would also benefit consumers
    Congress added new PHS Act section
                                                                   and quality, leading to inefficiency in the                        by reducing the time they spend searching
2715 through the Affordable Care Act to
                                                                   health insurance and labor markets.                                for and compiling health plan and cover-
ensure that plans and issuers provide ben-
                                                                      Furthermore, research suggests that                             age information.
efits and coverage information in a more
                                                                   many consumers do not understand how                                  Under the proposed regulations, group
uniform format that helps consumers to
                                                                   health insurance works.          Oftentimes,                       health plans and health insurance issuers
better understand their coverage and bet-
                                                                   health insurance contracts and benefit de-                         would incur costs to compile and provide
ter compare coverage options. These pro-
                                                                   scriptions are written in technical language                       the summary of benefits and coverage
posed regulations are necessary to provide
                                                                   that requires a sophisticated level of health                      disclosures (that includes coverage ex-
standards for a summary of benefits and
                                                                   insurance literacy many people do not                              amples (CEs)) and a uniform glossary of
coverage and a uniform glossary of terms
                                                                   have.41 One study found that consumers                             health coverage and medical terms. The
used in health coverage. This approach
                                                                   have particular difficulty understanding                           Departments estimate that the annualized
is consistent with Executive Order 13563,
                                                                   cost sharing and tend to underestimate                             cost may be around $50 million, although
which directs agencies to “identify and
                                                                   their coverage for mental health, substance                        there is uncertainty arising from general
consider regulatory approaches that reduce
                                                                   abuse and prescription drug benefits,                              data limitations and the degree to which
burdens and maintain flexibility and free-
                                                                   while overestimating their coverage for                            economies of scale exist for disclosing this
dom of choice for the public. These ap-
                                                                   long-term care.42                                                  information. The costs estimates employ
proaches include [...] disclosure require-
                                                                                                                                      assumptions that we believe fully capture
ments as well as provision of information                          3. Summary of Impacts                                              expected issuer and third-party administra-
to the public in a form that is clear and in-
                                                                                                                                      tor (TPA) costs, and perhaps overestimate
telligible.”                                                           Table 1 below depicts an accounting
                                                                                                                                      them if, for example, economies of scale
    The patchwork of consumer disclosure                           statement summarizing the Departments’
                                                                                                                                      are achievable.
requirements makes the process of shop-                            assessment of potential benefits, costs, and
                                                                                                                                         The Departments anticipate that the
ping for coverage an inefficient, difficult,                       transfers associated with this regulatory
                                                                                                                                      provisions of these proposed regulations
and time-consuming task. Consumers in-                             action. The Departments have limited the
                                                                                                                                      will help consumers make better health
cur significant search costs while trying                          period covered by the RIA to 2011–2013.
                                                                                                                                      coverage choices and more easily under-
to locate reliable cost, coverage and ben-                         Estimates are not provided for subsequent
                                                                                                                                      stand their coverage. In accordance with
efit data.39 Such search costs arise, in part,                     years, because there will be significant
                                                                                                                                      Executive Orders 12866 and 13563, the
due to a lack of uniform information across                        changes in the marketplace in 2014 related
                                                                                                                                      Departments believe that the benefits of
the various coverage options, particularly                         to the offering of new individual and small
                                                                                                                                      this regulatory action justify the costs.
in the individual market but also in some                          group plans through the Affordable In-
large employer plans. Although not di-                             surance Exchanges, and the wide-ranging
rectly comparable, in Medigap, a market                            scope of these changes makes it difficult
with standardized benefits, the average per                        to project results for 2014 and beyond.
beneficiary search cost was estimated at                               The direct benefits of these proposed
$72 —far higher than in other insurance                            regulations come from improved informa-
markets, such as auto insurance.40                                 tion, which will enable consumers to better


38 For example, New York requires Health Maintenance Organizations to provide to prospective members, as well as policyholders, information on cost-sharing, including out-of-network
costs, limitations and exclusions on benefits, prior authorization requirements, and other disclosures such as appeal rights. NY Ins. Law § 3217–a (2010). Utah requires each insurer issuing
a health benefit plan to provide all enrollees, prior to enrollment in the health benefit plan, written disclosure of restrictions or limitations on prescription drugs and biologics, coverage limits
under the plan, and any limitation or exclusion of coverage. Utah Code § 31A–22–613.5 (2010). Rhode Island requires all health insurance forms to meet minimum readability standards.
Office of the Health Insurance Commissioner Regulation 5: Standards for Readability of Health Insurance Forms, State of Rhode Island and Providence Plantations, August 21, 2010.
39 M. Susan Marquis et al., “Consumer Decision Making in the Individual Health Insurance Market,” 25 Health Affairs w.226, w.231-w.232 (May 2006). Available at: http://content.healthaf-
fairs.org/content/25/3/w226.full.pdf+html.
40   Nicole Maestas et al., “Price Variation in Markets with Homogenous Goods: The Case of Medigap,” National Bureau of Economic Research (January 2009).
41   For example, as discussed earlier, the average Summary Plan Description is written at a first-year college reading level. See Employee Benefit Research Institute, October 2006.
42D.W. Garnick, A.M. Hendricks, K.E. Thorpe, J.P. Newhouse, K. Donelan and R.J. Blendon. “How well do Americans understand their health coverage?” Health Affairs, 12(3). 1993:204–12.
Available at: http://content.healthaffairs.org/content/12/3/204.full.pdf.



October 17, 2011                                                                              550                                                                       2011–42 I.R.B.
     Table 1. Accounting Table
     Benefits:
     Qualitative:
     Improved information will enable consumers to more easily and efficiently understand and compare coverage, and as a
     result, make better choices.
     Costs:                               Estimate                            Year                        Discount                             Period Covered
                                                                              Dollar                      Rate
                                                                                                          Percent
     Annualized Monetized                 $51                                 2011                        7                                    2011–2013
     ($ millions/year)
                                          $47                                 2011                        3                                    2011–2013



4. Benefits                                                     that such improvements will result in a                        ings for some value-conscious consumers
                                                                more efficient, competitive market.                            who today pay higher premiums because
    In developing these proposed regu-                              These proposed regulations would also                      of imperfect information about benefits.45
lations, the Departments carefully con-                         benefit consumers by reducing the time                         In particular, the use of coverage exam-
sidered their potential effects, including                      they spend searching for and compiling                         ples46 called for by these proposed regu-
costs, benefits, and transfers. Because of                      health plan and coverage information.                          lations would better enable consumers to
data limitations, the Departments did not                       As stated above, consumers in the indi-                        understand how key coverage provisions
attempt to quantify expected benefits of                        vidual market, as well as consumers in                         operate in the context of recognizable
these proposed regulations. Nonetheless,                        some large employer-sponsored plans,                           health care situations and more mean-
the Departments were able to identify sev-                      have a number of coverage options and                          ingfully compare the level of financial
eral benefits, which are discussed below.                       must make a choice using disclosures                           protection offered by a plan or coverage,
    These proposed regulations could gen-                       and tools that vary widely in content and                      resulting in potential cost-savings. 47,48
erate significant economic and social                           format. A growing body of decision-mak-                        The Departments therefore expect that
welfare benefits to consumers. Under                            ing research suggests that the abundance                       uniform disclosures under these proposed
these proposed regulations, health insur-                       and complexity of information can over-                        regulations would enable consumers
ance issuers and group health plans would                       whelm consumers and create a significant                       to derive more value from their health
provide clear and consistent information                        non-price barrier to coverage.43 For ex-                       coverage and enhance the ability of plan
to consumers. Uniform disclosure is an-                         ample, a RAND study of California’s                            sponsors, particularly small businesses,
ticipated to benefit individuals shopping                       individual market found that reducing bar-                     to purchase products that are appropriate
for, or enrolled in, group and individ-                         riers to information about health insurance                    to both their needs and the health and
ual health insurance coverage and group                         products would lead to increases in pur-                       financial needs of their employees.
health plans. The direct benefits of these                      chase rates comparable to modest price                             Finally, these proposed regulations are
proposed regulations come from improved                         subsidies.44 By ensuring consumers have                        expected to facilitate consumers’ ability
information, which will enable consumers                        access to readily available, concise, and                      to understand their coverage. As stated
to better understand the coverage they                          understandable information about their                         above, research suggests that consumers
have and allow consumers choosing cov-                          coverage options, these proposed regu-                         do not understand how coverage works or
erage to more easily compare options.                           lations could reduce consumers’ cost of                        the terminology used in health insurance
As a result, consumers will make better                         obtaining information and may increase                         policies. Consequently, consumers may
coverage decisions, which more closely                          health insurance purchase rates.                               face unexpected medical expenses if they
match their preferences with respect to                             Furthermore, greater transparency in                       become seriously ill. They may also be-
benefit design, level of financial protec-                      pricing and benefits information will allow                    come confused by a coverage or payment
tion, and cost. The Departments believe                         consumers to make more informed pur-                           decision made by their plan or issuer, lead-
                                                                chasing decisions, resulting in cost-sav-                      ing to inefficiency in the operation of em-
43 Judith H. Hibbard and Ellen Peters, “Supporting Informed Consumer Health Care Decisions: Data Presentation Approaches that Facilitate the Use of Information in Choice,” 24 Annu.
Rev. Public Health 413, 416 (2003).
44 M. Susan Marquis et al., “Consumer Decision Making in the Individual Health Insurance Market,” 25 Health Affairs w.226, w.231-w.232 (May 2006). Available at: http://content.healthaf-
fairs.org/content/25/3/w226.full.pdf+html.
45 A study of California’s individual market found that 25 percent of consumers chose products with premiums that were more than 30 percent higher than the median price for an actuarially
equivalent product for a similar person. Melinda Beeuwkes Buntin et al.,“Trends and Variability In Individual Insurance Products,” Health Affairs w3.449, w3.457 (2003), available at
http://content.healthaffairs.org/content/early/2003/09/24/hlthaff.w3.449.citation.
46   The NAIC recommends that the term “coverage examples” be used as reference to the statutory term “coverage facts labels,” and the Departments concur with this recommendation.
47   Shoshanna Sofaer et al., “Helping Medicare Beneficiaries Choose Health Insurance: The Illness Episode Approach,” 30 The Gerontologist 308–315 (1990).
48   Michael Schoenbaum et al., “Health Plan Choice and Information about Out-of-Pocket Costs: An Experimental Analysis,” 38 Inquiry 35–48 (Spring 2001).



2011–42 I.R.B.                                                                           551                                                            October 17, 2011
ployee benefit plans and health insurance                       the tasks and level of resources required.                       lives includes individuals in the individual
coverage. By making it easier for con-                          Based on these discussions, the Depart-                          market as well as those in insured group
sumers to understand the key features of                        ments estimate that there will be two                            health plans.
their coverage, these proposed regulations                      categories of principal costs associated                             With respect to the self-insured mar-
would enhance consumers’ ability to use                         with the standards in these proposed regu-                       ket, the Departments estimate there are
their coverage. Additionally, the uniform                       lations: one-time start-up costs and main-                       77 million individuals in self-insured
format will make it easier for consumers                        tenance costs. The one-time start-up costs                       ERISA-covered plans and approximately
who change jobs or insurance coverage to                        include costs to develop teams to review                         14 million individuals in self-insured
see how their new plan or coverage bene-                        the new standards and costs to implement                         non-Federal governmental plans.52 The
fits are similar to and different from their                    workflow and process changes, partic-                            Departments note that, according to 2007
previous coverage.                                              ularly the development of information                            Economic Census data, there are 2,243
                                                                technology (IT) systems interfaces that                          TPAs providing administrative services
5. Costs                                                        would generate SBC disclosures through                           for health and/or welfare funds. However,
                                                                data housed in a number of different sys-                        there is some uncertainty as to whether
   Section 2715 of the PHS Act and these
                                                                tems. The maintenance costs include costs                        all of those TPAs serve self-insured plans;
proposed regulations direct group health
                                                                to maintain and update IT systems in com-                        many issuers, for example, have subsidiary
plans and health insurance issuers to com-
                                                                pliance with the proposed standards; to                          lines of business through administrative
pile and provide a summary of benefits and
                                                                produce, review, distribute, and update                          services only (ASO) contracts through
coverage (SBC) (that includes coverage
                                                                the SBC disclosures;49 to produce and                            which they perform third-party adminis-
examples (CEs)) and a uniform glossary
                                                                distribute notices of modifications, and to                      trative functions for self-insured plans.53
of health coverage and medical terms. The
                                                                provide the glossary in paper form upon                          Based on conversations with one national
Departments have attempted to quantify
                                                                request.                                                         TPA association, the Departments assume
one-time start-up costs as well as mainte-
                                                                    With respect to the individual market,                       that about one-third of the total number
nance costs. However, there is uncertainty
                                                                issuers are responsible for generating, re-                      of TPAs, or about 748 TPAs, are relevant
arising from general data limitations and
                                                                viewing, updating, and distributing SBCs.                        for purposes of this analysis. However,
the degree to which economies of scale
                                                                With respect to employer-sponsored cov-                          given the considerable overlap between
can be realized to reduce costs for issuers
                                                                erage, the Departments assume fully-in-                          issuers and TPAs, the Departments recog-
and TPAs. The costs estimates employ as-
                                                                sured plans will rely on health insurance                        nize there may be fewer affected TPAs, so
sumptions that we believe more than fully
                                                                issuers, and self-insured plans will rely on                     these estimates should be considered an
capture expected issuer and third-party
                                                                TPAs, to perform these functions. While                          upper bound of burden estimates. These
administrator costs, and perhaps overesti-
                                                                plans may prepare the SBC disclosures in-                        estimates may be adjusted proportionally
mate them if, for example, economies of
                                                                ternally, the Departments make this simpli-                      in the final regulations based upon addi-
scale are achievable. On the basis of such
                                                                fying assumption because most plans ap-                          tional information about the number of
assumptions, the Departments estimate
                                                                pear to rely on issuers and TPAs for the                         TPAs serving self-insured plans.
that issuers and TPAs will incur approxi-
                                                                purpose of administrative duties such as                             Because the SBC disclosures are
mately $25 million in costs in 2011, $73
                                                                enrollment and claims processing.50 Thus,                        closely related to disclosures that issuers
million in costs in 2012, and $58 million
                                                                the Departments use health insurance is-                         and TPAs provide today as a part of their
in costs in 2013. These costs and the
                                                                suers and TPAs as the unit of analysis for                       normal operations (e.g., information on
methodology used to estimate them are
                                                                the purposes of estimating administrative                        premiums, covered benefits, and cost shar-
discussed below, and presented in Tables
                                                                costs.                                                           ing), the incremental costs of compiling
2–5 below.
                                                                    As discussed in the Medical Loss Ratio                       and providing such readily available in-
General Assumptions                                             (MLR) interim final rule (75 FR 74918),                          formation in the proposed, standardized
                                                                the Departments estimate there are about                         format is estimated to be modest.54 The
    In order to assess the potential admin-                     440 firms offering comprehensive cov-                            per-issuer or -TPA cost will largely be
istrative costs relating to these proposed                      erage in the individual, small, or large                         determined by its size (based on annual
regulations, the Departments consulted                          group markets, and 75 million covered                            premium revenues) and current prac-
with industry experts to gain insight into                      lives therein.51 The number of covered                           tices-most importantly, whether the issuer
49Plans and issuers subject to ERISA or the Code may provide SBCs electronically only if the requirements of the Department of Labor’s electronic disclosure safe harbor at 29 CFR
2520.104b–1 are met. Otherwise, by default, plans and issuers must use paper versions of SBCs.
50   See, for example, the Department of Labor’s March 2011 report to Congress on self-insured health plans, available at http://www.dol.gov/ebsa/pdf/ACAReportToCongress032811.pdf.
51 The NAIC data actually indicate 442 issuers and 74,830,101 covered lives. But the Departments have limited these values to only two significant figures given general data uncertainty.
For example, the NAIC data do not include issuers regulated by California’s Department of Managed Health Care (DMHC) as well as small, single-State issuers that are not required by State
regulators to submit NAIC annual financial statements.
52 U.S. Department of Labor, EBSA calculations using the March 2009 Current Population Survey Annual Social and Economic Supplement and the 2009 Medical Expenditure Panel Survey;
see also interim final rule for internal claims and appeals and external review processes (75 FR 43330, 43345).
53   See, for example, the Department of Labor’s March 2011 report to Congress on self-insured health plans, available at http://www.dol.gov/ebsa/pdf/ACAReportToCongress032811.pdf.
54For example, issuers in the individual and small group markets already report some of the SBC information to HHS for display in the plan finder on the HealthCare.gov website. Issuers
have been reporting data to HHS since May 2010 and have refreshed that data on a quarterly basis. These reporting entities have demonstrated that they have the capacity to report information
on plan benefit design. See http://finder.healthcare.gov/. Further, ERISA-covered plans already report some of the SBC information in summary plan descriptions (SPDs).



October 17, 2011                                                                          552                                                                    2011–42 I.R.B.
or TPA maintains a robust information                           dividual, small group, and large group                             To account for variations among TPAs,
technology infrastructure, including a plan                     comprehensive coverage.55 Consistent                           the Departments applied the proportions of
benefits design database. Moreover, with                        with the assumptions that were used in the                     small, medium, and large issuers to the es-
regard to issuers, administrative costs may                     MLR interim final rule, small issuers are                      timated 750 TPAs. The Departments ac-
be related to the number of markets in                          defined as those earning up to $50 mil-                        knowledge that issuers and TPAs are dif-
which it operates (that is, individual, small                   lion in annual premium revenue; medium                         ferent and may not have the same size vari-
group, or large group market); the number                       issuers as those earning between $50 mil-                      ation. Nonetheless, given general data lim-
of policies it offers; and the number of                        lion and $1 billion in annual premium                          itations, the Departments have adopted this
States and licensed entities through which                      revenue; and large issuers as those earning                    methodology, and, on its basis, estimate
it offers coverage.                                             more than $1 billion in annual premium                         that there are 240 small, 390 medium, and
    To account for variations among is-                         revenue. Based on these assumptions, the                       120 large TPAs. Table 2 below provides
suers, the Departments classify them by                         Departments estimate there are 140 small,                      a synopsis of the number of issuers and
size as small, medium, and large issuers                        230 medium, and 70 large issuers.                              TPAs.
based on 2009 premium revenue for in-


     Table 2. Issuer and TPA size classification
                                                                   Small                                       Medium                                        Large
                     Issuers                                        140                                           230                                           70
                      TPAs                                          240                                           390                                          120



Staffing Assumptions                                            large issuer’s/TPA’s time, and a small is-                     these regulations would be split between
                                                                suer would need about 50% of a large                           the costs to produce SBCs (50%) and the
   Table 6 below summarizes the Depart-                         issuer’s/TPA’s time, to implement IT sys-                      costs to produce the CEs (50%).
ments’ staffing assumptions, including the                      tems and workflow process changes.
estimated number of hours for each task                            The Departments estimate that it would                      Production and Review of SBCs and CEs
for a small, medium, or large issuer/TPA                        take a large issuer/TPA about 160 hours
as well as the percentage of time that dif-                     to develop teams to analyze the new stan-                          The Departments estimate that each is-
ferent professionals devote to each task.                       dards in relation to their current workflow                    suer/TPA would need 3 hours to produce,
The following assumptions are based on                          processes. The Departments assume such                         and 1 hour to review, SBCs (not including
the best information available to the De-                       teams would be comprised of IT profes-                         CEs) for all products. The Departments
partments at this time. Particularly, the                       sionals (45%), benefits/sales profession-                      assume that the 3 hours needed to produce
following series of assumptions are based                       als (50%), and attorneys (5%). We scale                        the SBCs would be equally divided be-
on conversations with industry experts, the                     down the burden for medium and small is-                       tween IT professionals and benefits/sales
Departments’ understanding of the regu-                         suers/TPAs by assuming the same relative                       professionals. The Departments assume
lated community, and previous analysis in                       proportion as above (that is, 75 percent and                   that the 1 hour needed to review the
the MLR interim final rule. We welcome                          50 percent, respectively).                                     SBCs would be equally divided between
comments that provide better information                           The Departments assume that each                            financial managers for benefits/sales pro-
or data about any of the following assump-                      issuer/TPA would incur a maintenance                           fessionals and attorneys.
tions.                                                          cost to maintain IT systems and address                            In 2012 and 2013, issuers and TPAs
                                                                changes in regulatory requirements. The                        would produce CEs for three benefits sce-
IT Systems and Workflow Process                                 Departments assume the maintenance cost                        narios. The Departments estimate it will
Changes                                                         would equal 15% of the total one-time                          take each issuer/TPA 90 hours to produce,
                                                                burden noted above (for example, the                           and 30 hours to review, CEs for all appli-
   The Departments estimate that it would                       Departments assume it will take a large                        cable products. The Departments assume
take a large issuer/TPA about 960 hours                         issuer 15% of 1120 hours, or 168 hours).                       that the 90 hours to produce the CEs would
to implement IT systems and workflow                            The Departments further assume that the                        be equally divided between IT profession-
process changes, based on discussions                           teams to implement the maintenance tasks                       als and benefits/sales professionals. The
with a large issuer. The Departments as-                        would be comprised of IT professionals                         Departments also assume that the 30 hours
sume that these IT systems and workflow                         (55%), benefits/sales professionals (40%),                     to review the CEs would be equally di-
process changes would be implemented                            and attorneys (5%).                                            vided between financial managers for ben-
only by IT professionals. Furthermore,                             The Departments assume that the                             efits/sales professionals and attorneys.
the Departments assume that a medium                            one-time and maintenance costs to imple-                           The Departments assume that in 2012
issuer/TPA would need about 75% of                              ment IT systems changes and to address                         and 2013, respectively, issuers and TPAs

55   The premium revenue data come from the 2009 NAIC financial statements, also known as “Blanks,” where insurers report information about their various lines of business.



2011–42 I.R.B.                                                                           553                                                           October 17, 2011
would provide, upon request, a paper copy                          Distribution Assumptions                                              for the individual market is based
of the uniform glossary to 2.5% and 5%                                                                                                   on statistics set forth by the National
of covered individuals who receive a glos-                            The Departments make the following                                 Telecommunications and Information
sary. The Departments assume that indi-                            assumptions regarding the distribution of                             Administration, which indicate that
viduals who do not request a paper copy                            the SBC disclosures (including CEs).57                                30% of Americans do not use the In-
of the glossary will access it electronically                      These assumptions are based on the best                               ternet.61
using the Internet address provided in the                         information available to the Departments
SBC.                                                               at this time. Particularly, the following                       •     SBC disclosures would be distributed
   For each individual who receives the                            series of assumptions are based on con-                               with usual marketing and enrollment
SBC or uniform glossary in paper form,                             versations with industry experts, the De-                             materials, thus, costs to mail the doc-
the Departments estimate that printing and                         partments’ understanding of the regulated                             uments will be negligible. However,
distributing the paper disclosures would                           community, and previous analysis in the                               notices of modifications would require
take clerical staff about 1 minute (0.02                           MLR interim final rule. The distribution                              mailing and supply costs as follows:
hours) in the group markets and about                              assumptions are as follows:                                           $0.44 postage cost per mailing and
2 minutes (0.03 hours) in the individual                                                                                                 $0.05 supply cost per mailing.
market. The Departments assume that the                            •    The SBCs would be limited to one per
individual market has lower economies                                   household for family members located                       •     Printing costs $0.03 cents per side of
                                                                        at the same residence. According to                              a page. Thus, it would cost $0.18 to
of scale and, thus, increased distribution
                                                                        one large issuer, there are 2.2 covered                          print a complete SBC (which is six
costs.
                                                                        lives per family.                                                sides of a page based on the length
Labor Cost Assumptions                                                                                                                   of the NAIC sample completed SBC)
                                                                   •    The number of individuals who would                              and $0.12 cents to print the uniform
    Table 7 below presents the Depart-                                  receive an SBC before enrolling in the                           glossary (which is four sides of a page,
ments’ hourly labor cost assumptions                                    plan or coverage equals 20% of the                               based on the length of the NAIC rec-
(stated in 2011 dollars) for each staff                                 number of enrollees at any point dur-                            ommended uniform glossary). This
category based on BLS data. The De-                                     ing the course of a year.58                                      cost burden is in addition to the 1
partments use mean hourly wage esti-                                                                                                     minute or 2 minutes it would take cler-
mates from the Bureau of Labor Statis-                             •    In 2013, about 2% of covered individu-                           ical staff to print and distribute the
tics’ (BLS) May 2009 National Occupa-                                   als would receive a notice of modifica-                          SBC or glossary.
tional Employment and Wage Estimates                                    tions.59 Further, the burden and cost of
(accessed at http://www.bls.gov/oes/cur-                                providing such notices would be pro-                       Cost Estimate
rent/oes_nat.htm#00–0000) for com-                                      portional to the combined burden and
                                                                        cost of providing the SBCs, including                         The Tables below present costs and bur-
puter systems analysts (Occupation Code
                                                                        CEs. In 2012, the first year of im-                        den hours for issuers and TPAs associated
15–1051), insurance underwriters (Occu-
                                                                        plementation, the number of notices of                     the proposed disclosure requirements of
pation Code 13–2053), financial managers
                                                                        modifications would be negligible.                         PHS Act section 2715. Tables 3–5 con-
(Occupation Code 23–1011), executive
                                                                                                                                   tain cost estimates for 2011, 2012, and
secretaries and administrative assistants
(Occupation Code 43–6011), and attor-
                                                                   •    Electronic distribution will account                       2013, derived from the labor hours pre-
                                                                        for 38 percent of all disclosures in the                   sented in Table 3 and the hourly rate es-
neys (Occupation Code 23–1011) as the
                                                                        group market and 70 percent of all dis-                    timates presented in Table 7, as well as es-
basis for estimating labor costs for 2011
                                                                        closures in the individual market. The                     timates of non-labor costs. Labor hour es-
through 2013 and adjust the hourly wage
                                                                        estimate for the group market is based                     timates were developed for each one-time
rate to include a 33% fringe benefit esti-
                                                                        on the methodology used to analyze                         and maintenance task associated with an-
mate for private sector employees.56
                                                                        the cost burden for the DOL claims                         alyzing requirements, developing IT sys-
                                                                        procedure regulation (OMB Control                          tems, and producing SBCs (that include
                                                                        Number 1210–0053).60 The estimate                          CEs).


56   See the Technical Appendix to the MLR interim final rule, available at http://cciio.cms.gov.
57   Although CEs are an integral component of SBCs, the costs associated with CEs are different from the rest of the SBC, and, thus, are separately calculated within this analysis.
58Based on this assumption, the Departments estimated that small issuers or TPAs have about 180,000 shoppers in a given year, medium issuers or TPAs have 3,700,000 shoppers in a given
year, and large issuers or TPAs have 11,000,000 shoppers in a given year.
59 ERISA section 104(b) requires ERISA-covered plans to furnish participants and beneficiaries with a Summary of Material Modifications (SMM) no later than 210 days after the end of the
plan year in which the material change was adopted. As part of its analysis for the Department of Labor’s SPD/SMM regulations (29 CFR 2520.104b–(3)), the Department estimated that
about 20 percent of health plans would need to distribute SMM in a given year due to plan amendments. However, almost all of these modification occur between plan years — not during a
plan year; therefore, the modifications would be required to be disclosed in a SBC that is distributed upon renewal of coverage. The Departments, thus, expects that only two percent of plans
will need to issue an updated SBC mid-year, because mid-year changes that would result in an update to the SBC are very rare. For purposes of simplification, the Departments extend this
assumption to the individual market as well.
60   See the ERISA e-disclosure rule at 29 CFR 2520.104b–1.
61 U.S. Department of Commerce, National Telecommunications and Information Administration, Digital Nation (February 2010), available at http://www.ntia.doc.gov/reports/2010/NTIA_in-
ternet_use_report_Feb2010.pdf.



October 17, 2011                                                                            554                                                                    2011–42 I.R.B.
 TABLE 3. 2011 Hour Burden, Equivalent Cost, and Cost Burden — 2011 Dollars
                                               Number of Affected              Hour Burden       Equivalent Cost
                                                   Entities
 SBC Requirements —                                      440                     88,000            $4,600,000
 Issuers — One Time
 SBC Requirements —                                      750                     150,000           $7,800,000
 TPAs — One-Time
 Coverage Example                                        440                     88,000            $4,600,000
 Requirements —
 Issuers — One Time
 Coverage Example                                        750                     150,000           $7,800,000
 Requirements — TPAs — One-Time
 Total                                                                           240,000           $25,000,000




 TABLE 4. 2012 Hour Burden, Equivalent Cost, and Cost Burden — 2011 Dollars
                                 Number of   Hour Burden       Equivalent Cost     Cost Burden        Number of
                                  Affected                                         (non-labor)        Disclosures
                                  Entities
 SBC Requirements — Issuers         440         540,000          $18,000,000        $2,900,000        41,000,000
 SBC Requirements — TPAs            750         660,000          $23,000,000        $3,700,000        49,000,000
 Coverage Example                   440         140,000          $7,600,000         $1,500,000        41,000,000
 Requirements — Issuers
 Coverage Example                   750         240,000          $13,000,000        $1,800,000        49,000,000
 Requirements — TPAs
 Glossary Requests — Issuers        440         11,000            $330,000           $370,000          610,000
 Glossary Requests — TPAs           750         13,000            $370,000           $470,000          770,000
                      Subtotal                 1,600,000         $62,000,000       $11,000,000        91,000,000
            Total 2012 Costs                                     $73,000,000




2011–42 I.R.B.                                      555                                          October 17, 2011
 TABLE 5. 2013 Hour Burden, Equivalent Cost, and Cost Burden — 2011 Dollars
                                  Number of      Hour Burden       Equivalent Cost        Cost Burden        Number of
                                   Affected                                               (non-labor)        Disclosures
                                   Entities
 SBC Requirements — Issuers          440           480,000           $15,000,000           $2,900,000        41,000,000
 SBC Requirements — TPAs             750           560,000           $17,000,000           $3,700,000        49,000,000
 Coverage Example                    440            79,000           $4,300,000            $1,500,000        41,000,000
 Requirements — Issuers
 Coverage Example                    750           130,000           $7,200,000            $1,800,000        49,000,000
 Requirements — TPAs
 Notice of Material                  440            10,000            $320,000              $330,000          820,000
 Modifications — Issuers
 Notice of Material                  750            12,000            $400,000              $400,000         1,000,000
 Modifications — TPAs
 Glossary Requests — Issuers         440            23,000            $660,000              $700,000         1,200,000
 Glossary Requests — TPAs            750            26,000            $750,000              $900,000         1,500,000
 Subtotal                                         1,300,000          $46,000,000           $12,000,000       95,000,000
 Total 2013 Costs                                                    $58,000,000




 TABLE 6. Estimated Staffing Hours for Small, Medium, and Large Issuers and TPAs
                                Percent of
                                                                                   Hours
                               Hours by Task
 STAFFING HOUR                                     Small Issuer/           Medium Issuer/                Large Issuer/
 ASSUMPTIONS                                          TPA                      TPA                           TPA
   IT Development and
   Workflow Process
   Change
     One-Time
        Develop Teams                                   80                          120                      160
        / Analyze
        Requirements (IT,
        underwriting /
        sales)
            IT Professionals               45%          36                           54                       72
            Benefits / Sales
        Professionals                      50%          40                           60                       80
            Attorneys                      5%            4                           6                        8
        Implementing                                    480                         720                      960
        Systems Changes
        (IT and workflow)
            IT Professionals           100%             480                         720                      960




October 17, 2011                                        556                                               2011–42 I.R.B.
     Maintenance
       Updating to                  84     126         168
       Address Changes
       in Requirements
         IT Professionals   55%    46.20   69.30       92.40
         Benefits / Sales
       Professionals        40%    33.60   50.40       67.20
         Attorneys           5%    4.20    6.30        8.40
   SBC Requirement
   (maintenance)
       Producing SBCs               3       3           3
         IT Professionals   50%     1.5     1.5         1.5
         Benefits / Sales
       Professionals        50%     1.5     1.5         1.5
       Internal Review of           1       1           1
       SBCs
         Financial          50%     0.5     0.5         0.5
         Managers —
         Benefits / Sales
       Professionals
         Attorneys          50%     0.5     0.5         0.5
       Producing and
       Distributing Paper
       Version of SBCs
       (Group Markets)
         Clerical Staff     100%   0.02    0.02        0.02
       Producing and
       Distributing
       Paper Version of
       SBCs (Individual
       Market)
         Clerical Staff     100%   0.03    0.03        0.02
   CE Requirement
   (maintenance)
       Producing 3 CEs              90      90          90
         IT Professionals   50%     45      45          45
         Benefits / Sales
       Professionals        50%     45      45          45




2011–42 I.R.B.                     557             October 17, 2011
          Internal Review of                                    30                           30                          30
          3 CEs
              Financial
              Managers —
              Benefits / Sales
          Professionals                        50%              15                           15                          15
              Attorneys                        50%              15                           15                          15




  TABLE 7. Estimated Loaded Hourly Wages for Staff Categories
                                                                                                                 Loaded Hourly
                     Staff Category                                          BLS Code
                                                                                                                Wage (2011 Dollars)
  IT Professionals                                                   Computer Systems Analysts                  $53.26
                                                                     (Occupation Code 15–1051)
  Financial Professionals — Benefits / Sales                           Insurance Underwriters                   $41.94
                                                                     (Occupation Code 13–2053)
  Financial Manager                                                      Financial Managers                     $75.32
                                                                     (Occupation Code 11–3031)
  Attorneys                                                                   Lawyers                           $85.44
                                                                     (Occupation Code 23–1011)
  Clerical Staff                                            Executive Secretaries and Administrative            $29.15
                                                                           Assistants
                                                                  (Occupation Code 43–6011)



6. Regulatory Alternatives                       A second choice related to whether, in      are eligible. The Departments believe this
                                             the case of covered individuals residing at     balanced approach addresses the needs of
    Several provisions in these proposed     the same address, one SBC would satisfy         plans, issuers, and consumers, at renewal.
regulations involved policy choices. A       the disclosure requirement with respect to          A third policy choice related to the
first policy choice involved determining     all such individuals, or whether multiple       interpretation of the PHS Act section
how to minimize the burden of providing      SBCs would be required to be provided.          2715(d)(4), which requires notice of any
the SBC to individuals and employers         Under the proposed regulations, the De-         material modification (as defined for pur-
shopping for health insurance coverage.      partments allow a plan or issuer to provide     poses of section 102 of ERISA) in any of
The Departments recognize it may be          a single SBC in circumstances in which a        the terms of the plan or coverage that is
difficult for issuers to provide accurate    participant and any beneficiaries (or, in the   not reflected in the most recently provided
information about the terms of coverage      individual market, the primary subscriber       SBC. The Departments note that a mate-
prior to underwriting. Accordingly, the      and any covered dependents) are known to        rial modification, within the meaning of
proposed regulations provide that issuers    reside at the same address.                     section 102 of ERISA and its implement-
offering health insurance coverage in con-       In the group market, the proposed reg-      ing regulations at 29 CFR 2520.104b–3,
nection with the individual market that      ulations would further limit burden by re-      is broadly defined to include any modifi-
make information for their standard poli-    quiring a plan or issuer to provide, at re-     cation to the coverage offered under the
cies available on the Secretary of HHS’s     newal, a new SBC for only the benefit           plan or policy, that independently, or in
Web portal (HealthCare.gov), in com-         package in which a participant or benefi-       conjunction with other contemporaneous
pliance with 45 CFR 159.120, will have       ciary is enrolled. That is, if the plan of-     modifications or changes, would be con-
satisfied the requirement to provide an      fers multiple benefits packages, an SBC is      sidered by the average plan participant to
SBC to individuals who request informa-      not required for each benefit package of-       be an important change in covered benefits
tion about coverage. The Departments         fered under the group health plan, which        or other terms of coverage under the plan
believe this approach promotes regulatory    the Departments believe would otherwise         or policy. The proposed regulations would
efficiency, minimizing the administrative    create an undue burden during open sea-         interpret this provision as requiring notice
burden on health insurance issuers without   son. Participants and beneficiaries would       only for a material modification that (1)
lessening the protections under PHS Act      be able to receive upon request an SBC          affects the information in the SBC; and
section 2715.                                for any benefits package for which they         (2) occurs other than in connection with


October 17, 2011                                                558                                                 2011–42 I.R.B.
renewal or reissuance of coverage (that is,      that analysis, HHS used total Accident and      tion 553(b) of the Administrative Proce-
a mid-plan or -policy year change). This         Health (A&H) earned premiums as a proxy         dure Act (5 U.S.C. chapter 5) does not
approach is consistent with the language         for annual receipts. HHS estimated that         apply to these proposed regulations. It
of section 2715(d)(4) and is more nar-           there were 28 small entities with less than     is hereby certified that the collections
rowly focused on what we interpret to be         $7 million in A&H earned premiums of-           of information contained in this notice
the purpose of that provision.                   fering individual or group comprehensive        of proposed rulemaking will not have a
                                                 major medical coverage; however, this es-       significant impact on a substantial number
B. Regulatory Flexibility Act—Department         timate may overstate the actual number          of small entities. Accordingly, a regulatory
of Labor and Department of Health and            of small health insurance issuers offering      flexibility analysis under the Regulatory
Human Services                                   such coverage, since it does not include re-    Flexibility Act (5 U.S.C. chapter 6) is
                                                 ceipts from these companies’ other lines of     not required. Section 54.9815–2715 of
    The Regulatory Flexibility Act (RFA)
                                                 business. These 28 small entities represent     the proposed regulations would require
requires agencies that issue a regulation
                                                 about 6.4 percent of the approximately 440      both group health insurance issuers and
to analyze options for regulatory relief of
                                                 health insurers that are accounted for in       group health plans to distribute an SBC
small businesses if a proposed rule has a
                                                 this RIA. Based on this calculation, the De-    and notice of any material modifications
significant impact on a substantial num-
                                                 partments assume that there are an equal        to the plan that affect the information
ber of small entities. The RFA generally
                                                 percentage of TPAs that are small entities.     required in the SBC. Under these proposed
defines a ’’small entity’’ as (1) a propri-
                                                 That is, 48 small entities represent about      regulations, if a health insurance issuer
etary firm meeting the size standards of the
                                                 6.4 percent of the approximately 750 TPAs       satisfies the obligations to distribute an
Small Business Administration (SBA), (2)
                                                 that are accounted for in this RIA.             SBC and a notice of modifications, those
a nonprofit organization that is not domi-
                                                     The Departments estimate that issuers       obligations are satisfied not just for the
nant in its field, or (3) a small government
                                                 and TPAs earning less than $50 million          issuer but also for the group health plan.
jurisdiction with a population of less than
                                                 in annual premium revenue, including the        For group health plans maintained by
50,000. (States and individuals are not in-
                                                 76 small entities mentioned above, would        small entities, it is anticipated that the
cluded in the definition of ’’small entity.’’)
                                                 incur costs of approximately $15,000,           health insurance issuer will satisfy these
The Departments use as their measure of
                                                 $26,000, and $15,000 per issuer/TPA in          obligations for both the plan and the
significant economic impact on a substan-
                                                 2011, 2012 and 2013, respectively. Num-         issuer in almost all cases. For this reason,
tial number of small entities a change in
                                                 bers of this magnitude do not approach the      these information collection requirements
revenues of more than 3 to 5 percent.
                                                 amounts necessary to be considered a “sig-      will not impose a significant impact on
    As discussed in the Web Portal interim
                                                 nificant economic impact” on firms with         a substantial number of small entities.
final rule (75 FR 24481), HHS examined
                                                 revenues in the order of millions of dol-       Pursuant to section 7805(f) of the Code,
the health insurance industry in depth in
                                                 lars. Additionally, as discussed earlier, the   this regulation has been submitted to the
the Regulatory Impact Analysis we pre-
                                                 Departments believe that these estimates        Chief Counsel for Advocacy of the Small
pared for the proposed rule on establish-
                                                 overstate the number of small entities that     Business Administration for comment on
ment of the Medicare Advantage program
                                                 will be affected by the requirements in this    its impact on small business.
(69 FR 46866, August 3, 2004). In that
                                                 proposed regulation, as well as the rela-
analysis, HHS determined that there were                                                         D. Unfunded Mandates Reform
                                                 tive impact of these requirements on these
few if any insurance firms underwriting                                                          Act—Department of Labor and
                                                 entities, because the Departments have
comprehensive health insurance policies                                                          Department of Health and Human
                                                 based their analysis on the affected enti-
(in contrast, for example, to travel insur-                                                      Services
                                                 ties’ total A&H earned premiums (rather
ance policies or dental discount policies)
                                                 than their total annual receipts). Accord-
that fell below the size thresholds for                                                              Section 202 of the Unfunded Man-
                                                 ingly, the Departments have determined
’’small’’ business established by the SBA.                                                       dates Reform Act (UMRA) of 1995 states
                                                 and certify that these proposed rules will
Currently, the SBA size threshold is $7                                                          that agencies assess anticipated costs and
                                                 not have a significant economic impact on
million in annual receipts for both health                                                       benefits before issuing any proposed rule
                                                 a substantial number of small entities, and
insurers (North American Industry Classi-                                                        that includes a Federal mandate that could
                                                 that a regulatory flexibility analysis is not
fication System, or NAICS, Code 524114)                                                          result in expenditure in any one year by
                                                 required.
and TPAs (NAICS Code 524292).                                                                    State, local or Tribal governments, in the
    Additionally, as discussed in the Med-       C. Special Analyses—Department of the           aggregate, or by the private sector, of $100
ical Loss Ratio interim final rule (75 FR        Treasury                                        million in 1995 dollars updated annually
74918), HHS used a data set created from                                                         for inflation. In 2011, that threshold level
2009 National Association of Insurance              For purposes of the Department of the        is approximately $136 million. These pro-
Commissioners (NAIC) Health and Life             Treasury it has been determined that this       posed regulations include no mandates on
Blank annual financial statement data to         notice of proposed rulemaking is not a          State, local, or Tribal governments. These
develop an updated estimate of the num-          significant regulatory action as defined        proposed regulations include directions
ber of small entities that offer comprehen-      in Executive Order 12866. Therefore,            to produce standardized consumer disclo-
sive major medical coverage in the indi-         a regulatory assessment is not required.        sures that will affect private sector firms
vidual and group markets. For purposes of        It has also been determined that sec-           (for example, health insurance issuers of-



2011–42 I.R.B.                                                      559                                            October 17, 2011
fering coverage in the individual and group                        NAIC, including the SBC template (with                           Constitution Avenue, NW, Room N–5718,
markets, and third-party administrators                            instructions, samples and a guide for cov-                       Washington, DC 20210.             Telephone:
providing administrative services to group                         erage examples calculations to be used in                        (202) 693–8410; Fax: (202) 219–4745.
health plans), but we tentatively conclude                         completing the template) and the uniform                         These are not toll-free numbers. E-mail:
that these costs will not exceed the $136                          glossary. These collection instruments                           ebsa.opr@dol.gov. ICRs submitted to
million threshold. Thus, we tentatively                            were developed over a period of several                          OMB also are available at reginfo.gov
conclude that these proposed regulations                           months and agreed to by the entire NAIC                          (http://www.reginfo.gov/public/do/PRA-
do not impose an unfunded mandate on                               working group and recommended to the                             Main).
State, local or Tribal governments or the                          Departments by the NAIC.                                             The Departments estimate 858 respon-
private sector. Regardless, consistent with                           Currently, the Departments are solicit-                       dents each year from 2011–2013. This es-
policy embodied in UMRA, this notice of                            ing public comments for 60 days concern-                         timate reflects approximately 220 issuers
proposed rulemaking has been designed                              ing these disclosures. The Departments                           offering comprehensive major medical
to be the least burdensome alternative for                         have submitted a copy of these interim fi-                       coverage in the small and large group mar-
State, local and Tribal governments, and                           nal regulations to OMB in accordance with                        kets, and approximately 638 third-party
the private sector while achieving the ob-                         44 U.S.C. 3507(d) for review of the infor-                       administrators (TPAs).62
jectives of the Affordable Care Act.                               mation collections. The Departments and                              To account for variation in firm size, the
                                                                   OMB are particularly interested in com-                          Departments estimate a weighted burden
E. Paperwork Reduction Act                                         ments that:                                                      on the basis of issuer’s 2009 total earned
                                                                                                                                    premiums for comprehensive major med-
1. Department of Labor and Department                              •    Evaluate whether the collection of in-                      ical coverage.63 The Departments define
of the Treasury                                                         formation is necessary for the proper                       small issuers as those with total earned
                                                                        performance of the functions of the                         premiums less than $50 million; medium
   Section 2715 of the PHS Act directs the
                                                                        agency, including whether the infor-                        issuers as those with total earned premi-
Departments, in consultation with the Na-
                                                                        mation will have practical utility;                         ums between $50 million and $999 mil-
tional Association of Insurance Commis-
sioners (NAIC) and a working group com-
                                                                   •    Evaluate the accuracy of the agency’s                       lion; and large issuers as those with to-
                                                                        estimate of the burden of the collection                    tal earned premiums of $1 billion or more.
prised of stakeholders, to “develop stan-
                                                                        of information, including the validity                      Accordingly, the Departments estimate ap-
dards for use by a group health plan and
                                                                        of the methodology and assumptions                          proximately 70 small, 115 medium, and
a health insurance issuer in compiling and
                                                                        used;                                                       35 large issuers. Similarly, the Depart-
providing to applicants, enrollees, and pol-
icyholders and certificate holders a sum-
                                                                   •    Enhance the quality, utility, and clarity                   ments estimate approximately 204 small,
                                                                        of the information to be collected; and                     332 medium, and 102 large TPAs.
mary of benefits and coverage explanation
that accurately describes the benefits and
                                                                   •    Minimize the burden of the collection
                                                                        of information on those who are to re-                      2011 Burden Estimate
coverage under the applicable plan or cov-
                                                                        spond, including through the use of
erage.” Plans and issuers are required to
                                                                        appropriate automated, electronic, me-                         While the disclosures in these proposed
begin providing the disclosure (herein re-
                                                                        chanical, or other technological collec-                    regulations are not required until March
ferred to as a “summary of benefits and
                                                                        tion techniques or other forms of in-                       2012, the Departments estimate a one-time
coverage” or SBC) no later than March 23,
                                                                        formation technology, for example, by                       administrative cost of about $36,000,000
2012.
                                                                        permitting electronic submission of re-                     across the industry and a total of about
   To implement this provision, collection
                                                                        sponses.                                                    680,000 burden hours to prepare for the
of information requirements relate to the
                                                                                                                                    provisions of these proposed regulations.
provision of the following:
                                                                   Comments should be sent to the Office                            This calculation is made assuming issuers
•      Summary of benefits and coverage.                           of Information and Regulatory Affairs,                           and TPAs will need to implement two
•      Coverage examples (as components of                         Attention: Desk Officer for the Employee                         principal tasks: (1) develop teams to an-
       each SBC).                                                  Benefits Security Administration either                          alyze current workflow processes against
•      A uniform glossary of health coverage                       by fax to (202) 395–5806 or by e-mail to                         the new rules and (2) make appropriate
       and medical terms (uniform glossary).                       oira_submission@omb.eop.gov. A copy                              changes to IT systems and processes.
•      Notice of modifications.                                    of the ICR may be obtained by contact-                              With respect to task (1), the Depart-
                                                                   ing the PRA addressee: G. Christopher                            ments estimate about 97,000 burden
   In developing these collections of in-                          Cosby, Office of Policy and Research,                            hours and an equivalent cost of about
formation, the Departments have incorpo-                           U.S. Department of Labor, Employee                               $4,800,000. The Departments calculate
rated the documents recommended by the                             Benefits Security Administration, 200                            these estimates as follows:64

62 The Departments estimate that there are 440 issuers and 750 TPAs. Because the Department of Labor and the Department of the Treasury share the hour and cost burden for issuers and
TPAs with the Department of Health and Human Services, the burden to produce the SBCs including Coverage Examples for group health plans is calculated using half the number of issuers
(220) and 85% of the TPAs (638). While the group health plans could prepare their own SBCs including coverage examples, the Departments assume that SBCs including coverage examples
would be prepared by service providers, i.e., issuers and TPAs.
63   The premium revenue data come from the 2009 NAIC financial statements, also known as “Blanks,” where insurers report information about their various lines of business
64   For the purposes of these and other estimates in this section III.E, the Departments again use the assumptions outlined above in section III.A.5.



October 17, 2011                                                                             560                                                             2011–42 I.R.B.
  Task 1: Analyze current workflow and new rules
                      Hourly       Small Issuer / TPA                 Medium Issuer/TPA              Large Issuer/TPA
                      Wage          Hours        Equivalent Cost       Hours     Equivalent Cost      Hours      Equivalent Cost
                      Rate
  IT Professionals    $53.26          36              $1,900             54          $2,900             72            $3,800
  Benefits/Sales
                      $41.94          40              $1,700             60          $2,500             80            $3,400
  Professionals
  Attorneys           $85.44          4                 $340              6              $510            8            $680
  Total per
                                      80              $3,900            120          $5,900             160           $7,900
  issuer/TPA
  Total for all
                                    22,000         $1,100,000          53,000      $2,600,000         22,000       $1,100,000
  issuers/TPAs



  With respect to task (2), the Depart-      hours and an equivalent cost of about        $31,000,000. The Departments calculate
ments estimate about 580,000 burden                                                       these estimates as follows:


  Task 2: IT Changes
                      Hourly       Small Issuer / TPA                 Medium Issuer/TPA              Large Issuer/TPA
                      Wage          Hours        Equivalent Cost       Hours     Equivalent Cost      Hours      Equivalent Cost
                      Rate
  IT Professionals    $53.26         480             $26,000            720          $38,000            960          $51,000
  Total per
                                     480             $26,000            720          $38,000            960          $51,000
  issuer/TPA
  Total for all
                                   130,000         $7,100,000         320,000      $17,000,000       130,000       $7,000,000
  issuers/TPAs



   The Departments assume the total          •   The Departments estimate that there         Summary of Benefits and Cover-
one-time administrative burden will be           will be about 77,000,000 SBC re-         age (not including coverage examples)
divided equally between 2011 and 2012.           sponses.                                 — The estimated hour burden is about
Thus, in 2011, the Departments estimate      •   The Departments assume that of           820,000 hours, and the estimated total cost
a one-time administrative cost of about          the total number of SBC responses,       is about $30,000,000. The Departments
$18,000,000 across the industry and about        38% would be sent electronically in      calculate these estimates as follows:
340,000 hours. The Departments assume            the small and large group markets.
issuers and TPAs will incur no other costs       Accordingly, the Departments estimate
in 2011 related to the proposed collection       that about 29,000,000 SBCs would be
of information.                                  electronically distributed, and about
                                                 48,000,000 SBCs would be distributed
2012 Burden Estimate                             in paper form.       The Departments
                                                 assume there are no costs associated
   The estimate hour and cost burden for         with electronic disclosures; there
the collections of information in 2012 are       are costs only with regard to paper
as follows:                                      disclosures.




2011–42 I.R.B.                                                 561                                            October 17, 2011
  Task 1: Equivalent Costs for Producing SBCs
                     Hourly      Small Issuer / TPA                    Medium Issuer/TPA                  Large Issuer/TPA
                     Wage         Hours         Equivalent Cost         Hours       Equivalent Cost       Hours      Equivalent Cost
                     Rate
  IT Professionals    $53.26        1.5                $80                1.5                $80            1.5            $80
  Benefits/Sales
                      $41.94        1.5                $63                1.5                $63            1.5            $63
  Professionals
  Financial
                      $75.32        0.5                $38                0.5                $38            0.5            $38
  Managers
  Attorneys           $85.44        0.5                $43                0.5                $43            0.5            $43
  Total per
                                    4                 $220                 4               $220              4            $220
  issuer/TPA
  Total for all
                                   1100              $61,000             1800          $100,000             550          $31,000
  issuers/TPAs




  Task 2: Equivalent Costs for Distributing SBCs
                                  Hourly Wage        Hours per SBC        Total Number              Total Hours      Total Equivalent
                                     Rate                                   of SBCs                                        Cost
  Clerical Staff                      $29.15              0.017             48,000,000               820,000           $24,000,000




  Task 1: Cost Burden for Printing SBCs
                                          Cost per SBC                         Total SBCs                      Total Cost Burden
  Printing Costs                             $0.12                              48,000,000                        $5,800,0000



   Task 2: Coverage Examples — The          hours, and the estimated total cost is about      $8,700,000. The Departments calculate
estimated hour burden is about 100,000                                                        these estimates as follows:


  Task 2: Equivalent Costs for Producing Coverage Examples
                     Hourly      Small Issuer / TPA                    Medium Issuer/TPA                  Large Issuer/TPA
                     Wage         Hours         Equivalent Cost         Hours       Equivalent Cost       Hours      Equivalent Cost
                     Rate
  IT Professionals   $53.26         45               $2,400               45               $2,400           45           $2,400
  Benefits/Sales
                     $41.94         45               $1,900               45               $1,900           45           $1,900
  Professionals
  Financial
                     $75.32         15               $1,100               15               $1,100           15           $1,100
  Managers
  Attorneys          $85.44         15               $1,300               15               $1,300           15           $1,300
  Total per
                                   120               $6,700              120               $6,700           120          $6,700
  issuer/TPA
  Total for all
                                  33,000           $1,900,000           53,000         $3,000,000         16,000        $900,000
  issuers/TPAs




October 17, 2011                                               562                                                   2011–42 I.R.B.
  Task 2: Cost Burden for Printing Coverage Examples
                                       Printing Cost Per CE               Total CEs Printed                  Total Cost Burden
  Printing Costs                               $0.06                            48,000,000                        $2,900,0000



   Task 3: Glossary Requests — The De-        2013 Burden Estimate                              Task 4: Glossary Requests — The De-
partments assume that in 2012, issuers and                                                   partments assume that in 2013, issuers and
TPAs will begin responding to glossary            Task 1: Summary of Benefits and            TPAs will again respond to glossary re-
requests to covered individuals, and that     Coverage (not including coverage exam-         quests to covered individuals, and that 5%
2.5% of covered individuals, who receive      ples) — The number of SBC responses            of covered individuals, who receive paper
paper SBCs, will request glossaries. The      is assumed to remain constant. Thus, in        SBCs, will request glossaries. The De-
Departments further estimate that the bur-    2013, the Departments again estimate a to-     partments further estimate that the burden
den and cost of providing the notices to be   tal cost of about $30,000,000 and about        and cost of providing the glossaries to be
2.5% of the burden and cost of distributing   820,000 burden hours for SBCs (not in-         5% of the burden and cost of distributing
paper SBCs, plus an additional cost bur-      cluding coverage examples).                    paper SBCs, plus an additional cost bur-
den of $0.49 for each glossary (including         Task 2: Coverage Examples — The            den for $0.49 for each glossary (including
$0.44 for first-class postage and $0.05 for   Departments again estimate a total cost        $0.44 for first-class postage and $0.05 for
supply costs). Accordingly, in 2012, the      of about $8,700,000 and 100,000 burden         supply costs). Accordingly, in 2013, the
Departments estimate a total cost of about    hours for coverage examples.                   Departments estimate a total cost of about
$1,300,000 and 21,000 burden hours asso-          Task 3: Notices of Modifications —         $2,700,000 and 41,000 burden hours asso-
ciated with about 1,200,000 glossary re-      The Departments assume that in 2013,           ciated with 2,400,000 glossary requests.
quests.                                       issuers and TPAs would send notices of            Task 5: Maintenance Administrative
   Task 4: One-Time Administrative            modifications to covered individuals, and      Costs — In 2013, the Departments as-
Costs — As mentioned above, the Depart-       that 2% of covered individuals would           sume that issuers and TPAs will need to
ments estimate a one-time administrative      receive such notice. The Departments           make updates to address changes in stan-
cost of about $36,000,000 across the in-      further estimate that the burden and cost      dards, and, thus, incur 15% of the one-time
dustry and a total of about 680,000 burden    of providing the notices to be 2% of the       administrative burden. Accordingly, the
hours, and assume this burden will be         combined burden and cost of the SBCs           estimated hour burden is about 100,000
equally divided between 2011 and 2012.        including the coverage examples, plus          hours, and the estimated total cost is about
Thus, in 2012, the Departments estimate       an additional cost burden for $0.49 for        $5,400,000. The Departments calculate
a one-time administrative cost of about       each paper notice (including $0.44 for         these estimates as follows:
$18,000,000 across the industry and about     first-class postage and $0.05 for supply
340,000 burden hours.                         costs). Accordingly, in 2013, the De-
   The total 2012 burden estimate is about    partments estimate a total cost of about
$58,000,000. The total number of burden       $1,400,000 and 18,000 burden hours as-
hours is about 1,300,000.                     sociated with about 1,500,000 notices of
                                              modification.


  Task 2: Equivalent Costs for Producing Coverage Examples
                      Hourly        Small Issuer / TPA                  Medium Issuer/TPA                Large Issuer/TPA
                      Wage           Hours        Equivalent Cost        Hours      Equivalent Cost       Hours      Equivalent Cost
                      Rate
  IT Professionals      $53.26        46.2             $2,500             69.3           $3,700            92.4          $4,900
  Benefits / Sales
                        $41.94        33.6             $1,800             50.4           $2,700            67.2          $3,600
  Professionals
  Attorneys             $85.44        4.2                $220             6.3              $340            8.4            $450
  Total per
                                       84              $4,500             126            $6,700            168           $8,900
  issuer/TPA
  Total for all
                                     23,000         $1,200,000          56,000         $3,000,000        23,000        $1,200,000
  issuers/TPAs




2011–42 I.R.B.                                                  563                                              October 17, 2011
  The total 2013 cost estimate is about                               The Departments note that persons are                         comply with, an ICR unless the ICR has a
$48,000,000.The total number of burden                             not required to respond to, and generally                        valid OMB control number.
hours is about 1,100,000 hours.                                    are not subject to any penalty for failing to                       The 2012–2013 paperwork burden esti-
                                                                                                                                    mates are summarized as follows:


 Type of Review: New collection.
 Agencies: Employee Benefits Security Administration, Department of Labor; Internal Revenue Service, U.S. Department of
 the Treasury.
 Title: Affordable Care Act Uniform Explanation of Coverage Documents
 OMB Number: XXXX–XXX; XXXX–XXXX.
 Affected Public: Business or other for profit; not-for-profit institutions.
 Total Respondents: 858.
 Total Responses: 80,000,000.
 Frequency of Response: On-going.
 Estimated Total Annual Burden Hours: 600,000 hours (Employee Benefits Security Administration); 600,000 hours (Internal
 Revenue Service).
 Estimated Total Annual Burden Cost: $5,100,000 (Employee Benefits Security Administration); $5,100,000 (Internal Revenue
 Service).

2. Department of Health and Human                                  small issuers as those with total earned pre-                    administrative cost of about $14,000,000
Services                                                           miums less than $50 million; medium is-                          across the industry and 270,000 burden
                                                                   suers as those with total earned premiums                        hours to prepare for the provisions of these
    The Department estimates 333 respon-                           between $50 million and $999 million; and                        proposed regulations. This calculation is
dents each year from 2011–2013. This es-                           large issuers as those with total earned pre-                    made assuming issuers and TPAs will need
timate reflects the approximately 220 is-                          miums of $1 billion or more. Accordingly,                        to implement two principal tasks: (1) de-
suers offering comprehensive major med-                            the Department estimates approximately                           velop teams to analyze current workflow
ical coverage in the individual market and                         70 small, 115 medium, and 35 large is-                           processes against the new standards and
to fully-insured non-federal governmen-                            suers. Similarly, the Department estimates                       (2) make appropriate changes to IT sys-
tal plans, and 113 TPAs acting as service                          approximately 36 small, 59 medium, and                           tems and processes.
providers for self-insured non-federal gov-                        18 large TPAs.                                                      With respect to task (1), the Department
ernmental plans.65                                                                                                                  estimates about 38,000 burden hours, and
    To account for variation in firm size, the                     2011 Burden Estimate                                             an equivalent cost of about $1,900,000.
Department estimates a weighted burden                                                                                              The Department calculates these estimates
on the basis of issuer’s 2009 total earned                            While the disclosures in these proposed                       as follows:67
premiums for comprehensive major med-                              regulations are not required until March
ical coverage.66 The Department defines                            2012, the Department estimates a one-time




65 The Department estimates that there are 440 issuers and 750 TPAs. Because the Department shares the hour and cost burden for issuers with the Department of Labor and the Department
of the Treasury, the burden to produce the SBCs including coverage examples for non-federal governmental plans and issuers in the individual market is calculated using half the number
of issuers (221) and 15% of TPAs (113). While non-federal governmental plans could prepare their own SBCs including Coverage Examples, the Department assumes that SBCs including
coverage examples would be prepared by service providers, i.e., issuers and TPAs.
66   The premium revenue data come from the 2009 NAIC financial statements, also known as “Blanks,” where insurers report information about their various lines of business
67   For the purposes of these and other estimates in this section III.E, the Departments again use the assumptions outlined above in section III.A.5.



October 17, 2011                                                                             564                                                             2011–42 I.R.B.
  Task 1: Analyze current workflow and new rules
                       Hourly        Small Issuer / TPA                 Medium Issuer/TPA                Large Issuer/TPA
                       Wage           Hours        Equivalent Cost       Hours     Equivalent Cost        Hours      Equivalent Cost
                       Rate
  IT Professionals       $53.26         36              $1,900             54            $2,900             72            $3,800
  Benefits/Sales
                         $41.94         40              $1,700             60            $2,500             80            $3,400
  Professionals
  Attorneys              $85.44         4                 $340              6              $510              8             $680
  Total per
                                        80              $3,900            120            $5,900             160           $7,900
  issuer/TPA
  Total for all
                                      8,500           $420,000           21,000      $1,000,000            8,500        $450,000
  issuers/TPAs



   With respect to task (2), the Department    equivalent cost of out $12,000,000. The      Department calculates these estimates as
estimates 230,000 burden hours, and an                                                      follows:


  Task 2: IT Changes
                       Hourly        Small Issuer / TPA                 Medium Issuer/TPA                Large Issuer/TPA
                       Wage           Hours        Equivalent Cost       Hours     Equivalent Cost        Hours      Equivalent Cost
                       Rate
  IT Professionals       $53.26        480             $26,000            720          $38,000              960          $51,000
  Total per
                                       480             $26,000            720          $38,000              960          $51,000
  issuer/TPA
  Total for all
                                     51,000          $2,700,000         125,000      $6,700,000           51,000       $2,700,000
  issuers/TPAs



   The Department assumes the total one-       •   The Department estimates that there            associated with electronic disclosures,
time administrative burden will be divided         will be about 13,000,000 SBC re-               and there are costs only with regard to
equally between 2011 and 2012. Thus, in            sponses in 2012.                               paper disclosures.
2011, the Department estimates a one-time
administrative cost of about $7,000,000        •   The Department assumes that 38 per-         Task 1: Summary of benefits and
across the industry and 135,000 burden             cent of the SBCs would be sent elec-     coverage (not including coverage ex-
hours. The Department assumes issuers              tronically in the group market, and      amples) — The estimated hour burden is
and TPAs will incur no other costs in 2011         70 percent of the SBCs would be sent     about 170,000 hours, and the estimated
related to the proposed collection of infor-       electronically in the individual mar-    total cost is about $5,900,000. The Depart-
mation.                                            ket. Accordingly, the Department         ment calculates these estimates as follows:
                                                   estimates that about 5,900,000 SBCs
2012 Burden Estimate                               would be electronically distributed,
                                                   and about 7,400,000 SBCs would be
   The hour and cost burden for the collec-        distributed in paper form. The De-
tions of information are as follows:               partment assumes there are no costs




2011–42 I.R.B.                                                   565                                              October 17, 2011
  Task 1: Equivalent Costs for Producing SBCs
                      Hourly     Small Issuer / TPA                    Medium Issuer/TPA                   Large Issuer/TPA
                      Wage        Hours         Equivalent Cost         Hours       Equivalent Cost        Hours      Equivalent Cost
                      Rate
  IT Professionals      $53.26      1.5                $80                1.5               $80              1.5            $80
  Benefits/Sales
                        $41.94      1.5                $63                1.5               $63              1.5            $63
  Professionals
  Financial
                        $75.32      0.5                $38                0.5               $38              0.5            $38
  Managers
  Attorneys             $85.44      0.5                $43                0.5               $43              0.5            $43
  Total per
                                    4                 $220                 4                $220                4          $220
  issuer/TPA
  Total for all
                                   420               $24,000             700               $39,000           200          $12,000
  issuers/TPAs




  Task 1: Equivalent Costs for Distributing SBCs
                                  Hourly Wage        Hours per SBC        Total Number               Total Hours      Total Equivalent
                                     Rate                                   of SBCs                                         Cost
  Clerical Staff, Individual          $29.15              0.033                2,700,000               89,000           $2,600,000
  Market
  Clerical, Group Market              $29.15              0.017                4,700,000               80,000           $2,300,000
  Total                                                                        7,400,000              170,000           $4,900,000




  Task 1: Cost Burden for Printing SBCs
                                          Cost per SBC                         Total SBCs                       Total Cost Burden
  Printing Costs                             $0.12                              7,400,000                           $890,000



   Task 2: Coverage Examples — The          hours, and the estimated total cost is about      $2,700,000. The Department calculates
estimated hour burden is about 40,000                                                         these estimates as follows:




October 17, 2011                                               566                                                   2011–42 I.R.B.
  Task 2: Equivalent Costs for Producing Coverage Examples
                      Hourly        Small Issuer / TPA                  Medium Issuer/TPA                Large Issuer/TPA
                      Wage           Hours        Equivalent Cost        Hours       Equivalent Cost      Hours     Equivalent Cost
                      Rate
  IT Professionals      $53.26         45               $2,400             45             $2,400            45           $2,400
  Benefits/Sales
                        $41.94         45               $1,900             45             $1,900            45           $1,900
  Professionals
  Financial
                        $75.32         15               $1,100             15             $1,100            15           $1,100
  Managers
  Attorneys             $85.44         15               $1,300             15             $1,300            15           $1,300
  Total per
                                      120               $6,700             120            $6,700           120           $6,700
  issuer/TPA
  Total for all
                                     13,000            $710,000          21,000        $1,200,000         6,400         $350,000
  issuers/TPAs




  Task 2: Cost Burden for Printing Coverage Examples
                                       Printing Cost Per CE                Total CEs Printed                 Total Cost Burden
  Printing Costs                               $0.06                             7,400,000                        $440,000



    Task 3: Glossary Requests — The             The total 2012 burden estimate is about      2013, the Department estimate a total cost
Department assumes that in 2012, issuers      $16,000,000. The total number of burden        of about $300,000 and 4,200 burden hours
and TPAs will begin responding to glos-       hours is 350,000.                              associated with about 260,000 notices of
sary requests to covered individuals, and                                                    modification.
that 2.5% of covered individuals, who re-     2013 Burden Estimate                              Task 4: Glossary Requests — The De-
ceive paper SBCs, will request glossaries.                                                   partment assumes that in 2013, issuers and
                                                  Task 1: Summary of benefits and
The Departments further estimate that the                                                    TPAs will again respond to glossary re-
                                              coverage (not including coverage exam-
burden and cost of providing the glossaries                                                  quests to covered individuals, and that 5%
                                              ples) — The number of SBC responses
to be 2.5% of the burden and cost of dis-                                                    of covered individuals, who receive paper
                                              is assumed to remain constant. Thus, in
tributing paper SBCs, plus an additional                                                     SBCs, will request glossaries. The Depart-
                                              2013, the Department again estimates a to-
cost burden of $0.49 for each glossary (in-                                                  ment further estimates that the burden and
                                              tal cost of about $5,900,000 and 170,000
cluding $0.44 for first-class postage and                                                    cost of providing the glossaries to be 5%
                                              burden hours for SBCs (not including cov-
$0.05 for supply costs). Accordingly, in                                                     of the burden and cost of distributing pa-
                                              erage examples).
2012, the Department estimates a total cost                                                  per SBCs, plus an additional cost burden
                                                  Task 2: Coverage Examples — In
of about $240,000 and 4,300 burden hours                                                     of $0.49 for each glossary (including $0.44
                                              2013, the Department again estimates a to-
associated with about 190,000 glossary re-                                                   for first-class postage and $0.05 for sup-
                                              tal cost of about $2,700,000 and 40,320
quests.                                                                                      ply costs). Accordingly, in 2013, the De-
                                              burden hours for coverage examples.
    Task 4: One-Time Administrative                                                          partment estimates a total cost of $470,000
                                                  Task 3: Notices of Modifications —
Costs: As mentioned above, the Depart-                                                       and 8,500 burden hours associated with
                                              The Department assumes that in 2013, is-
ment estimates a one-time administrative                                                     370,000 glossary requests.
                                              suers will begin sending notices of modifi-
cost of about$14,000,000 across the indus-                                                      Task 5: Maintenance Administrative
                                              cations to covered individuals, and that 2%
try and a total of 270,000 burden hours,                                                     Costs — In 2013, the Department assume
                                              of covered individuals will receive such
and assumes this burden will be equally                                                      that issuers and TPAs will need to make
                                              notice. The Department further estimates
divided between 2011 and 2012. Thus, in                                                      updates to address changes in standards,
                                              that the burden and cost of providing the
2012, the Department estimates a one-time                                                    and, thus, incur 15% of the one-time ad-
                                              notices to be 2% of the combined burden
administrative cost of about $7,000,000                                                      ministrative burden. Accordingly, the
                                              and cost of the SBCs including the cover-
across the industry and 135,000 burden                                                       estimated hour burden is about 40,000
                                              age examples, plus an additional cost bur-
hours.                                                                                       hours, and the estimated total cost is about
                                              den for $0.49 for each paper notice (in-
                                                                                             $2,000,000. The Departments calculate
                                              cluding $0.44 for first-class postage and
                                                                                             these estimates as follows:
                                              $0.05 for supply costs). Accordingly, in


2011–42 I.R.B.                                                    567                                            October 17, 2011
  Task 2: Equivalent Costs for Producing Coverage Examples
                     Hourly        Small Issuer / TPA                   Medium Issuer/TPA                Large Issuer/TPA
                     Wage           Hours       Equivalent Cost          Hours      Equivalent Cost       Hours     Equivalent Cost
                     Rate
  IT Professionals     $53.26       46.2             $2,500               69.3              $3,700         92.4          $4,900
  Benefits / Sales
                       $41.94       33.6             $1,800               50.4              $2,700         67.2          $3,600
  Professionals
  Attorneys            $85.44        4.2                $220              6.3               $340            8.4           $450
  Total per
                                     84              $4,500               126               $6,700         168           $8,900
  issuer/TPA
  Total for all
                                    8,900           $470,000            22,000        $1,100,000          8,900         $470,000
  issuers/TPAs



  The total 2013 cost estimate is about        The Department notes that persons are          comply with, an ICR unless the ICR has a
$11,000,000. The total number of burden     not required to respond to, and generally         valid OMB control number.
hours is about 260,000 hours.               are not subject to any penalty for failing to        The 2012–2013 paperwork burden esti-
                                                                                              mates are summarized as follows:


 Type of Review: New collection.
 Agency: Department of Health and Human Services.
 Title: Affordable Care Act Uniform Explanation of Coverage Documents
 OMB Number: 0938–New.
 Affected Public: Business; State, Local, or Tribal Governments.
 Total Respondents: 333.
 Total Responses: 13,000,000.
 Frequency of Response: On-going.
 Estimated Total Annual Burden Hours: 310,000 hours.
 Estimated Total Annual Burden Cost: $1,600,000.

   To obtain copies of the supporting       address, phone number, OMB number,                    1. Submit your comments electron-
statement and any related forms for the     and CMS document identifier, to Paper-            ically as specified in the ADDRESSES
proposed paperwork collections refer-       work@cms.hhs.gov, or call the Reports             section of this proposed rule; or
enced above, access CMS’ Web site at        Clearance Office at 410–786–1326.                     2. Submit your comments to the Office
http://www.cms.gov/PaperworkReduc-             If you comment on this information col-        of Information and Regulatory Affairs, Of-
tionActof1995/PRAL/list.asp#TopOfPage       lection and recordkeeping requirements,           fice of Management and Budget,
or email your request, including your       please do either of the following:


 Attention: CMS Desk Officer, CMS–9982–P
 Fax: 202–395–5806; or
 E-mail: OIRA_submission@omb.eop.gov

E. Federalism Statement-Department of       requires the adherence to specific criteria       distribution of power and responsibilities
Labor and Department of Health and          by Federal agencies in the process of their       among the various levels of government.
Human Services                              formulation and implementation of poli-           Federal agencies promulgating regulations
                                            cies that have “substantial direct effects”       that have federalism implications must
  Executive Order 13132 outlines fun-       on the States, the relationship between the       consult with State and local officials and
damental principles of federalism, and      national government and States, or on the         describe the extent of their consultation


October 17, 2011                                               568                                                  2011–42 I.R.B.
and the nature of the concerns of State        health insurance coverage except to the         ance issuers, and Congress’ intent to pro-
and local officials in the preamble to the     extent that such standard or requirement        vide uniform minimum protections to con-
regulation.                                    prevents the application of a requirement”      sumers in every State. By doing so, it is
    In the Departments’ view, these pro-       of a Federal standard. The conference           the Departments’ view that they have com-
posed rules have federalism implications,      report accompanying HIPAA indicates             plied with the requirements of Executive
because it would have direct effects on        that this is intended to be the “narrowest”     Order 13132.
the States, the relationship between na-       preemption of State laws (See House Conf.          Pursuant to the requirements set forth
tional governments and States, or on the       Rep. No. 104–736, at 205, reprinted             in section 8(a) of Executive Order 13132,
distribution of power and responsibilities     in 1996 U.S. Code Cong. & Admin.                and by the signatures affixed to this pro-
among various levels of government re-         News 2018). States may continue to              posed rule, the Departments certify that the
lating to the disclosure of health insurance   apply State law requirements except to          Employee Benefits Security Administra-
coverage information to consumers. Un-         the extent that such requirements prevent       tion and the Centers for Medicare & Med-
der these proposed rules, all group health     the application of the Affordable Care          icaid Services have complied with the re-
plans and health insurance issuers offering    Act requirements that are the subject of        quirements of Executive Order 13132 for
group or individual health insurance cov-      this rulemaking. Accordingly, States have       the attached proposed rule in a meaningful
erage, including self-funded non-federal       significant latitude to impose requirements     and timely manner.
governmental plans as defined in section       on health insurance issuers that are more
2791 of the PHS Act, would be required         restrictive than the Federal law. However,      IV. Statutory Authority
to follow uniform standards for compil-        under these proposed rules, a State would
                                                                                                  The Department of the Treasury pro-
ing and providing a summary of benefits        not be allowed to impose a requirement
                                                                                               posed regulations are proposed to be
and coverage to consumers. Such Federal        that modifies the summary of benefits and
                                                                                               adopted pursuant to the authority con-
standards developed under PHS Act sec-         coverage required to be provided under
                                                                                               tained in sections 7805 and 9833 of the
tion 2715(a) would preempt any related         PHS Act section 2715(a), because it would
                                                                                               Code.
State standards that require a summary         prevent the application of this proposed
                                                                                                  The Department of Labor proposed
of benefits and coverage that provides         rule’s uniform disclosure requirement.
                                                                                               regulations are proposed to be adopted
less information to consumers than that            In compliance with the requirement of
                                                                                               pursuant to the authority contained in
required to be provided under PHS Act          Executive Order 13132 that agencies ex-
                                                                                               29 U.S.C. 1027, 1059, 1135, 1161–1168,
section 2715(a).                               amine closely any policies that may have
                                                                                               1169, 1181–1183, 1181 note, 1185, 1185a,
    In general, through section 514, ERISA     federalism implications or limit the policy
                                                                                               1185b, 1185d, 1191, 1191a, 1191b, and
supersedes State laws to the extent that       making discretion of the States, the De-
                                                                                               1191c; sec. 101(g), Pub. L.104–191, 110
they relate to any covered employee ben-       partments have engaged in efforts to con-
                                                                                               Stat. 1936; sec. 401(b), Pub. L. 105–200,
efit plan, and preserves State laws that       sult with and work cooperatively with af-
                                                                                               112 Stat. 645 (42 U.S.C. 651 note); sec.
regulate insurance, banking, or securi-        fected States, including consulting with,
                                                                                               512(d), Pub. L. 110–343, 122 Stat. 3881;
ties. While ERISA prohibits States from        and attending conferences of, the National
                                                                                               sec. 1001, 1201, and 1562(e), Pub. L.
regulating a plan as an insurance or in-       Association of Insurance Commissioners
                                                                                               111–148, 124 Stat. 119, as amended
vestment company or bank, the preemp-          and consulting with State insurance offi-
                                                                                               by Pub. L. 111–152, 124 Stat. 1029;
tion provisions of section 731 of ERISA        cials on an individual basis. It is expected
                                                                                               Secretary of Labor’s Order 3–2010, 75 FR
and section 2724 of the PHS Act (im-           that the Departments will act in a similar
                                                                                               55354 (September 10, 2010).
plemented in 29 CFR 2590.731(a) and            fashion in enforcing the Affordable Care
                                                                                                  The Department of Health and Hu-
45 CFR 146.143(a)) apply so that the           Act, including the provisions of section
                                                                                               man Services proposed regulations are
HIPAA requirements (including those of         2715 of the PHS Act. Throughout the
                                                                                               proposed to be adopted pursuant to the
the Affordable Care Act) are not to be         process of developing these proposed reg-
                                                                                               authority contained in sections 2701
“construed to supersede any provision of       ulations, to the extent feasible within the
                                                                                               through 2763, 2791, and 2792 of the PHS
State law which establishes, implements,       specific preemption provisions of HIPAA
                                                                                               Act (42 USC 300gg through 300gg–63,
or continues in effect any standard or         as it applies to the Affordable Care Act, the
                                                                                               300gg–91, and 300gg–92), as amended.
requirement solely relating to health          Departments have attempted to balance the
insurance issuers in connection with group     States’ interests in regulating health insur-   *****



                                                                                                                 Sarah Hall Ingram,
                                                                                                    Acting Deputy Commissioner for
                                                                                                          Services and Enforcement,
                                                                                                            Internal Revenue Service.


 Signed this              15th                     day of                                         August               , 2011.




2011–42 I.R.B.                                                    569                                            October 17, 2011
                                                                                                                 Phyllis C. Borzi,
                                                                                                               Assistant Secretary,
                                                                                         Employee Benefits Security Administration,
                                                                                                             Department of Labor.
 CMS–9982–P
 Dated July 28, 2011.


                                                                                                                     Donald Berwick,
                                                                                                                        Administrator,
                                                                                                             Centers for Medicare &
                                                                                                                    Medicaid Services.
 Dated August 9, 2011.


                                                                                                                  Kathleen Sebelius,
                                                                                                                          Secretary,
                                                                                                           Department of Health and
                                                                                                                     Human Services.
 CMS–9982–P
 BILLING CODE 4120–01–P

DEPARTMENT OF THE TREASURY                     paragraph (a)(1) in accordance with the            (1) In the case of renewal or reissuance,
Internal Revenue Service                       rules of this section.                          if written application is required for re-
26 CFR Chapter I                                  (i) By a group health insurance issuer       newal (in either paper or electronic form),
                                               to a group health plan — (A) A health in-       the SBC must be provided no later than the
   Accordingly, 26 CFR Parts 54 and 602        surance issuer offering group health insur-     date the materials are distributed.
are proposed to be amended as follows:         ance coverage must provide the SBC to a            (2) If renewal or reissuance is auto-
                                               group health plan (or its sponsor) upon ap-     matic, the SBC must be provided no later
PART 54—PENSION EXCISE TAXES                   plication or request for information about      than 30 days prior to the first day of the
                                               the health coverage as soon as practicable      new policy year.
   Paragraph 1. The authority citation for
                                               following the request, but in no event later       (D) If a group health plan (or its spon-
Part 54 is amended by adding an entry for
                                               than seven days following the request. If       sor) requests an SBC from a health insur-
                                               an SBC is provided upon request for in-         ance issuer offering group health insurance
§54.9815–2715 in numerical order to
                                               formation about health coverage and the         coverage, it must be provided as soon as
read in part as follows:
                                               plan (or its sponsor) subsequently applies      practicable, but in no event later than seven
   Authority: 26 U.S.C. 7805. ***              for health coverage, a second SBC must be       days following the request for an SBC.
   Section 54.9815–2715 also issued un-        provided under this paragraph (a)(1)(i)(A)         (ii) By a group health insurance issuer
der 26 U.S.C. 9833.                            only if the information required to be in the   and a group health plan to participants
   Par. 2. Section 54.9815–2715 is added       SBC has changed.                                and beneficiaries — (A) A group health
to read as follows:                               (B) If there is any change in the infor-     plan (including its administrator, as de-
                                               mation required to be in the SBC before the     fined under section 3(16) of ERISA), and
§54.9815–2715 Summary of benefits              coverage is offered, or before the first day    a health insurance issuer offering group
and coverage and uniform glossary.             of coverage, the issuer must update and         health insurance coverage, must provide
                                               provide a current SBC to the plan (or its       an SBC to a participant or beneficiary (as
   (a) Summary of benefits and coverage        sponsor) no later than the date of the offer    defined under sections 3(7) and 3(8) of
— (1) In general. A group health plan          (or no later than the first day of coverage,    ERISA), and consistent with the rules of
(and its administrator as defined in section   as applicable).                                 paragraph (a)(1)(iii) of this section) with
3(16)(A) of ERISA), and a health insur-           (C) If the issuer renews or reissues the     respect to each benefit package offered by
ance issuer offering group health insurance    policy, certificate, or contract of insur-      the plan or issuer for which the participant
coverage, is required to provide a written     ance (for example, for a succeeding policy      or beneficiary is eligible.
summary of benefits and coverage (SBC)         year), the issuer must provide a new SBC           (B) The SBC must be provided as part
for each benefit package without charge to     when the policy, certificate, or contract is    of any written application materials that
entities and individuals described in this     renewed or reissued.                            are distributed by the plan or issuer for



October 17, 2011                                                  570                                                 2011–42 I.R.B.
enrollment. If the plan does not distrib-         ciary’s last known address is different than        (H) A statement that the SBC is only
ute written application materials for enroll-     the participant’s last known address, a sep-     a summary and that the plan document,
ment, the SBC must be distributed no later        arate SBC is required to be provided to the      policy, or certificate of insurance should
than the first date the participant is eligible   beneficiary at the beneficiary’s last known      be consulted to determine the governing
to enroll in coverage for the participant or      address.                                         contractual provisions of the coverage;
any beneficiaries.                                   (C) With respect to a group health               (I) Contact information for questions
    (C) If there is any change to the infor-      plan that offers multiple benefit packages,      and obtaining a copy of the plan docu-
mation required to be in the SBC before           the plan or issuer is required to provide        ment or the insurance policy, certificate, or
the first day of coverage, the plan or issuer     a new SBC automatically upon renewal             contract of insurance (such as a telephone
must update and provide a current SBC to a        only with respect to the benefit package         number for customer service and an Inter-
participant or beneficiary no later than the      in which a participant or beneficiary is         net address for obtaining a copy of the plan
first day of coverage.                            enrolled; SBCs are not required to be pro-       document or the insurance policy, certifi-
    (D) The plan or issuer must provide the       vided automatically with respect to benefit      cate, or contract of insurance);
SBC to special enrollees (as described in         packages in which the participant or ben-           (J) For plans and issuers that maintain
§ 54.9801–6) within seven days of a re-           eficiary are not enrolled. However, if a         one or more networks of providers, an
quest for enrollment pursuant to a special        participant or beneficiary requests an SBC       Internet address (or similar contact infor-
enrollment right.                                 with respect to another benefit package          mation) for obtaining a list of network
    (E) If the plan or issuer requires partic-    (or more than one other benefit package)         providers;
ipants or beneficiaries to renew in order to      for which the participant or beneficiary is         (K) For plans and issuers that use a for-
maintain coverage (for example, for a suc-        eligible, the SBC (or SBCs, in the case of a     mulary in providing prescription drug cov-
ceeding plan year), the plan or issuer must       request for SBCs relating to more than one       erage, an Internet address (or similar con-
provide a new SBC when the coverage is            benefit package) must be provided upon           tact information) for obtaining information
renewed.                                          request in accordance with the rules of          on prescription drug coverage;
    (1) If written application is required        paragraph (a)(1)(ii) of this section, which         (L) An Internet address for obtaining
for renewal (in either paper or electronic        requires the SBC to be provided as soon          the uniform glossary, as described in para-
form), the SBC must be provided no later          as practicable, but in no event later than       graph (c) of this section; and
than the date the materials are distributed.      seven days following the request.                   (M) Premiums (or in the case of a self-
    (2) If renewal is automatic, the SBC             (2) Content — (i) In general. The SBC         insured group health plan, cost of cover-
must be provided no later than 30 days            must include the following:                      age).
prior to the first day of coverage under the         (A) Uniform definitions of standard in-          (ii) Coverage examples. The SBC must
new plan year.                                    surance terms and medical terms so that          include coverage examples that illustrate
    (F) A plan or issuer must provide the         consumers may compare health coverage            benefits provided under the plan or cov-
SBC to participants or beneficiaries upon         and understand the terms of (or exceptions       erage for common benefits scenarios (in-
request, as soon as practicable, but in no        to) their coverage;                              cluding pregnancy and serious or chronic
event later than seven days following the            (B) A description of the coverage, in-        medical conditions) that are identified by
request.                                          cluding cost sharing, for each category          the Secretary in accordance with the fol-
    (iii) Special rules to prevent unnec-         of benefits identified by the Secretary in       lowing:
essary duplication with respect to group          guidance;                                           (A) Number of examples. The Secretary
health coverage — (A) An entity required             (C) The exceptions, reductions, and           may identify up to six coverage examples
to provide an SBC under paragraph (a)(1)          limitations of the coverage;                     that may be required in an SBC.
of this section with respect to an individ-          (D) The cost-sharing provisions of the           (B) Benefits scenarios. For purposes of
ual satisfies that requirement if another         coverage, including deductible, coinsur-         this section, a benefits scenario is a hy-
party provides the SBC, but only to the           ance, and copayment obligations;                 pothetical situation, consisting of a sam-
extent that the SBC is timely and com-               (E) The renewability and continuation         ple treatment plan for a specified medi-
plete in accordance with the other rules          of coverage provisions;                          cal condition during a specific period of
of this section. Therefore, for example,             (F) Coverage examples, in accordance          time, based on recognized clinical prac-
in the case of a group health plan funded         with the rules of paragraph (a)(2)(ii) of this   tice guidelines available through the Na-
through an insurance policy, the plan sat-        section;                                         tional Guideline Clearinghouse, Agency
isfies the requirement to provide an SBC             (G) With respect to coverage beginning        for Healthcare Research and Quality. The
with respect to an individual if the issuer       on or after January 1, 2014, a statement         Secretary will specify, in guidance, the
provides a timely and complete SBC to             about whether the plan or coverage pro-          types of services, dates of service, applica-
the individual.                                   vides minimum essential coverage as de-          ble billing codes, and allowed charges for
    (B) If a participant and any beneficia-       fined under section 5000A(f) and whether         each claim in the benefits scenario.
ries are known to reside at the same ad-          the plan’s or coverage’s share of the total         (C) Demonstration of benefit provided.
dress, and a single SBC is provided to            allowed costs of benefits provided under         To demonstrate benefits provided under
that address, the requirement to provide the      the plan or coverage meets applicable re-        the plan or coverage, a plan or issuer simu-
SBC is satisfied with respect to all individ-     quirements;                                      lates how claims would be processed under
uals residing at that address. If a benefi-                                                        the scenarios provided by the Secretary to


2011–42 I.R.B.                                                       571                                              October 17, 2011
generate an estimate of cost sharing a con-     of the terms of the plan or coverage that           (3) Appearance. A group health plan,
sumer could expect to pay under the ben-        would affect the content of the SBC, that is    and a health insurance issuer, must pro-
efit package. The demonstration of bene-        not reflected in the most recently provided     vide the uniform glossary with the appear-
fits will take into account any cost sharing,   SBC, and that occurs other than in connec-      ance authorized in guidance, ensuring that
excluded benefits, and other limitations on     tion with a renewal or reissuance of cover-     the uniform glossary is presented in a uni-
coverage, as described by the Secretary in      age, the plan or issuer must provide notice     form format and utilizes terminology un-
guidance.                                       of the modification to enrollees not later      derstandable by the average plan enrollee.
    (3) Appearance. A group health plan         than 60 days prior to the date on which             (4) Form and manner. A plan or is-
and a health insurance issuer must provide      such modification will become effective.        suer must make the uniform glossary de-
an SBC as a stand-alone document in the         The notice of modification must be pro-         scribed in this paragraph (c) available upon
form authorized by the Secretary and com-       vided in a form that is consistent with the     request, in either paper or electronic form
pleted in accordance with the instructions      rules of paragraph (a)(4) of this section.      (as requested), within seven days of the re-
for completing the SBC that are authorized          (c) Uniform glossary — (1) In general.      quest. (Under the rules of paragraph (a) of
by the Secretary in guidance. The SBC           A group health plan, and a health insurance     this section, the form authorized in guid-
must be presented in a uniform format, use      issuer offering group health insurance cov-     ance for the SBC will disclose to partici-
terminology understandable by the aver-         erage, must make available to participants      pants and beneficiaries their rights to re-
age plan enrollee, not exceed four dou-         and beneficiaries the uniform glossary de-      quest a copy of the uniform glossary.)
ble-sided pages in length, and not include      scribed in paragraph (c)(2) of this section         (d) Preemption. With respect to the
print smaller than 12-point font.               in accordance with the appearance and for-      standards for providing an SBC required
    (4) Form — (i) An SBC provided by           mat requirements of paragraphs (c)(3) and       under paragraph (a) of this section, State
an issuer offering group health insurance       (c)(4) of this section.                         laws that require a health insurance issuer
coverage to a plan (or its sponsor), may            (2) Health-coverage-related terms and       to provide an SBC that supplies less infor-
be provided in paper form. Alternatively,       medical terms. The uniform glossary must        mation than required under paragraph (a)
the SBC may be provided electronically          provide uniform definitions, specified by       of this section are preempted.
(such as email or an Internet posting) if the   the Secretary in guidance, for the fol-             (e) Failure to provide. A group health
following three conditions are satisfied —      lowing health-coverage-related terms and        plan or health insurance issuer that will-
    (A) The format is readily accessible by     medical terms:                                  fully fails to provide information required
the plan (or its sponsor);                          (i) Allowed amount, appeal, bal-            under this section to a participant or bene-
    (B) The SBC is provided in paper form       ance billing, co-insurance, complications       ficiary is subject to a fine of not more than
free of charge upon request, and                of pregnancy, co-payment, deductible,           $1,000 for each such failure. A failure with
    (C) If the electronic form is an Internet   durable medical equipment, emergency            respect to each participant or beneficiary
posting, the issuer timely advises the plan     medical condition, emergency medical            constitutes a separate offense for purposes
(or its sponsor) in paper form or email that    transportation, emergency room care,            of this paragraph (e).
the documents are available on the Internet     emergency services, excluded services,              (f) Applicability date. This section is
and provides the Internet address.              grievance, habilitation services, health        applicable beginning March 23, 2012. See
    (ii) An SBC provided by a plan or is-       insurance, home health care, hospice            § 54.9815–1251T(d), providing that this
suer to a participant or beneficiary may be     services, hospitalization, hospital out-        section applies to grandfathered health
provided in paper form. Alternatively, the      patient care, in-network co-insurance,          plans.
SBC may be provided electronically if the       in-network co-payment, medically nec-
requirements of 29 CFR 2520.104b–1 are          essary, network, non-preferred provider,        PART 602—OMB CONTROL
met.                                            out-of-network co-insurance, out-of-net-        NUMBERS UNDER THE PAPERWORK
    (5) Language. A group health plan           work co-payment, out-of-pocket limit,           REDUCTION ACT
or health insurance issuer must provide         physician services, plan, preauthorization,
                                                                                                   Par. 3. The authority citation for part
the SBC in a culturally and linguisti-          preferred provider, premium, prescription
                                                                                                602 continues to read in part as follows:
cally appropriate manner. For purposes          drug coverage, prescription drugs, primary
                                                                                                   Authority: 26 U.S.C. 7805. * * *
of this paragraph (a)(5), a plan or issuer      care physician, primary care provider,
                                                                                                   Par. 4. Section 602.101(b) is amended
is considered to provide the SBC in a           provider, reconstructive surgery, reha-
                                                                                                by adding the following entry in numerical
culturally and linguistically appropriate       bilitation services, skilled nursing care,
                                                                                                order to the table to read as follows:
manner if the thresholds and standards of       specialist, usual customary and reasonable
§54.9815–2719T(e) are met as applied to         (UCR), and urgent care; and                     §602.101 OMB Control numbers.
the SBC.                                            (ii) Such other terms as the Secretary
    (b) Notice of modifications. If a group     determines are important to define so that      *****
health plan, or health insurance issuer of-     individuals and employers may compare             (b) * * *
fering group health insurance coverage,         and understand the terms of coverage and
makes any material modification (as de-         medical benefits (including any exceptions
fined under section 102 of ERISA) in any        to those benefits), as specified in guidance.




October 17, 2011                                                   572                                                 2011–42 I.R.B.
 CFR part or section where                                                                                            Current OMB
 Identified and described                                                                                             control No.
 *****
 54.9815–2715                               ...........................................................               1545–
 *****

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


2011–42 I.R.B.                                                                  573                                           October 17, 2011
definition of a notional principal contract    contract as defined in §1.446–3(c) of the        Section 4(a) of the CEA provides, in part,
in §1.446–3(c) with the addition of credit     proposed regulations.                            that it is unlawful to engage in any trans-
default swaps. The parallel language sug-                                                       action in, or in connection with, a com-
gests that Congress was attempting to          C. Definition of Regulated Futures               modity futures contract unless such trans-
harmonize the category of swaps excluded       Contract                                         action is conducted on or subject to the
under section 1256(b)(2)(B) with swaps                                                          rules of a board of trade which has been
that qualify as notional principal contracts       Section 1256(g)(1) defines a regulated       designated as a contract market and such
under §1.446–3(c), rather than with the        futures contract as “a contract (A) with re-     contract is executed or consummated by or
contracts defined as “swaps” under section     spect to which the amount required to be         through a contract market. Section 5(d)
721 of the Dodd-Frank Act. Accordingly,        deposited and the amount which may be            of the CEA, as amended by section 735
§1.1256(b)–1(a) of the proposed regula-        withdrawn depends on a system of mark-           of the Dodd-Frank Act, provides that the
tions provides that a section 1256 contract    ing to market, and (B) which is traded on        rules of a designated contract market may
does not include a contract that qualifies     or subject to the rules of a qualified board     authorize, for bona fide business purposes,
as a notional principal contract as defined    or exchange.” The apparent breadth of sec-       transfer trades or office trades, or an ex-
in proposed §1.446–3(c). As discussed          tion 1256(g)(1) has raised questions in the      change of (i) futures in connection with
herein, the proposed regulations under         past as to whether a contract other than a       a cash commodity transaction, (ii) futures
§1.446–3 also expressly provide that a         futures contract can be a regulated futures      for cash commodities, or (iii) futures for
credit default swap is a notional principal    contract. The Treasury Department and            swaps. As such, the Treasury Department
contract.                                      the IRS have historically limited the scope      and the IRS believe that a futures con-
                                               of a regulated futures contract to those fu-     tract that results from one of these transac-
2. Option on a notional principal contract     tures contracts that have the characteristics    tions is a regulated futures contract under
                                               of traditional futures contracts. Under the      section 1256(g)(1) because the contract is
    Section 1256(b)(2)(B) raises questions
                                               Dodd-Frank Act, a “designated contract           traded subject to the rules of a designated
as to whether an option on a notional
                                               market” may trade both futures contracts         contract market.
principal contract that is traded on a qual-
                                               and swap contracts, although there will be
ified board or exchange would constitute
                                               specific reporting rules for swap contracts.     D. Qualified Board or Exchange
a “similar agreement” or would instead
                                               In order to properly limit section 1256 to
be treated as a nonequity option under
                                               futures contracts that trade on designated           Section 1256(g)(7)(C) provides that
section 1256(g)(3). Since an option on a
                                               contract markets, §1.1256(b)–1(b) of the         a qualified board or exchange includes
notional principal contract is closely con-
                                               proposed regulations provides that a regu-       any other exchange, board of trade, or
nected with the underlying contract, the
                                               lated futures contract is a section 1256 con-    other market which the Secretary deter-
Treasury Department and the IRS believe
                                               tract only if the contract is a futures con-     mines has rules adequate to carry out
that such an option should be treated as
                                               tract that is not required to be reported as a   the purposes of section 1256. Section
a similar agreement within the meaning
                                               swap under the Commodity Exchange Act            1.1256(g)–1(a) of the proposed regula-
of section 1256(b)(2)(B). Accordingly,
                                               (7 U.S.C. 1) (the CEA). The reporting pro-       tions specifies that such determinations
§1.1256(b)–1(a) of the proposed regula-
                                               visions for swaps under the CEA will not         are only made through published guidance
tions also provides that a section 1256
                                               be effective until the CFTC has published        in the Federal Register or in the Internal
contract does not include an option on
                                               final rules implementing such provisions.        Revenue Bulletin.
any contract that is a notional principal
                                               It is anticipated that swap reporting rules          Since section 1256(g)(7) was adopted,
contract defined in §1.446–3(c) of the pro-
                                               will be in effect before these regulations       the Treasury Department and the IRS
posed regulations.
                                               are finalized. If, however, these proposed       have issued determinations for six enti-
3. Ordering rule                               income tax regulations are finalized before      ties, all of them foreign futures exchanges.
                                               the swap reporting provisions become ef-         See Rev. Rul. 2010–3, 2010–3 I.R.B.
   The proposed regulations provide an         fective, the Treasury Department and the         272 (London International Financial Fu-
ordering rule for a contract that trades       IRS will evaluate whether the provisions         tures and Options Exchange), Rev. Rul.
as a futures contract regulated by the         of §1.1256(b)–1(b) need to be adjusted.          2009–24, 2009–36 I.R.B. 306 (ICE Fu-
Commodity Futures Trading Commission               Questions have also been raised as to        tures Canada), Rev. Rul. 2009–4, 2009–5
(CFTC), but that also meets the defini-        whether the requirement that a regulated         I.R.B. 408 (Dubai Mercantile Exchange),
tion of a notional principal contract. The     futures contract be “traded on or subject        Rev. Rul. 2007–26, 2007–1 C.B. 970
Treasury Department and the IRS believe        to the rules of” a qualified board or ex-        (ICE Futures), Rev. Rul. 86–7, 1986–1
that such a contract is not a commodity        change includes off-exchange transactions        C.B. 295 (The Mercantile Division of
futures contract of the kind envisioned by     such as an exchange of a futures contract        the Montreal Exchange), and Rev. Rul.
Congress when it enacted section 1256.         for a cash commodity, or an exchange of          85–72, 1985–1 C.B. 286 (International Fu-
Accordingly, §1.1256(b)–1(a) of the pro-       a futures contract for a swap, that are car-     tures Exchange (Bermuda)). The IRS has
posed regulations provides that section        ried out subject to the rules of a CFTC          followed a two step process for making
1256 does not include any contract, or         designated contract market. The phrase           each of the six qualified board or exchange
option on such contract, that is both a sec-   “traded on or subject to the rules of” ap-       determinations under section 1256(g)(7).
tion 1256 contract and a notional principal    pears to have originated under the CEA.          See §601.601(d)(2)(ii)(b).


October 17, 2011                                                  574                                                  2011–42 I.R.B.
    In the first step, the exchange submitted   tus under section 1256(g)(7)(C) on the ex-      of swaps categorized as notional prin-
a private letter ruling to the IRS request-     change continuing to satisfy all CFTC con-      cipal contracts governed by the rules of
ing a determination that the exchange is        ditions necessary to retain its direct access   §1.446–3.
a qualified board or exchange within the        no-action relief letter. Consequently, if
meaning of section 1256(g)(7)(C). Once          the CFTC adopts the proposed registration       3. Weather-related and other
the IRS determined that the exchange had        system, an exchange that has previously         non-financial index based swaps
rules sufficient to carry out the purposes      received a qualified board or exchange de-
of section 1256, the Treasury Department        termination under section 1256(g)(7)(C)            Since the time that the §1.446–3 reg-
and the IRS published a revenue ruling an-      must obtain a CFTC Order of Registration        ulations were promulgated, markets have
nouncing that the named exchange was a          in order to maintain its qualified board or     developed for contracts based on non-fi-
qualified board or exchange. The revenue        exchange status. The IRS will continue to       nancial indices. Many of these contracts
rulings apply to commodity futures con-         evaluate the CFTC’s rules in this regard to     are structured as swaps, and payments are
tracts and futures contract options of the      determine if any changes to the IRS’s sec-      calculated based on indices such as tem-
type described under the CEA that are en-       tion 1256(g)(7)(C) guidance process are         perature, precipitation, snowfall, or frost.
tered into on the named exchange. The           warranted.                                      For example, payments made under a
revenue ruling does not apply to contracts                                                      weather derivative may be based on heat-
that are entered into on another exchange       E. Definition and Scope of a Notional           ing degree days and cooling degree days.
that is affiliated with the named exchange.     Principal Contract                              As a technical matter, a weather-related
    In determining whether a foreign ex-                                                        swap currently is not a notional principal
change is a qualified board or exchange         1. Payments under a notional principal          contract because a weather index does
under section 1256(g)(7)(C), the Treasury       contract                                        not qualify as a “specified index” under
Department and the IRS have looked to                                                           §1.446–3(c)(2) of the current regulations,
                                                   In 1993, the IRS promulgated                 which generally require that such index be
whether the exchange received a CFTC            §1.446–3(c) which defines a notional prin-
“direct access” no-action relief letter per-                                                    a financial index.
                                                cipal contract as a financial instrument           The Treasury Department and the IRS
mitting the exchange to make its electronic     that provides for the payment of amounts
trading and matching system available in                                                        believe that swaps on non-financial indices
                                                by one party to another at specified inter-     should be treated as notional principal con-
the United States, notwithstanding that the     vals calculated by reference to a specified
exchange was not designated as a contract                                                       tracts. Accordingly, §1.446–3(c)(2)(ii) of
                                                index upon a notional principal amount          the proposed regulations expands a speci-
market pursuant to section 5 of the CEA.        in exchange for specified consideration
Section 738 of the Dodd-Frank Act, how-                                                         fied index to include non-financial indices
                                                or a promise to pay similar amounts.            that are comprised of any objectively de-
ever, provides the CFTC with authority          Questions have arisen as to the proper in-
to adopt rules and regulations that require                                                     terminable information that is not within
                                                terpretation of this requirement. Sections      the control of any of the parties to the con-
registration of a foreign board of trade        1.446–3(c)(1)(i) and (ii) of the proposed
that provides United States participants di-                                                    tract and is not unique to one of the parties’
                                                regulations expressly provide that a no-        circumstances, and that cannot be reason-
rect access to the foreign board of trade’s     tional principal contract requires one party
electronic trading system. In formulating                                                       ably expected to front-load or back-load
                                                to make two or more payments to a coun-         payments accruing under the contract.
these rules and regulations, the CFTC is di-    terparty. For this purpose, the fixing of an
rected to consider whether comparable su-       amount is treated as a payment, even if the     4. Excluded contracts
pervision and regulation exists in the for-     actual payment reflecting that amount is to
eign board of trade’s home country. Pur-        be made at a later date. Thus, for example,        Section 1.446–3(c)(1)(ii) currently pro-
suant to section 738, the CFTC has pro-         a contract that provides for a settlement       vides that a contract described in section
posed a registration system to replace the      payment referenced to the appreciation          1256(b) and a futures contract are not
direct access no-action letter process. Un-     or depreciation on a specified number of        notional principal contracts. In order to
der the proposed registration system, a for-    shares of common stock, adjusted for ac-        remove the circularity that would oth-
eign board of trade operating pursuant to       tual dividends paid during the term of the      erwise exist between excluded contracts
an existing direct access no-action relief      contract, is treated as a contract with more    under §1.446–3(c)(1)(ii) and proposed
letter must apply through a limited appli-      than one payment with respect to that leg       §1.1256(b)–1, a contract described in sec-
cation process for an “Order of Registra-       of the contract.                                tion 1256(b) and a futures contract have
tion” which will replace the foreign board                                                      been deleted from excluded contracts un-
of trade’s existing direct access no-action     2. Credit default swaps                         der proposed §1.446–3(c)(1)(iv).
letter. Many of the proposed requirements
for and conditions applied to a foreign            In Notice 2004–52, 2004–2 C.B.               5. Conforming Amendments
board of trade’s registration will be based     168, the Treasury Department and the
upon those applicable to the foreign board      IRS described four possible character-             The definition of a notional principal
of trade’s currently granted direct access      izations of a credit default swap. See          contract in §1.446–3(c) of the proposed
no-action relief letter.                        §601.601(d)(2)(ii)(b). These proposed           regulations is intended to be the oper-
    The IRS has conditioned a foreign ex-       regulations resolve this uncertainty by         ative definition for all Federal income
change’s qualified board or exchange sta-       adding credit default swaps to the list         tax purposes, except where a different


2011–42 I.R.B.                                                     575                                             October 17, 2011
or more limited definition is specifically       minutes before the hearing starts. For         §1.446–3 Notional principal contracts.
prescribed. Thus, the regulations under          information about having your name
sections 512, 863, 954, and 988 have been        placed on the building access list to attend   *****
amended to reference the definition of a         the hearing, see the “FOR FURTHER                 (c) Definitions and scope.
notional principal contract in §1.446–3(c).      INFORMATION CONTACT” section of                   (1) Notional principal contract.
                                                 this preamble.                                    (i) In general.
Proposed Effective/Applicability Date               The rules of 26 CFR 601.601(a)(3) ap-          (ii) Payment defined.
                                                 ply to the hearing. Persons who wish to           (iii) Included contracts.
    These regulations are proposed to apply                                                        (A) Special rule for credit default
                                                 present oral comments at the hearing must
to contracts entered into on or after the date                                                  swaps.
                                                 submit written or electronic comments by
the final regulations are published in the                                                         (B) Special rule for nonfunctional cur-
                                                 December 15, 2011 and an outline of the
Federal Register.                                                                               rency notional principal contracts.
                                                 topics to be discussed and the time to be
                                                 devoted to each topic (a signed original          (iv) Excluded contracts.
Special Analyses
                                                 and eight (8) copies) by December 14,             (v) Transactions within section 475.
    It has been determined that this notice      2011. A period of 10 minutes will be              (vi) Transactions within section 988.
of proposed rulemaking is not a significant      allotted to each person for making com-           (2) Specified index.
regulatory action as defined in Executive        ments. An agenda showing the scheduling           (i) Specified financial index.
Order 12866. Therefore, a regulatory             of the speakers will be prepared after the        (ii) Specified non-financial index.
assessment is not required. It has also          deadline for receiving outlines has passed.       (3) Notional principal amount.
been determined that section 553(b) of the       Copies of the agenda will be available free       (4) Special definitions.
Administrative Procedure Act (5 U.S.C.           of charge at the hearing.                         (i) Related person and party to the con-
chapter 5) does not apply to these regu-                                                        tract.
lations, and because the regulation does         Drafting Information                              (ii) Objective financial information.
not impose a collection of information                                                             (iii) Dealer in notional principal con-
on small entitles, the Regulatory Flexi-            The principal author of these proposed      tracts.
bility Act (5 U.S.C. chapter 6) does not         regulations is K. Scott Brown, Office             (5) [Reserved]
apply. Pursuant to section 7805(f) of the        of the Associate Chief Counsel (Finan-            (6) Examples.
Code, this notice of proposed rulemaking         cial Institutions and Products). However,      *****
will be submitted to the Chief Counsel           other personnel from the IRS and Treasury        (j) Effective/applicability date.
for Advocacy of the Small Business               Department participated in their develop-
                                                                                                *****
Administration for comment on its impact         ment.
                                                                                                    (c) Definitions and scope—(1) Notional
on small business.
                                                                   *****                        principal contract—(i) In general. A no-
Comments and Public Hearing                                                                     tional principal contract is a financial in-
                                                 Proposed Amendments to the                     strument that requires one party to make
   Before these proposed regulations are         Regulations                                    two or more payments to the counterparty
adopted as final regulations, consideration                                                     at specified intervals calculated by refer-
will be given to any written comments               Accordingly, 26 CFR part 1 is proposed      ence to a specified index upon a notional
(a signed original and eight (8) copies)         to be amended as follows:                      principal amount in exchange for specified
or electronic comments that are sub-                                                            consideration or a promise to pay similar
mitted timely to the IRS. The Treasury           PART 1—INCOME TAXES                            amounts. An agreement between a tax-
Department and IRS invite comments                                                              payer and a qualified business unit (as de-
on the clarity of the proposed rules and            Paragraph 1. The authority citation for     fined in section 989(a)) of the taxpayer, or
how they can be made easier to under-            part 1 continues to read in part as follows:   among qualified business units of the same
stand. All comments will be available at            Authority: 26 U.S.C. 7805 * * *             taxpayer, is not a notional principal con-
www.regulations.gov or upon request.                Par. 2. Section 1.446–3 is amended by:      tract because a taxpayer cannot enter into
   A public hearing has been sched-                 1. Revising the entries for the table of    a contract with itself.
uled for January 19, 2012, beginning             contents in §1.446–3(a) for paragraphs (c)         (ii) Payment defined. For purposes of
at 10 a.m. in the Auditorium, Internal           and (j).                                       paragraph (c)(1)(i) of this section, a pay-
Revenue Building, 1111 Constitution                 2. Revising paragraphs (c)(1), (c)(2),      ment includes an amount that is fixed on
Avenue, N.W., Washington, DC. Due                and (c)(3).                                    one date and paid or otherwise taken into
to building security procedures, visitors           3. Adding and reserving paragraph           account on a later date. Thus, for exam-
must enter at the Constitution Avenue            (c)(5).                                        ple, a contract that provides for a settle-
entrance. In addition, all visitors must            4. Adding paragraph (c)(6).                 ment payment referenced to the appreci-
present photo identification to enter the           5. Adding two sentences to the end of       ation or depreciation on a specified num-
building. Because of access restrictions,        paragraph (j).                                 ber of shares of common stock, adjusted
visitors will not be admitted beyond the            The revisions and additions read as fol-    for actual dividends paid during the term
immediate entrance area more than 30             lows:                                          of the contract, is treated as a contract with



October 17, 2011                                                   576                                                  2011–42 I.R.B.
more than one payment with respect to that      be governed by paragraph (g)(3) of this         sold between the parties as part of the
leg of the contract. See Example 2 of this      section.                                        contract. The notional principal amount
paragraph (c).                                      (v) Transactions within section 475. To     may vary over the term of the contract,
    (iii) Included contracts. Notional prin-    the extent that the rules provided in para-     provided that it is set in advance or varies
cipal contracts governed by this section in-    graphs (e) and (f) of this section are incon-   based on objective financial information
clude contracts commonly referred to as         sistent with the rules that apply to any no-    (as defined in paragraph (c)(4)(ii) of this
interest rate swaps, currency swaps, ba-        tional principal contract that is governed      section). If a notional principal contract
sis swaps, interest rate caps, interest rate    by section 475 and the regulations there-       references a notional principal amount
floors, commodity swaps, equity swaps,          under, the rules of section 475 and the reg-    that varies, or that references a different
equity index swaps, credit default swaps,       ulations thereunder govern.                     notional principal amount for each party,
weather-related swaps, and similar agree-           (vi) Transactions within section 988.       and a principal purpose for entering into
ments that satisfy the requirements of para-    To the extent that the rules provided in        the contract is to avoid the application of
graph (c)(1)(i). A collar is not itself a no-   this section are inconsistent with the rules    the rules in this section, the Commissioner
tional principal contract, but a cap and a      that apply to any notional principal con-       may recharacterize the contract according
floor that comprise a collar may be treated     tract that is also a section 988 transaction    to its substance, including by separating
as a single notional principal contract un-     or that is integrated with other prop-          the contract into a series of notional prin-
der paragraph (f)(2)(v)(C) of this section.     erty or debt pursuant to section 988(d),        cipal contracts for purposes of applying
A contract may be a notional principal con-     the rules of section 988 and the regula-        the rules of this section or by treating the
tract governed by this section even though      tions thereunder govern. The rules of           contract, in whole or in part, as a loan.
the term of the contract is subject to ter-     §1.446–3(g)(4) are not considered to be
mination or extension. Each confirma-           inconsistent with the rules of section 988.     *****
tion under a master agreement to enter          See §1.988–2(e)(3)(iv).                             (5) [Reserved]
into an agreement covered by this section           (2) Specified index. A specified index          (6) Examples. The following examples
is treated as a separate notional principal     may be either a specified financial index       illustrate the application of paragraph (c)
contract (or as more than one notional prin-    or a specified non-financial index.             of this section.
                                                                                                    Example 1. Forward rate agreement. (i) On Jan-
cipal contract if the confirmation creates          (i) Specified financial index. A speci-     uary 1, 2012, A enters into a contract with unrelated
more than one notional principal contract).     fied financial index is—                        counterparty B under which on December 31, 2013,
Notwithstanding the rule under paragraph            (A) A fixed rate, price, or amount;         A will pay or receive from B, as the case may be,
(c)(3) of this section—                             (B) A fixed rate, price, or amount appli-   an amount determined by subtracting 6% multiplied
    (A) Special rule for credit default         cable in one or more specified periods fol-     by a notional amount of $10 million from 3 month
                                                                                                LIBOR on December 31, 2013 multiplied by
swaps. A credit default swap contract           lowed by one or more different fixed rates,     the same notional amount ((3 month LIBOR X
that permits or requires the delivery of        prices, or amounts applicable in other pe-      $10,000,000) – (6% X $10,000,000)). The contract
specified debt instruments in satisfaction      riods;                                          provides for no other payments.
of one leg of the contract is a notional            (C) An index that is based on objective         (ii) Because this contract provides for a single
principal contract if it otherwise satisfies    financial information (as defined in para-      net payment between A and B determined by inter-
                                                                                                est rates in effect on the settlement date of the con-
the requirements of paragraph (c)(1)(i) of      graph (c)(4)(ii) of this section); and          tract, the contract is not a notional principal contract
this section.                                       (D) An interest rate index that is regu-    defined in §1.446–3(c)(1)(i).
    (B) Special rule for nonfunctional cur-     larly used in normal lending transactions           Example 2. Equity total return contract with div-
rency notional principal contracts. A no-       between a party to the contract and unre-       idend adjustments. (i) On January 1, 2012, A enters
tional principal contract that permits or re-   lated persons.                                  into a contract with unrelated counterparty B under
                                                                                                which on December 31, 2013, A will receive from B
quires the delivery of specified currency in        (ii) Specified non-financial index. A       an amount equal to the appreciation (if any) on a no-
satisfaction of one or both legs of the con-    specified non-financial index is any objec-     tional amount of 1 million shares of XYZ common
tract but that otherwise qualifies as a non-    tively determinable information that—           stock, plus any dividends or other distributions that
functional currency notional principal con-         (A) Is not within the control of any of     are paid on 1 million shares of XYZ common stock
tract under §1.988–1(a)(2)(iii)(B) is a no-     the parties to the contract and is not unique   during the term of the contract. In return, on Decem-
                                                                                                ber 31, 2013 A will pay B an amount equal to any de-
tional principal contract.                      to one of the parties’ circumstances;           preciation on 1 million shares of XYZ common stock,
    (iv) Excluded contracts. A forward              (B) Is not financial information; and       and an amount equal to 3 month LIBOR multiplied by
contract, an option, and a guarantee are not        (C) Cannot be reasonably expected to        the notional value of 1 million shares of XYZ stock
notional principal contracts. An instru-        front-load or back-load payments accruing       on January 1, 2012 compounded over the term of the
ment or contract that constitutes indebted-     under the contract.                             contract. All payments are netted such that A and B
                                                                                                are only liable for the net payment due under the con-
ness under general Federal income tax law           (3) Notional principal amount. For          tract on December 31, 2013.
is not a notional principal contract. An        purposes of this section, a notional prin-          (ii) Because both legs of this contract provide
option or forward contract that entitles or     cipal amount is any specified amount of         for payments that become fixed during the term of
obligates a person to enter into a notional     money or property that, when multiplied         the contract (the dividend payments and the LIBOR-
principal contract is not a notional prin-      by either a specified financial index or a      based payments), each leg of the contract is treated
                                                                                                as providing for more than one payment. In addi-
cipal contract, but payments made under         specified non-financial index, measures         tion, since the indices referenced in the contract are
such an option or forward contract may          a party’s rights and obligations under the      specified indices described in paragraph (c)(2)(i) of
                                                contract, but is not borrowed, loaned, or       this section, and the 1 million shares of XYZ com-



2011–42 I.R.B.                                                     577                                                 October 17, 2011
mon stock are a notional principal amount described             1. Revising the third sentence and re-        on or after the date of publication of a Trea-
in paragraph (c)(3) of this section, the contract is a no-   moving the fourth sentence of paragraph          sury decision adopting these rules as final
tional principal contract defined in §1.446–3(c)(1)(i).      (a)(1).                                          regulations in the Federal Register. Sec-
*****                                                           2. Adding two sentences to the end of         tion 1.954–2(h)(3) as contained in 26 CFR
   (j) Effective/applicability date. * * *                   paragraph (a)(2).                                part 1 revised April 1, 2011, continues to
The rules of paragraph (c) of this sec-                         The revision and addition read as fol-        apply to notional principal contracts en-
tion apply to notional principal contracts                   lows:                                            tered into before the date of publication of
entered into on or after the date of publica-                                                                 a Treasury decision adopting these rules as
tion of a Treasury decision adopting these                   §1.863–7 Allocation of income                    final regulations in the Federal Register.
rules as final regulations in the Federal                    attributable to certain notional principal
                                                                                                              *****
Register. Section 1.446–3(c) as contained                    contracts under section 863(a).
                                                                                                                 Par. 6. Section 1.988–1 is amended by:
in 26 CFR part 1 revised April 1, 2011,                                                                          1. Revising paragraph (a)(2)(iii)(B)(2).
continues to apply to notional principal                         (a) Scope—(1) Introduction. * * * No-
                                                             tional principal contract income is income          2. Adding two sentences to the end of
contracts entered into before the date                                                                        paragraph (a)(2)(iii)(C).
of publication of a Treasury decision                        attributable to a notional principal contract
                                                             as defined in §1.446–3(c). * * *                    The revision and addition read as fol-
adopting these rules as final regulations in                                                                  lows:
the Federal Register.                                            (2) * * * The rules of this section ap-
   Par.     3.    Section 1.512(b)–(1) is                    ply to notional principal contracts as de-
                                                                                                              §1.988–1 Certain definitions and special
amended by:                                                  fined in §1.446–3(c) that are entered into
                                                                                                              rules.
   1. Revising paragraph (a)(1).                             on or after the date of publication of a Trea-
   2. Adding two sentences to the end of                     sury decision adopting these rules as final          (a) * * *
paragraph (a)(3).                                            regulations in the Federal Register. Sec-            (2) * * *
   The revision and addition read as fol-                    tion 1.863–7 as contained in 26 CFR part             (iii) * * *
lows:                                                        1 revised April 1, 2011, continues to apply          (B) * * *
                                                             to notional principal contracts entered into         (2) Definition of notional principal con-
§1.512(b)–1 Modifications.                                   before the date of publication of a Treasury     tract. Generally, the term “notional princi-
                                                             decision adopting these rules as final reg-      pal contract” means a contract defined in
*****                                                        ulations in the Federal Register.                §1.446–3(c). However, a “notional princi-
   (a) Certain Investment Income—(1) In                                                                       pal contract” shall only be considered as
                                                             *****
general. Dividends, interest, payments                                                                        described in paragraph (a)(2)(iii)(B)(1) of
                                                                Par. 5. Section 1.954–2 is amended by:
with respect to securities loans (as defined                                                                  this section if the underlying property to
                                                                1. Revising paragraph (h)(3)(i).
in section 512(a)(5)), annuities, income                                                                      which the instrument ultimately relates is
                                                                2. Adding paragraph (h)(3)(iii).
from notional principal contracts (as de-                                                                     money (for example, functional currency),
                                                                The revision and addition read as fol-
fined in §1.446–3(c)), other substantially                                                                    nonfunctional currency, or property the
                                                             lows:
similar income from ordinary and routine                                                                      value of which is determined by reference
investments to the extent determined by                      §1.954–2 Foreign personal holding                to an interest rate. Thus, the term “notional
the Commissioner, and all deductions di-                     company income.                                  principal contract” includes a currency
rectly connected with any of the foregoing                                                                    swap as defined in §1.988–2(e)(2)(ii), but
items of income shall be excluded in com-                    *****                                            does not include a swap referenced to a
puting unrelated business taxable income.                       (3) Notional principal contracts—(i)          commodity or equity index.
*****                                                        In general. Income equivalent to interest            (C) * * * The rules of this paragraph
   (3) * * * The rules of paragraph (a)(1)                   includes income from notional principal          (a)(2)(iii) apply to notional principal con-
of this section apply to notional principal                  contracts (as defined in §1.446–3(c)) de-        tracts as defined in §1.446–3(c) that are en-
contracts as defined in §1.446–3(c) that are                 nominated in the functional currency of          tered into on or after the date of publication
entered into on or after the date of pub-                    the taxpayer (or a qualified business unit of    of a Treasury decision adopting these rules
lication of a Treasury decision adopting                     the taxpayer, as defined in section 989(a)),     as final regulations in the Federal Reg-
these rules as final regulations in the Fed-                 the value of which is determined solely          ister. Section 1.988–1(a)(2)(iii) as con-
eral Register. Section 1.512(b)–1(a)(1) as                   by reference to interest rates or interest       tained in 26 CFR part 1 revised April 1,
contained in 26 CFR part 1 revised April 1,                  rate indices, to the extent that the income      2011, continues to apply to notional princi-
2011, continues to apply to notional princi-                 from such transactions accrues on or after       pal contracts entered into before the date of
pal contracts entered into before the date of                August 14, 1989.                                 publication of a Treasury decision adopt-
publication of a Treasury decision adopt-                    *****                                            ing these rules as final regulations in the
ing these rules as final regulations in the                     (iii) Effective/applicability date. The       Federal Register.
Federal Register.                                            rules of paragraph (h)(3) of this section ap-    *****
*****                                                        ply to notional principal contracts as de-          Par. 7. Section 1.1256(b)–1 is added to
 Par. 4. Section 1.863–7 is amended by:                      fined in §1.446–3(c) that are entered into       read as follows:




October 17, 2011                                                                578                                                   2011–42 I.R.B.
§1.1256(b)–1 Section 1256 contract                 (2) That is traded on or subject to the    the Commodity Futures Trading Commis-
defined.                                        rules of a qualified board or exchange; and   sion, or any other exchange, board of trade,
                                                   (3) That is not required to be reported    or other market for which the Secretary
   (a) General rule. A section 1256 con-        as a swap under the Commodity Exchange        determines in published guidance in the
tract does not include any contract, or         Act.                                          Federal Register or in the Internal Rev-
option on such contract, that is a no-             (c) Effective/applicability date. The      enue Bulletin (see §601.601(d)(2)(ii) of
tional principal contract as defined in         rules of this section apply to contracts      this chapter) that such market has rules ad-
§1.446–3(c). A contract that is defined         entered into on or after the date the final   equate to carry out the purposes of section
as both a notional principal contract in        regulations are published in the Federal      1256.
§1.446–3(c) and as a section 1256 con-          Register.                                        (b) Effective/applicability date. The
tract in section 1256(b)(1) is treated as a        Par. 8. Section 1.1256(g)–1 is added to    rule of this section applies to taxable
notional principal contract and not as a        read as follows:                              years ending on or after the date the final
section 1256 contract.                                                                        regulations are published in the Federal
   (b) Regulated futures contract. A regu-      §1.1256(g)–1 Qualified board or               Register.
lated futures contract is a section 1256 con-   exchange defined.
tract only if the contract is a futures con-                                                                                Steven T. Miller,
tract—                                             (a) General rule. A qualified board or                          Deputy Commissioner for
   (1) With respect to which the amount         exchange means a national securities ex-                           Services and Enforcement.
required to be deposited and the amount         change registered with the Securities Ex-
                                                                                              (Filed by the Office of the Federal Register on
which may be withdrawn depends on a             change Commission, a domestic board of        September 15, 2011, 8:45 a.m., and published in the issue of
system of marking to market;                    trade designated as a contract market by      the Federal Register for September 16, 2011, 76 F.R. 57684)




2011–42 I.R.B.                                                    579                                                  October 17, 2011
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 to
where a ruling mentions a previously pub-        1986 Code and regulations the same po-           show that the previous published rulings
lished ruling and points out an essential        sition published under the 1939 Code and         will not be applied pending some future
difference between them.                         regulations. The term is also used when          action such as the issuance of new or
    Modified is used where the substance         it is desired to republish in a single rul-      amended regulations, the outcome of cases
of a previously published position is being      ing a series of situations, names, etc., that    in litigation, or the outcome of a Service
changed. Thus, if a prior ruling held that a     were previously published over a period of       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.


October 17, 2011                                                       i                                                 2011–42 I.R.B.
Numerical Finding List1                                       Notices— Continued:                                           Treasury Decisions— Continued:

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

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin
2011–26, dated June 27, 2011.


2011–42 I.R.B.                                                                            ii                                                       October 17, 2011
Finding List of Current Actions on                               Revenue Procedures— Continued:
Previously Published Items1                                      2010-39
                                                                 Amplified, modified, and superseded by
Bulletins 2011–27 through 2011–42
                                                                 Rev. Proc. 2011-47, 2011-42 I.R.B. 520
Announcements:
                                                                 2011-4
2007-47                                                          Modified by
Updated and superseded by                                        Rev. Proc. 2011-44, 2011-39 I.R.B. 446
Ann. 2011-59, 2011-37 I.R.B. 335                                 2011-14
Notices:                                                         Modified by
                                                                 Rev. Proc. 2011-43, 2011-37 I.R.B. 326
2006-101
                                                                 2011-35
Amplified and superseded by
                                                                 Amplified and modified by
Notice 2011-64, 2011-37 I.R.B. 231
                                                                 Rev. Proc. 2011-42, 2011-37 I.R.B. 318
2007-93
                                                                 Revenue Rulings:
Obsoleted by
T.D. 9545, 2011-41 I.R.B. 490                                    58-225
2010-23                                                          Obsoleted by
Modified and supplemented by                                     Rev. Rul. 2011-15, 2011-30 I.R.B. 57
Notice 2011-54, 2011-29 I.R.B. 53                                Treasury Decisions:
2010-81
                                                                 9527
Amended and supplemented by
                                                                 Corrected by
Notice 2011-63, 2011-34 I.R.B. 172
                                                                 Ann. 2011-49, 2011-36 I.R.B. 228
2010-88
Modified by
Ann. 2011-40, 2011-29 I.R.B. 56

Proposed Regulations:

REG-118761-09
Hearing scheduled by
Ann. 2011-38, 2011-28 I.R.B. 45

REG-151687-10
Hearing scheduled by
Ann. 2011-48, 2011-36 I.R.B. 227

Revenue Procedures:

72-36
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B. 318

2004-29
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B. 318

2006-56
Modified and amplified by
Rev. Proc. 2011-46, 2011-42 I.R.B. 518

2007-35
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B. 318

2008-24
Modified and superseded by
Rev. Proc. 2011-38, 2011-30 I.R.B. 66

2008-32
Superseded by
Rev. Proc. 2011-39, 2011-30 I.R.B. 68

1   A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin 2011–26, dated June 27, 2011.


October 17, 2011                                                                             iii                                                             2011–42 I.R.B.
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