bulletin no. 2011-42 october 17, 2011 highlights of this …bulletin no. 2011-42 october 17, 2011...

Bulletin No. 2011-42October 17, 2011

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

T.D. 9546, page 505.Final regulations under section 142 of the Code provide thedefinition of solid waste disposal facilities for purposes of therules applicable to tax-exempt bonds issued by state and localgovernments to finance solid waste disposal facilities.

REG–111283–11, page 573.Proposed regulations describe swaps and similar agreementsthat fall within the meaning of section 1256(b)(2)(B) of theCode. The proposed regulations also revise the definition of anotional principal contract under regulations section 1.446–3.A public hearing is scheduled for January 19, 2012.

REG–128224–06, page 533.Proposed regulations under section 67 of the Code provideguidance on which costs incurred by estates or trusts otherthan grantor trusts (non-grantor trusts) are subject to the 2-per-cent floor for miscellaneous itemized deductions under section67(a). A public hearing is scheduled for December 19, 2011.

EMPLOYEE PLANS

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

ESTATE TAX

Notice 2011–82, page 516.This notice provides guidance under section 2010 of the Codeon electing portability of a deceased spousal unused exclusionamount on a Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return). This notice also announcesthat the Treasury Department and the Service intend to issueregulations to implement the provisions of section 2010(c) andinvites public comments.

Rev. Proc. 2011–48, page 527.This procedure instructs taxpayers how to file a protectiveclaim for refund when the estate has a claim or expense notyet deductible under section 2053 of the Code and the cor-responding regulations. In addition, this procedure details theprocedures 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 protectiveclaim for refund is ready for consideration.

EXCISE TAX

REG–140038–10, page 537.Proposed regulations under section 9815 of the Code imple-ment the disclosure requirements to help plans and individualsbetter understand their health coverage, as well as other cover-age options, regarding the summary of benefits and coverageand the uniform glossary for group health plans and health in-surance coverage in the group and individual markets underthe 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 the2011–2012 special per diem rates for taxpayers to use insubstantiating the amount of ordinary and necessary businessexpenses incurred while traveling away from home, specifically(1) the special transportation industry rates, (2) the rate for theincidental expenses only deduction, and (3) the rates and listof high-cost localities for the high-low substantiation method.

Notice 2011–82, page 516.This notice provides guidance under section 2010 of the Codeon electing portability of a deceased spousal unused exclusionamount on a Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return). This notice also announcesthat the Treasury Department and the Service intend to issueregulations to implement the provisions of section 2010(c) andinvites public comments.

Rev. Proc. 2011–46, page 518.Nonaccrual-experience method book safe harbor. Thisprocedure provides a safe harbor method of accounting for tax-payers using the nonaccrual-experience method of accountingunder section 448(d)(5) of the Code and regulations section1.448–2. This procedure also provides procedures for obtain-ing automatic consent to change to this safe harbor methodand 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 rulesfor 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 employeeor 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 protectiveclaim for refund when the estate has a claim or expense notyet deductible under section 2053 of the Code and the cor-responding regulations. In addition, this procedure details theprocedures 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 protectiveclaim for refund is ready for consideration.

October 17, 2011 2011–42 I.R.B.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-

force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished 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.

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Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 62.—AdjustedGross Income Defined26 CFR 1.62–2: Reimbursements and other expenseallowance arrangements.

Rules are provided under which a reimbursementor other expense allowance arrangement for the costof lodging, meal, and incidental expenses, or ofmeal and incidental expenses only, incurred by anemployee, partner, or volunteer while traveling awayfrom home, satisfies the requirements of section62(c) of the Code for substantiation of the amount ofthe expenses. See Rev. Proc. 2011-47, page 520.

Section 142.—ExemptFacility Bond26 CFR 1.142(a)(6)–1: Exempt facility bonds: solidwaste disposal facilities.

T.D. 9546

Definition of Solid WasteDisposal Facilities forTax-Exempt Bond Purposes

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains finalregulations on the definition of solid wastedisposal facilities for purposes of the rulesapplicable to tax-exempt bonds issued byState and local governments. These regu-lations provide guidance to State and localgovernments that issue tax-exempt bondsto finance solid waste disposal facilitiesand to taxpayers that use those facilities.

DATES: Effective Date: These regulationsare effective August 19, 2011.

Applicability Date: For dates of appli-cability, see §1.142(a)(6)–1(i).

FOR FURTHER INFORMATIONCONTACT: Timothy Jones, (202)622–3980 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends the IncomeTax Regulations (26 CFR part 1) un-

der section 142 of the Internal Rev-enue Code (Code) to provide final rulesfor determining whether a facility is asolid waste disposal facility under sec-tion 142(a)(6). This document also re-moves certain existing regulations onthis subject. On September 16, 2009,the IRS published a Notice of ProposedRulemaking (REG–140492–02, 2009–42I.R.B. 559) in the Federal Register(74 FR 47500) (the Proposed Regulations).The Proposed Regulations under proposed§1.142(a)(6)–1 would modify existingregulations under §1.103–8(f)(2) of theIncome Tax Regulations and §17.1 ofthe temporary Income Tax Regulations(together, the Existing Regulations) on thissubject. Public comments on the ProposedRegulations were received and a publichearing was held on January 5, 2010.

After consideration of the public com-ments, the IRS and the Treasury Depart-ment adopt the Proposed Regulations, withrevisions, as final regulations by this Trea-sury decision (the Final Regulations). Sig-nificant aspects of the public commentsand the revisions made in the Final Reg-ulations are discussed in this preamble.

Explanation of Provisions

1. Introduction.

In general, interest on State or localbonds is excludable from gross income un-der section 103(a). Under section 103(b),however, interest on private activity bondsis excludable from gross income undersection 103 only if the bond meets therequirements for a qualified bond undersection 141(e) and other applicable re-quirements under section 103. Section141(e) defines a qualified bond to includean exempt facility bond that meets certainrequirements. Section 142(a) defines anexempt facility bond to mean any bondthat is issued as part of an issue 95 percentor more of the net proceeds of which areto be used to provide an exempt facil-ity specified in section 142(a). Section142(a)(6) includes a solid waste disposalfacility as one specified type of qualifiedexempt facility.

In general, the Proposed Regulationsaddressed the requirements for solid waste

disposal facilities under section 142(a)(6)for purposes of eligibility for tax-exemptprivate activity bond financing. The Pro-posed Regulations provided that a facilityqualifies as a solid waste disposal facility ifit processes solid waste in a qualified solidwaste disposal process, performs prelimi-nary functions, or is a functionally relatedor subordinate facility. The Proposed Reg-ulations focused on eligible processes todispose of solid waste, including a finaldisposal process, an energy conversionprocess, and a recycling process. The Pro-posed Regulations also provided a moredeveloped definition of solid waste whichfocused on used materials and residualmaterials, with certain specific exclusions.The Proposed Regulations eliminated a“no-value” test from the solid waste def-inition under §1.103–8(f)(2)(ii)(b) of theExisting Regulations, which provides thatmaterial does not qualify as solid wasteunless, on the issue date of the tax-exemptbonds used to provide the solid wastedisposal facility, the property is useless,unused, unwanted, or discarded solid ma-terial that has no market or other valueat the place where the property is located(No-Value Test). The Proposed Regu-lations also proposed various allocationand accounting rules based on existingprinciples for mixed-input facilities andmixed-use facilities. Overall, the Pro-posed Regulations implement a policy infavor of recycling through the use of solidwaste disposal facilities.

Commentators generally supported theapproach taken towards solid waste dis-posal facilities under the Proposed Regu-lations. The Final Regulations retain theoverall approach of the Proposed Regula-tions and make certain technical changesin response to public comments, as dis-cussed further in this preamble.

2. Solid Waste Disposal Facility.

The Proposed Regulations defined theterm solid waste disposal facility to meana facility that processes solid waste in aqualified solid waste disposal process, per-forms a preliminary function, or is a func-tionally related and subordinate facility.

2011–42 I.R.B. 505 October 17, 2011

The Final Regulations retain this definitionof a solid waste disposal facility.

3. Definition of Solid Waste.

The Proposed Regulations defined theterm solid waste to mean garbage, refuse,and other solid material derived from anyagricultural, commercial, consumer, or in-dustrial operation or activity, based largelyon an existing definition under the Exist-ing Regulations. The Proposed Regula-tions refined the existing definition to re-quire that solid waste be either used ma-terial or residual material. The ProposedRegulations also eliminated the No-ValueTest. Additionally, the Proposed Regula-tions required that the person who acquiresthe material must reasonably expect to in-troduce it into a qualified solid waste dis-posal process within a reasonable period oftime after acquisition.

The Proposed Regulations defined usedmaterial to mean any material that hasbeen used previously as an agricultural,commercial, consumer, or industrial prod-uct or as a component of any such product.The Proposed Regulations defined resid-ual material to mean any residual byprod-uct or excess unused raw material that re-mains from the production of any agricul-tural, commercial, consumer, or industrialproduct, provided that material qualifiedas residual material only to the extent thatit constituted less than five percent (5%)of the total material introduced into theproduction process and it had a fair mar-ket value that is reasonably expected to belower than that of any product made in thatproduction process.

The Final Regulations generally retainthe core definition of solid waste from theProposed Regulations but modify that def-inition in certain technical respects. TheFinal Regulations clarify that material is“solid” only if it is solid at ambient temper-ature and pressure. The Final Regulationsalso clarify that solid waste can result fromgovernmental operations or activities. TheFinal Regulations expand the definition ofsolid waste to include animal waste.

With respect to the definition of resid-ual material, commentators generallysupported the analytic standard under theProposed Regulations, but recommendedremoving the five percent (5%) size limi-tation on residual material. Commentatorsrecommended removing this size limit

because it unduly restricts the scope ofresidual material in many circumstancesand it arbitrarily treats various industriesand activities differently because residualamounts vary widely by industry and ac-tivity. The Final Regulations adopt thiscomment to eliminate the five percent(5%) size limitation on residual materialand otherwise generally retain the analyticstandard for residual material. The FinalRegulations also expand the definition ofresidual material to include material de-rived from providing a service in whichno product is produced.

Further, for purposes of determiningresidual material when multiple produc-tion processes are operated on the samesite, commentators recommended a sep-arate evaluation of each process. Basedon reasons associated with scope and ad-ministrability, the IRS and the TreasuryDepartment intended to cover only resid-ual material that remains at the end ofintegrated processes that are functionallyinterconnected or interdependent, basedon all the facts and circumstances. Ac-cordingly, the Final Regulations do notadopt this comment. Instead, the FinalRegulations adopt an integrated processstandard to limit residual material.

4. Specific Exclusions from the Definitionof Solid Waste.

In general, the Proposed Regulationsexcluded from the definition of solid wastethe following items: (1) virgin material;(2) solids within liquids and liquid waste;(3) precious metals; (4) hazardous mate-rial; and (5) radioactive material. TheFinal Regulations retain these exclusionswith certain technical modifications.

The exclusion for virgin material aimedto distinguish solid waste disposal frommanufacturing. The exclusion for certainprecious metals aimed to recognize thatrecovery of these metals generally wouldtake place without regard to a recyclingindustry. With respect to the exclusionsfor hazardous and radioactive waste, thestatute and legislative history indicate thatCongress intended to exclude hazardouswaste and radioactive waste from solidwaste. The statute treats qualified haz-ardous waste facilities as eligible exemptfacilities under section 142(a)(10) sepa-rate and apart from solid waste disposalfacilities under section 142(a)(6). In ad-

dition, the legislative history provides, inrelevant part, that “the conferees wish toclarify that solid waste does not includemost hazardous waste (including radioac-tive waste).” H.Rep. No. 99–841, atII–704 (1986), 1986–3 (Vol. 4) C.B. 704.

Some commentators expressed concernthat the introduction of virgin materialor precious metals into a final disposalprocess, such as a landfill (as contrastedwith a recycling process), could disqualifya facility from treatment as a qualifiedsolid waste disposal facility. The FinalRegulations address this comment favor-ably and modify the definition of solidwaste to allow the introduction of virginmaterials and precious metals into a finaldisposal process. The Final Regulationsalso add a provision that allows the IRS toidentify other excluded precious metals infuture public administrative guidance.

Commentators also recommendedtreating hazardous waste and radioactivewaste as solid waste. The Final Regula-tions generally do not adopt this comment.The IRS and the Treasury Departmentbelieve that Congress generally intendedto exclude these materials from the def-inition of solid waste. Recognizing thatonly certain hazardous waste and radioac-tive waste are required to be disposed ofat regulated facilities, however, the FinalRegulations limit the exclusions for thesetwo types of waste to the extent that theyare required to be disposed of or containedat a regulated hazardous waste or radioac-tive waste disposal facility.

5. Qualified Solid Waste DisposalProcess.

The Proposed Regulations provided forthree eligible types of solid waste disposalprocesses: a final disposal process, an en-ergy conversion process, and a recyclingprocess. To provide flexibility for futureinnovation, the Proposed Regulations pro-vided that, absent an express restriction inthe proposed regulations, a solid waste dis-posal function may employ any biologi-cal, engineering, industrial, or technolog-ical method.

The Final Regulations generally retainthe eligible types of solid waste disposalprocesses from the Proposed Regulations,with technical clarifications. The FinalRegulations clarify that a final disposalprocess includes the spreading of solid

October 17, 2011 506 2011–42 I.R.B.

waste in an environmentally compliantand safe manner. The Final Regulationsalso clarify that an energy conversionprocess ends at the point at which usefulenergy is first created or incorporated intothe form of synthesis gas, heat, hot water,or other useful energy.

6. First Useful Product Principle.

The Proposed Regulations providedguidance on the standard for determiningthe first useful product for purposes ofestablishing the end point of a solid wastedisposal process. The first useful prod-uct principle has particular application torecycling. Under the Proposed Regula-tions, a useful product generally includeda product useful for consumption, eitheras an ultimate end-use product or as aninput to some stage of a manufacturingor production process, and that could besold for such use (taking into accountoperational constraints on such sales forcertain integrated processes), whether ornot actually sold.

The Final Regulations generally retainthe first useful product standard from theProposed Regulations. Some commen-tators recommended that determinationsunder the first useful product rule take intoaccount geographic location and trans-portation costs in certain situations. TheFinal Regulations adopt this comment.

7. Mixed-Input Facilities.

The Proposed Regulations provideda mixed-input accounting rule, whichtreated a facility as a qualified solid wastedisposal facility if at least 65 percent of allof the material introduced into such facil-ity in each year consisted of solid waste.This proposed rule recognizes that recy-cling processes may require supplementalinputs besides solid waste to operate vi-ably. This proposed rule is similar to anexisting rule under §1.103–8(f)(2)(ii)(c) ofthe Existing Regulations. This proposedrule requires annual testing for compliancewith the requisite 65 percent solid wastethreshold. Several commentators recom-mended reformulating this 65 percent testto require compliance based on an ag-gregate testing period measured over thelife of the tax-exempt bonds instead of anannual testing period. These commenta-tors expressed concerns about compliance

with an annual test during start-up periodsand aberrational years for various reasons.

The Final Regulations retain the an-nual 65 percent test for mixed-input facil-ities with modifications. In response tothe public comments, the Final Regula-tions provide a special rule that allows athree-year curative period to address theimpact of extraordinary events outside thecontrol of the operator of the solid wastedisposal facility (such as natural disasters,strikes, major utility disruptions, or gov-ernmental interventions). In addition, theFinal Regulations provide that the annualtesting does not begin until the facility isplaced in service within the meaning ofthe special placed-in-service definition in§1.150–2(c), which focuses on the point atwhich a facility is operational at substan-tially its design level.

8. Certain Other Changes.

Several commentators recommendedremoval of the proposed concept of facil-ities that perform a preliminary functionfor a qualified solid waste disposal processand removal of the threshold limit onpreliminary functions that requires morethan 50 percent of the materials that resultfrom preliminary functions to constitutesolid waste. The Final Regulations retainthe concept of a preliminary function, butremove the 50 percent threshold limit onpreliminary functions. The Final Regu-lations also provide for application of amixed-use accounting rule to facilities thatperform preliminary functions.

One commentator expressed concernthat Example 2 in the Proposed Reg-ulations was confusing, and the FinalRegulations remove that example with nosubstantive inference intended by that re-moval. The Final Regulations also expandand clarify certain other examples.

Commentators recommended varioustransition rules for applicability of the Fi-nal Regulations to refunding bonds issuedprior to the date of publication of the finalregulations. The Final Regulations pro-vide a transition rule for current refundingbonds the weighted average maturity ofwhich is no longer than the remainingweighted average maturity of the refundedbonds.

Effective/Applicability Dates

The Final Regulations apply to bondsto which section 142 applies that are soldon or after October 18, 2011. Issuers mayapply the Final Regulations to outstandingbonds sold before October 18, 2011. TheFinal Regulations need not be applied tobonds that are issued in a current refundingto refund bonds to which the Final Regu-lations do not apply if the weighted aver-age maturity of the refunding bonds is nolonger than the remaining weighted aver-age maturity of the refunded bonds.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866, as supplemented by Executive Or-der 13563. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations, and,because the regulations are interpretativeand do not impose a collection of infor-mation on small entities, the RegulatoryFlexibility Act (5 U.S.C. chapter 6) doesnot apply. Pursuant to section 7805(f) ofthe Code, the proposed regulations preced-ing these final regulations were submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Drafting Information

The principal author of these final reg-ulations is Timothy L. Jones, Office ofAssociate Chief Counsel (Financial Insti-tutions and Products). However, otherpersonnel from the IRS and the TreasuryDepartment participated in their develop-ment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, under the authority of26 U.S.C. 7805, 26 CFR parts 1 and 17 areamended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 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]

Par. 2. Section 1.103–8 is amended byremoving paragraph (f)(2)(ii) and redesig-nating paragraph (f)(2)(iii) as (f)(2)(ii).

Par. 3. Section 1.142(a)(6)–1 is addedto read as follows:

§1.142(a)(6)–1 Exempt facility bonds:solid waste disposal facilities.

(a) In general. This section defines theterm solid waste disposal facility for pur-poses of section 142(a)(6).

(b) Solid waste disposal facility. Theterm solid waste disposal facility means afacility to the extent that the facility—

(1) Processes solid waste (as defined inparagraph (c) of this section) in a qualifiedsolid waste disposal process (as defined inparagraph (d) of this section);

(2) Performs a preliminary function (asdefined in paragraph (f) of this section); or

(3) Is functionally related andsubordinate (within the meaning of§1.103–8(a)(3)) to a facility described inparagraph (b)(1) or (b)(2) of this section.

(c) Solid waste—(1) In general. Ex-cept to the extent excluded under para-graph (c)(2) of this section, for purposesof section 142(a)(6), the term solid wastemeans garbage, refuse, and other solid ma-terial derived from any agricultural, com-mercial, consumer, governmental, or in-dustrial operation or activity if the mate-rial meets the requirements of both para-graph (c)(1)(i) and paragraph (c)(1)(ii) ofthis section. For purposes of this section,material is solid if it is solid at ambienttemperature and pressure.

(i) Used material or residual material.Material meets the requirements of thisparagraph (c)(1)(i) if it is either used ma-terial (as defined in paragraph (c)(1)(i)(A))of this section or residual material (as de-fined in paragraph(c)(1)(i)(B) of this sec-tion).

(A) Used material. The term used ma-terial means any material that is a prod-uct of any agricultural, commercial, con-sumer, governmental, or industrial opera-tion or activity, or a component of any suchproduct or activity, and that has been usedpreviously. Used material also includesanimal waste produced by animals from abiological process.

(B) Residual material. The termresidual material means material that

meets the requirements of this paragraph(c)(1)(i)(B). The material must be a resid-ual byproduct or excess raw material thatresults from or remains after the com-pletion of any agricultural, commercial,consumer, governmental, or industrialproduction process or activity or from theprovision of any service. In the case ofmultiple processes constituting an inte-grated manufacturing or industrial process,the material must result from or remainafter the completion of such integratedprocess. As of the issue date of the bondsused to finance the solid waste disposalfacility, the material must be reasonablyexpected to have a fair market value that islower than the value of all of the productsmade in that production process or lowerthan the value of the service that producessuch residual material.

(ii) Reasonably expected introduc-tion into a qualified solid waste disposalprocess. Material meets the requirementsof this paragraph (c)(1)(ii) if it is reason-ably expected by the person who gener-ates, purchases, or otherwise acquires itto be introduced within a reasonable timeafter such generation, purchase or acqui-sition into a qualified solid waste disposalprocess described in paragraph (d) of thissection.

(2) Exclusions from solid waste. Thefollowing materials do not constitute solidwaste:

(i) Virgin material. Except to the extentthat virgin material constitutes an input to afinal disposal process or residual material,solid waste excludes any virgin material.The term virgin material means materialthat has not been processed into an agricul-tural, commercial, consumer, governmen-tal, or industrial product, or a componentof any such product. Further, for this pur-pose, material continues to be virgin ma-terial after it has been grown, harvested,mined, or otherwise extracted from its nat-urally occurring location and cleaned, di-vided into component elements, modified,or enhanced, as long as further processingis required before it becomes an agricul-tural, commercial, consumer, or industrialproduct, or a component of any such prod-uct.

(ii) Solids within liquids and liquidwaste. Solid waste excludes any solidor dissolved material in domestic sewageor other significant pollutant in waterresources, such as silt, dissolved or sus-

pended solids in industrial waste watereffluents, dissolved materials in irrigationreturn flows or other common water pol-lutants, and liquid or gaseous waste.

(iii) Precious metals. Except to the ex-tent that a precious metal constitutes an in-put to a final disposal process and/or an un-recoverable trace of the particular preciousmetal, solid waste excludes gold, silver,ruthenium, rhodium, palladium, osmium,iridium, platinum, gallium, rhenium, andany other precious metal material as maybe identified by the Internal Revenue Ser-vice in future public administrative guid-ance.

(iv) Hazardous material. Solid wasteexcludes any hazardous material that mustbe disposed of at a facility that is subject tofinal permit requirements under subtitle Cof title II of the Solid Waste Disposal Actas in effect on the date of the enactment ofthe Tax Reform Act of 1986 (which is Oc-tober 22, 1986). See section 142(h)(1) ofthe Internal Revenue Code for the defini-tion of qualified hazardous waste facilities.

(v) Radioactive material. Solid wasteexcludes any radioactive material subjectto regulation under the Nuclear RegulatoryAct (10 CFR §1.1 et seq.), as in effect onthe issue date of the bonds.

(d) Qualified solid waste disposalprocess. The term qualified solid wastedisposal process means the processing ofsolid waste in a final disposal process (asdefined in paragraph (d)(1) of this section),an energy conversion process (as definedin paragraph (d)(2) of this section), or arecycling process (as defined in paragraph(d)(3) of this section). Absent an expressrestriction to the contrary in this section,a qualified solid waste disposal processmay employ any biological, engineering,industrial, or technological method.

(1) Final disposal process. The term fi-nal disposal process means the placementof solid waste in a landfill (including, forthis purpose, the spreading of solid wasteover land in an environmentally compli-ant and safe manner with no intent to re-move such solid waste), the incineration ofsolid waste without capturing any usefulenergy, or the containment of solid wastewith a reasonable expectation as of the dateof issue of the bonds that the containmentwill continue indefinitely and that the solidwaste has no current or future beneficialuse.

October 17, 2011 508 2011–42 I.R.B.

(2) Energy conversion process. Theterm energy conversion process means athermal, chemical, or other process that isapplied to solid waste to create and cap-ture synthesis gas, heat, hot water, steam,or other useful energy. The energy con-version process begins at the point of thefirst application of such process. The en-ergy conversion process ends at the pointat which the useful energy is first created,captured, or incorporated into the form ofsynthesis gas, heat, hot water, or other use-ful energy and before any transfer or dis-tribution of such synthesis gas, heat, hotwater or other useful energy, regardless ofwhether such synthesis gas, heat, hot wa-ter, or other useful energy constitutes a firstuseful product within the meaning of para-graph (e) of this section.

(3) Recycling process—(i) In general.The term recycling process means recon-stituting, transforming, or otherwise pro-cessing solid waste into a useful product.The recycling process begins at the pointof the first application of a process to re-constitute or transform the solid waste intoa useful product, such as decontamination,melting, re-pulping, shredding, or otherprocessing of the solid waste to accom-plish this purpose. The recycling processends at the point of completion of produc-tion of the first useful product from thesolid waste.

(ii) Refurbishment, repair, or similaractivities. The term recycling processdoes not include refurbishment, repair, orsimilar activities. The term refurbishmentmeans the breakdown and reassembly of aproduct if such activity is done on a prod-uct-by-product basis and if the finishedproduct contains more than 30 percent ofits original materials or components.

(e) First useful product. The term firstuseful product means the first product pro-duced from the processing of solid waste ina solid waste disposal process that is usefulfor consumption in agricultural, consumer,commercial, governmental, or industrialoperation or activity and that could be soldfor such use, whether or not actually sold.A useful product includes both a productuseful to an individual consumer as an ul-timate end-use consumer product and aproduct useful to an industrial user as a ma-terial or input for processing in some stageof a manufacturing or production processto produce a different end-use consumerproduct. The determination of whether a

useful product has been produced may takeinto account operational constraints thataffect the point in production when a use-ful product reasonably can be extracted orisolated and sold independently. For thispurpose, the costs of extracting, isolating,storing, and transporting the product to amarket may only be taken into account asoperational constraints if the product is notto be used as part of an integrated manu-facturing or industrial process in the samelocation as that in which the product is pro-duced.

(f) Preliminary function. A prelimi-nary function is a function to collect, sep-arate, sort, store, treat, process, disassem-ble, or handle solid waste that is prelimi-nary to and directly related to a qualifiedsolid waste disposal process.

(g) Mixed-use facilities—(1) In gen-eral. If a facility is used for both a qualifiedsolid waste disposal function (including aqualified solid waste disposal process ora preliminary function) and a nonquali-fied function (a mixed-use facility), thenthe costs of the facility allocable to thequalified solid waste disposal function aredetermined using any reasonable method,based on all the facts and circumstances.See §1.103–8(a)(1) for allocation rules onamounts properly allocable to an exemptfacility. Facilities qualify as functionallyrelated and subordinate to a qualified solidwaste disposal function only to the extentthat they are functionally related and sub-ordinate to the portion of the mixed-use fa-cility that is used for one or more qualifiedsolid waste disposal functions (includinga qualified solid waste disposal process ora preliminary function).

(2) Mixed inputs—(i) In general. Ex-cept as otherwise provided in paragraph(g)(2)(ii) of this section, for each facility(or a portion of a mixed-use facility) per-forming a qualified solid waste disposalprocess or a preliminary function, the per-centage of the costs of the property usedfor such process that are allocable to aqualified solid waste disposal process ora preliminary function cannot exceed theaverage annual percentage of solid wasteprocessed in that qualified solid waste dis-posal process or that preliminary functionwhile the issue is outstanding. The an-nual percentage of solid waste processed inthat qualified solid waste disposal processor preliminary function for any year is thepercentage, by weight or volume, of the

total materials processed in that qualifiedsolid waste disposal process or preliminaryfunction that constitute solid waste for thatyear.

(ii) Special rule for mixed-input pro-cesses if at least 65 percent of the materialsprocessed are solid waste—(A) In general.Except as otherwise provided in paragraph(g)(2)(ii)(B) of this section, for each facil-ity (or a portion of a mixed-use facility)performing a qualified solid waste disposalprocess or preliminary function, if the an-nual percentage of solid waste processed inthat qualified solid waste disposal processor preliminary function for each year thatthe issue is outstanding (beginning withthe date such facility is placed in servicewithin the meaning of §1.150–2(c)) equalsat least 65 percent of the materials pro-cessed in that qualified solid waste dis-posal process or preliminary function, thenall of the costs of the property used for suchprocess are treated as allocable to a quali-fied solid waste disposal process. The an-nual percentage of solid waste processed insuch qualified solid waste disposal processor preliminary function for any year is thepercentage, by weight or volume, of thetotal materials processed in that qualifiedsolid waste disposal process or preliminaryfunction that constitute solid waste for thatyear.

(B) Special rule for extraordinaryevents. In the case of an extraordinaryevent that is beyond the control of theoperator of a solid waste disposal facility(such as a natural disaster, strike, majorutility disruption, or governmental inter-vention) and that causes a solid wastedisposal facility to be unable to meet the 65percent test under paragraph (g)(2)(ii)(A)of this section for a particular year, thepercentage of solid waste processed forthat year equals—

(1) The sum of the amount of solidwaste processed in the solid waste disposalfacility for the year affected by the extraor-dinary event and the amount of solid wasteprocessed in the solid waste disposal facil-ity during the following two years in ex-cess of the amount required to meet thegeneral 65 percent threshold for the facil-ity during each of such two years; dividedby

(2) The total materials processed in thesolid waste disposal facility during theyear affected by the extraordinary event.If the resulting measure of solid waste

2011–42 I.R.B. 509 October 17, 2011

processed for the year affected by theextraordinary event equals at least 65 per-cent, then the facility is treated as meetingthe requirements of the 65 percent test un-der paragraph (g)(2)(ii)(A) of this sectionfor such year.

(iii) Facilities functionally related andsubordinate to mixed-input facilities.Except to the extent that facilities arefunctionally related and subordinate to amixed-input facility that meets the 65 per-cent test under paragraph (g)(2)(ii) of thissection, facilities qualify as functionallyrelated and subordinate to a mixed-inputfacility only to the extent that they arefunctionally related and subordinate to thequalified portion of the mixed-input facil-ity that is used for one or more qualifiedsolid waste disposal functions (includinga qualified solid waste disposal process ora preliminary function).

(h) Examples. The following examplesillustrate the application of this section:

Example 1. Nonqualified Unused Mate-rial—Cloth. Company A takes wool and weaves itinto cloth and then sells the cloth to a manufacturerto manufacture clothing. The cloth is material thathas not been used previously as a product of or other-wise used in an agricultural, commercial, consumer,governmental, or industrial operation or activity,or as a component of any such product or activity.Accordingly, the cloth is not solid waste.

Example 2. Residual Material—Waste Coal.Company B mines coal. Some of the ore mined isa low quality byproduct of coal mining commonlyknown as waste coal, which cannot be converted toenergy under a normal energy-production processbecause the BTU content is too low. Waste coal hasthe lowest fair market value of any product producedin Company B’s coal mining process. Waste coalis solid waste because it is residual material withinthe meaning of paragraph (c)(1)(i)(B) of this sectionand Company B reasonably expects to introduce thewaste coal into a solid waste disposal process.

Example 3. Virgin Material—Logs. Company Ccuts down trees and sells the logs to another company,which further processes the logs into lumber. In orderto facilitate shipping, Company C cuts the trees intouniform logs. The trees are not solid waste becausethey are virgin material within the meaning of para-graph (c)(2)(i) of this section that are not being intro-duced into a final disposal process within the mean-ing of paragraph (d)(1) of this section. The divisionof such trees into uniform logs does not change thestatus of the trees as virgin material.

Example 4. Qualified Solid Waste DisposalProcess—Landfill. Company D plans to construct alandfill. The landfill will not be subject to the finalpermit requirements under subtitle C of title II of theSolid Waste Disposal Act (as in effect on the date ofenactment of the Tax Reform Act of 1986). As ofthe issue date, Company D expects that the landfillwill be filled entirely with material that will qualifyas solid waste within the meaning of paragraph (c)of this section. Placing solid waste into a landfill is a

qualified solid waste disposal process. The landfillis a qualified solid waste disposal facility.

Example 5. Qualified Solid Waste DisposalProcess—Recycling Tires. Company E owns a fa-cility that converts used tires into roadbed material.The used tires are used material within the meaningof paragraph (c)(1)(i)(A) of this section that qualifiesas solid waste. Between the introduction of the oldtires into the roadbed manufacturing process and thecompletion of the roadbed material, the facility doesnot create any interim useful products. The processfor the manufacturing of the roadbed material fromthe old tires is a qualified solid waste disposal processas a recycling process and the facility that convertsthe tires into roadbed material is a qualified solidwaste disposal facility. This conclusion would be thesame if the recycling process took place at more thanone plant.

Example 6. Qualified Solid Waste DisposalProcess—Energy Conversion Process. CompanyF receives solid waste from a municipal garbagecollector. Company F burns that solid waste in anincinerator to remove exhaust gas and to produceheat. Company F further processes the heat in a heatexchanger to produce steam. Company F furtherprocesses the steam to generate electricity. The en-ergy conversion process ends with the production ofsteam. The facilities used to burn the solid waste andto capture the steam as useful energy are qualifiedsolid waste disposal facilities because they processsolid waste in an energy conversion process. Thegenerating facilities used to process the steam furtherto generate electricity are not engaged in the energyconversion process and are not qualified solid wastedisposal facilities.

Example 7. Nonqualified Refurbishment. Com-pany G purchases used cars and restores them. Thisrestoration process includes disassembly, cleaning,and repairing of the cars. Parts that cannot be repairedare replaced. The restored cars contain at least 30 per-cent of the original parts. While the cars are used ma-terial, the refurbishing process is not a qualified solidwaste disposal process. Accordingly, Company G’sfacility is not a qualified solid waste disposal facility.

Example 8. Qualified Solid Waste Disposal Facil-ity—First Useful Product Rule—Paper Recycling. (i)Company H employs an integrated process to re-pulpdiscarded magazines, clean the pulp, and produce re-tail paper towel products. Operational constraints onCompany H’s process do not allow for reasonable ex-traction, isolation, and sale of the cleaned paper pulpindependently without degradation of the pulp. Com-pany H further processes the paper pulp into large in-dustrial-sized rolls of paper which are approximately12 feet in diameter. At this point in the process,Company H could either sell such industrial-sizedrolls of paper to another company for further pro-cessing to produce retail paper products or it couldproduce those retail products itself. In general, pa-per pulp is a useful product that is bought and sold onthe market as a material for input into manufacturingor production processes. The discarded magazinesare used material within the meaning of paragraph(c)(1)(i)(A) of this section. Company H’s facility isengaged in a recycling process within the meaningof paragraph (d)(3) of this section to the extent thatit repulps and cleans the discarded magazines gen-erally and further to the extent that it produces in-dustrial-sized rolls of paper under the particular cir-

cumstances here. Specifically, taking into account theoperational constraints on Company H’s facility thatlimit its ability reasonably to extract, isolate, and sellthe paper pulp independently, the first useful productswithin the meaning of paragraph (e) of this sectionfrom Company H’s recycling process are the indus-trial-sized rolls of paper. The portion of CompanyH’s facility that processes the discarded magazinesand produces industrial-sized rolls of paper is a qual-ified solid waste disposal facility, and the portion ofCompany H’s facility that further processes the indus-trial-sized rolls of paper into retail paper towels is nota qualified solid waste facility.

(ii) The facts are the same as in paragraph (i) ofthis Example 8, except that Company H is able rea-sonably to extract the cleaned paper pulp from theprocess without degradation of the pulp and to sellthe cleaned paper pulp at its dock for a price that ex-ceeds its costs of extracting the pulp from the process.Therefore, the paper pulp is the first useful productwithin the meaning of paragraph (e) of this section.As a result, the portion of Company H’s facility thatprocesses the discarded magazines is a qualified solidwaste disposal facility, and the portion of CompanyH’s facility that produces industrial-sized rolls of pa-per is not a qualified solid waste disposal facility. If,however, the only reasonable way Company H couldsell the pulp was to transport the pulp to a distant mar-ket, then the costs of storing and transporting the pulpto the market may be taken into account in determin-ing whether the pulp is the first useful product.

Example 9. Preliminary Function—Energy Con-version Process. (i) Company I owns a paper mill.At the mill, logs from nearby timber operations areprocessed through a machine that removes bark. Thestripped logs are used to manufacture paper. Thestripped bark has the lowest fair market value of anyproduct produced from the paper mill. The strippedbark falls onto a conveyor belt that transports the barkto a storage bin that is used to store the bark brieflyuntil Company I feeds the bark into a boiler. Theconveyor belt and storage bin are used only for thesepurposes. The boiler is used only to create steam byburning the bark, and the steam is used to generateelectricity. The stripped bark is solid waste becauseit is residual material within the meaning of paragraph(c)(1)(i)(B) of this section and Company I expects tointroduce the bark into an energy conversion processwithin a reasonable period of time. The creation ofsteam from the stripped bark is an energy conversionprocess that starts with the incineration of the strippedbark. The energy conversion process is a qualifiedsolid waste disposal process. The conveyor belt per-forms a collection activity that is preliminary and thatis directly related to the solid waste disposal func-tion. The storage bin performs a storage function thatis preliminary and that is directly related to the solidwaste disposal function. Thus, the conveyor belt andstorage bin are solid waste disposal facilities. Thebark removal process is not a preliminary functionbecause it is not directly related to the energy conver-sion process and it does not become so related merelybecause it results in material that is solid waste.

(ii) The facts are the same as in paragraph (i) ofthis Example 9, except that the stripped bark repre-sents only 55 percent by weight and volume of thematerials that are transported by the conveyor belt.The remaining 45 percent of the materials transportedby the conveyor belt are not solid waste and these

October 17, 2011 510 2011–42 I.R.B.

other materials are sorted from the conveyor belt by asorting machine immediately before the stripped barkarrives at the storage bin. Fifty-five percent of thecosts of the conveyor belt and the sorting machine areallocable to solid waste disposal functions.

Example 10. Preliminary Function—Final Dis-posal Process. Company J owns a waste transferstation and uses it to collect, sort, and process solidwaste. Company J uses its trucks to haul the solidwaste to the nearest landfill. At least 65 percent byweight and volume of the material brought to thetransfer station is solid waste. The waste transfer sta-tion and the trucks perform functions that are prelim-inary and directly related to the solid waste disposalfunction of the landfill. Thus, the waste transfer sta-tion and the trucks qualify as solid waste disposal fa-cilities.

Example 11. Mixed-Input Facility. Company Kowns an incinerator financed by an issue and uses theincinerator exclusively to burn coal and other solidmaterial to create steam. Each year while the is-sue is outstanding, 40 percent by volume and 45 per-cent by weight of the solid material that Company Kprocesses in the conversion process is coal. The re-mainder of the solid material is either used materialor residual material within the meaning of paragraph(c)(1)(i) of this section. Sixty percent of the costs ofthe property used to perform the energy conversionprocess are allocable to a solid waste disposal func-tion.

(i) Effective/Applicability Dates—(1)In general. Except as otherwise providedin this paragraph (i), this section appliesto bonds to which section 142 applies thatare sold on or after October 18, 2011.

(2) Elective retroactive application. Is-suers may apply this section, in whole, butnot in part, to outstanding bonds to whichsection 142 applies and which were soldbefore October 18, 2011.

(3) Certain refunding bonds. An issuerneed not apply this section to bonds thatare issued in a current refunding to refundbonds to which this section does not ap-ply if the weighted average maturity of therefunding bonds is no longer than the re-maining weighted average maturity of therefunded bonds.

PART 17 [Removed]

Par. 4. Part 17 is removed.

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

Approved August 9, 2011.

Emily S. McMahon,(Acting) Assistant Secretaryof the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on August 18,2011, 8:45 a.m., and published in the issue of the FederalRegister for August 19, 2011, 76 F.R. 51879)

Section 162.—Trade orBusiness Expenses26 CFR 1.162–17: Reporting and substantiation ofcertain business expenses of employees.

Rules are provided for substantiating the amountof a deduction for an expense for meal and incidentalexpenses, or for incidental expenses only, incurredwhile traveling away from home. See Rev. Proc.2011-47, page 520.

Section 274.—Disallowanceof Certain Entertainment,Etc., Expenses26 CFR 1.274–5: Substantiation requirements.

Rules are provided for substantiating the amountof a deduction for an expense for meal and incidentalexpenses, or for incidental expenses only, incurredwhile traveling away from home. See Rev. Proc.2011-47, page 520.

Section 446.—General Rulefor Methods of Accounting

This revenue procedure provides a book safeharbor method of accounting for taxpayers using thenonaccrual-experince method of accounting and pro-cedures for obtaining automatic consent to change tothe method and to make certain changes within themethod. See Rev. Proc. 2011-46, page 518.

Section 481.—AdjustmentsRequired by Changes inMethods of Accounting

This revenue procedure provides procedures fortaxpayers using the nonaccrual-experience (NAE)method of accounting to change to a book safe harborNAE method of accounting. Taxpayer changing tothe NAE book safe harbor method must make an ad-justment under section 481(a) of the Code, howevertaxpayers make certain changes within the methodusing a cut-off. See Rev. Proc. 2011-46, page 518.

Section 2010.—UnifiedCredit Against Estate Tax

This notice provides guidance under section2010(c) of the Code on electing portability of a de-ceased spousal unused exclusion amount on a Form706 (United States Estate (and Generation-SkippingTransfer) Tax Return). This notice also announces

that the Treasury Department and the Internal Rev-enue Service intend to issue regulations to implementthe provisions of section 2010(c) of the Code andinvites public comments. See Notice 2011-82, page516.

Section 2053.—Expenses,Indebtedness, and Taxes26 CFR 20.2053–1: Deductions for expenses, indebt-edness, and taxes; in general

This revenue procedure instructs taxpayers how tofile a protective claim for refund when the estate hasa claim or expense not yet deductible under section2053 of the Internal Revenue Code and the corre-sponding regulations. In addition, this revenue pro-cedure details the procedures the Service will followin processing these protective claims for refund. Fi-nally, this revenue procedure instructs taxpayers howto notify the Service that a section 2053 protectiveclaim for refund is ready for consideration. See Rev.Proc. 2011-48, page 527.

Section 6402.—Authority toMake Credits or Refunds26 CFR 301.6402–1: Authority to make credits orrefunds.


Section 6501.—Limitationson Assessment andCollection26 CFR 301.6501(a)–1: Period of limitations uponassessment and collection.


2011–42 I.R.B. 511 October 17, 2011

Section 6511.—Limitationson Credit or Refund26 CFR 301.6511(a)–1: Period of limitation on filingclaim.

This revenue procedure instructs taxpayers how tofile a protective claim for refund when the estate hasa claim or expense not yet deductible under section2053 of the Internal Revenue Code and the corre-sponding regulations. In addition, this revenue pro-cedure details the procedures the Service will followin processing these protective claims for refund. Fi-nally, this revenue procedure instructs taxpayers how

to notify the Service that a section 2053 protectiveclaim for refund is ready for consideration. See Rev.Proc. 2011-48, page 527.

Section 6514.—Creditsor Refunds after Periodof Limitation26 CFR 301.6514(a)–1: Credits or refunds after pe-riod of limitation.

This revenue procedure instructs taxpayers how tofile a protective claim for refund when the estate has

a claim or expense not yet deductible under section2053 of the Internal Revenue Code and the corre-sponding regulations. In addition, this revenue pro-cedure details the procedures the Service will followin processing these protective claims for refund. Fi-nally, this revenue procedure instructs taxpayers howto notify the Service that a section 2053 protectiveclaim for refund is ready for consideration. See Rev.Proc. 2011-48, page 527.

October 17, 2011 512 2011–42 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous2011–2012 Special Per DiemRates

Notice 2011–81

SECTION 1. PURPOSE

This annual notice provides the2011–2012 special per diem rates for tax-payers to use in substantiating the amountof ordinary and necessary business ex-penses incurred while traveling away fromhome, specifically (1) the special trans-portation industry meal and incidentalexpenses rates (M&IE rates), (2) the ratefor the incidental expenses only deduc-tion, and (3) the rates and list of high-costlocalities for purposes of the high-lowsubstantiation method.

SECTION 2. BACKGROUND

Rev. Proc. 2011–47, 2011–42 I.R.B.520, provides rules for using a per diemrate to substantiate, under § 274(d) of theInternal Revenue Code and § 1.274–5 ofthe Income Tax Regulations, the amount ofordinary and necessary business expenses

paid or incurred while traveling away fromhome. Taxpayers using the rates and list ofhigh-cost localities provided in this noticemust comply with Rev. Proc. 2011–47.

SECTION 3. SPECIAL M&IE RATESFOR TRANSPORTATION INDUSTRY

The special M&IE rates for taxpayersin the transportation industry are $59 forany locality of travel in the continentalUnited States (CONUS) and $65 for anylocality of travel outside the continentalUnited States (OCONUS). See section4.04 of Rev. Proc. 2011–47.

SECTION 4. RATE FOR INCIDENTALEXPENSES ONLY DEDUCTION

The rate for any CONUS or OCONUSlocality of travel for the incidental ex-penses only deduction is $5 per day. Seesection 4.05 of Rev. Proc. 2011–47.

SECTION 5. HIGH-LOWSUBSTANTIATION METHOD

1. Annual high-low rates. For purposesof the high-low substantiation method, the

per diem rates in lieu of the rates describedin section 4.01 of Rev. Proc. 2011–47(the per diem substantiation method) are$242 for travel to any high-cost localityand $163 for travel to any other localitywithin CONUS. The amount of the $242high rate and $163 low rate that is treatedas paid for meals for purposes of § 274(n)is $65 for travel to any high-cost local-ity and $52 for travel to any other localitywithin CONUS. See section 5.02 of Rev.Proc. 2011–47. The per diem rates in lieuof the rates described in section 4.02 ofRev. Proc. 2011–47 (the meal and inciden-tal expenses only substantiation method)are $65 for travel to any high-cost local-ity and $52 for travel to any other localitywithin CONUS.

2. High-cost localities. The followinglocalities have a federal per diem rate of$202 or more, and are high-cost localitiesfor all of the calendar year or the portion ofthe calendar year specified in parenthesesunder the key city name.

Key City County or other defined location

ArizonaSedona City limits of Sedona

(March 1-April 30)

CaliforniaMonterey MontereyNapa Napa

(October 1-November 30 and April 1-September 30)San Diego San DiegoSan Francisco San FranciscoSanta Barbara Santa BarbaraSanta Monica City limits of Santa MonicaYosemite National Park Mariposa

(June 1-August 31)

ColoradoAspen Pitkin

(December 1-March 31 and June 1-August 31)Denver/Aurora Denver, Adams, Arapahoe, and JeffersonSteamboat Springs Routt

(December 1-March 31)Telluride San Miguel

(December 1-March 31)

2011–42 I.R.B. 513 October 17, 2011


Vail Eagle(December 1-August 31)

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

FloridaFort Lauderdale Broward

(January 1-May 31)Fort Walton Beach/De Funiak Springs Okaloosa and Walton

(June 1-July 31)Key West MonroeMiami Miami-Dade

(December 1-March 31)Naples Collier

(January 1-April 30)

IllinoisChicago Cook and Lake

(October 1-November 30 and April 1-September 30)

LouisianaNew Orleans Orleans, St. Bernard, Jefferson and

Plaquemine Parishes(October 1-June 30)

MaineBar Harbor Hancock

(July 1-August 31)

MarylandBaltimore 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

MassachusettsBoston/Cambridge Suffolk, City of CambridgeFalmouth City limits of Falmouth

(July 1-August 31)Martha’s Vineyard Dukes

(July 1-August 31)Nantucket Nantucket

(June 1-September 30)

New HampshireConway Carroll

(July 1-August 31)

October 17, 2011 514 2011–42 I.R.B.


New YorkFloral Park/Garden City/Great Neck NassauGlens Falls Warren

(July 1-August 31)Lake Placid Essex

(July 1-August 31)Manhattan (includes the boroughs of Manhattan, Brooklyn, the Bronx, Queensand Staten Island)

Bronx, Kings, New York, Queens,Richmond

Saratoga Springs/Schenectady Saratoga and Schenectady(July 1-August 31)

Tarrytown/White Plains/New Rochelle Westchester

North CarolinaKill Devil Dare

(June 1-August 31)

PennsylvaniaPhiladelphia Philadelphia

Rhode IslandJamestown/Middletown/Newport Newport

(October 1-October 31 and May 1-September 30)

UtahPark City Summit

(January 1-March 31)

VirginiaWashington, DC Metro Area Cities of Alexandria, Fairfax, and Falls

Church; counties of Arlington and FairfaxVirginia Beach City of Virginia Beach

(June 1-August 31)

WashingtonSeattle King

Wyoming Teton and SubletteJackson/Pinedale

(July 1-August 31)

3. Changes in high-cost localities. Thelist of high-cost localities in this notice dif-fers from the list of high-cost localitiesin section 5.03 of Rev. Proc. 2010–39(changes listed by key cities).

a. No localities have been added to thelist of high-cost localities.

b. The portion of the year for which thefollowing are high-cost localities has beenchanged: Yosemite National Park, Califor-nia; and Chicago, Illinois.

c. The following localities have beenremoved from the list of high-cost lo-calities: Phoenix/Scottsdale, Arizona;South Lake Tahoe, California; Silver-

thorne/Breckenridge, Colorado; River-head/Ronkonkoma/Melville, New York;and Stowe, Vermont.

SECTION 6. EFFECTIVE DATE

This notice is effective for per diem al-lowances for lodging, meal and inciden-tal expenses, or for meal and incidentalexpenses only that are paid to any em-ployee on or after October 1, 2011, fortravel away from home on or after Octo-ber 1, 2011. For purposes of computing theamount allowable as a deduction for travelaway from home, this notice is effectivefor meal and incidental expenses or for in-

cidental expenses only paid or incurred onor after October 1, 2011. See sections 4.06and 5.04 of Rev. Proc. 2011–47 for transi-tion rules for the last 3 months of calendaryear 2011.

DRAFTING INFORMATION

The principal author of this no-tice is Eric D. Brauer of the Office ofAssociate Chief Counsel (Income Tax& Accounting). For further informationregarding this notice, contact Mr. Brauerat (202) 622–4970 (not a toll-free call).

2011–42 I.R.B. 515 October 17, 2011

Guidance on ElectingPortability of DeceasedSpousal Unused ExclusionAmount

Notice 2011–82

PURPOSE

This notice alerts executors of theestates of decedents dying after Decem-ber 31, 2010, of the need to file a Form706, United States Estate (and Genera-tion-Skipping Transfer) Tax Return, withinthe time prescribed by law (including ex-tensions) in order to elect to allow thedecedent’s surviving spouse to take ad-vantage of the deceased spouse’s unusedexclusion amount, if any, pursuant tosection 303(a) of the Tax Relief, Unem-ployment Insurance Reauthorization, andJob Creation Act of 2010, P.L. 111–312(124 Stat. 3302) (TRUIRJCA) and section2010(c)(5)(A) of the Internal RevenueCode (Code). In particular, for the execu-tor of the estate of a decedent to elect undersection 2010(c)(5)(A) (a “portability elec-tion”) to allow the decedent’s survivingspouse to use the decedent’s unused exclu-sion amount, the executor is required to filea Form 706 for the decedent’s estate, evenif the executor is not otherwise obligatedto file a Form 706. This notice also alertsexecutors of the estates of decedents dyingafter December 31, 2010, that the estateof such a decedent will be considered tohave made a portability election if a Form706 is timely filed in accordance with theinstructions for that form. For those es-tates filing a Form 706 that choose not tomake a portability election, this notice ad-dresses how to avoid making the election.This notice also reminds taxpayers that aportability election can be made only ona Form 706 timely filed by the estate of adecedent dying after December 31, 2010,and any attempt to make a portabilityelection on a Form 706 filed for theestate of a decedent dying on or beforeDecember 31, 2010, will be ineffective.Finally, this notice alerts taxpayers thatthe Treasury Department and the InternalRevenue Service (Service) intend to issueregulations under section 2010(c) of theCode to address issues arising with respectto the portability election, and anticipatethat those regulations will be consistentwith the provisions of this notice.

BACKGROUND

Sections 302(a)(1) and 303(a) ofTRUIRJCA, enacted on December 17,2010, amended section 2010(c) of theCode. Section 2010(c), as amended,generally allows the surviving spouse of adecedent dying after December 31, 2010,to use the decedent’s unused exclusionamount in addition to the survivingspouse’s own basic exclusion amount.Thus, sections 302(a)(1) and 303(a) ofTRUIRJCA eliminate the need for spousesto retitle property and create trusts solelyto take full advantage of each spouse’sbasic exclusion amount.

Section 2010(c)(1) of the Code pro-vides that the applicable credit amount isthe amount of the tentative tax that wouldbe determined under section 2001(c) if theamount with respect to which the tenta-tive tax is to be computed were equal tothe applicable exclusion amount. Thus,generally, the applicable credit amounteffectively exempts from federal estateand gift tax a person’s taxable transferswith a cumulative value not exceeding theapplicable exclusion amount.

Under section 2010(c)(2), a person’sapplicable exclusion amount is the sum of(A) the basic exclusion amount and (B)in the case of a surviving spouse, the de-ceased spousal unused exclusion amount,if any.

Section 2010(c)(3) sets the basic exclu-sion amount at $5,000,000 in 2011, to beadjusted annually for inflation after 2011.

Section 2010(c)(4) defines the term“deceased spousal unused exclusionamount” to mean, with respect to the sur-viving spouse of a decedent dying afterDecember 31, 2010, the lesser of (A) thebasic exclusion amount, or (B) the excessof (i) the basic exclusion amount of the lastsuch deceased spouse of such survivingspouse, over (ii) the amount with respectto which the tentative tax is determinedunder section 2001(b)(1) on the estate ofsuch deceased spouse. The unused ex-clusion amount of a deceased spouse whodied before January 1, 2011, cannot beused by the surviving spouse, regardlessof the date of the surviving spouse’s death.

Under section 2010(c)(5)(A), a de-ceased spousal unused exclusion amountmay be taken into account by a surviv-ing spouse in determining the survivingspouse’s applicable exclusion amount only

if the executor of the deceased spousetimely files a Form 706 for the deceasedspouse’s estate, on which the executorcomputes the deceased spousal unusedexclusion amount and makes a portabil-ity election. An election, once made, isirrevocable. However, no election may bemade if the Form 706 is filed after the timeprescribed by law (including extensions)for filing a Form 706.

Section 6075(a) requires the executorof a decedent’s estate filing a tax returnto file the Form 706 within 9 months af-ter the date of the decedent’s death. Sec-tion 6081(a) provides that the Secretarymay grant a reasonable extension of timefor filing any return; however, generally,no such extension may be for more than 6months. Section 20.6081–1(b) of the Es-tate Tax Regulations grants executors ofdecedents’ estates an automatic 6-monthextension of time to file the Form 706.Executors currently may request the auto-matic extension of time to file Form 706 bytimely filing Form 4768, “Application forExtension of Time To File a Return and/orPay U.S. Estate (and Generation-SkippingTransfer) Taxes.”

Section 2010(c)(5)(B) allows the Secre-tary to examine a return of the predeceasedspouse, even after the time has expired un-der section 6501 for assessing tax underchapter 11 or 12, to make determinationswith respect to the deceased spousal un-used exclusion amount, notwithstandingany period of limitation in section 6501.

Section 2010(c)(6) provides that theSecretary shall prescribe regulations asmay be necessary or appropriate to imple-ment section 2010(c).

DISCUSSION

The Treasury Department and the Ser-vice anticipate that, as a general rule,married couples will want to ensure thatthe unused basic exclusion amount of thefirst spouse to die will be available tothe surviving spouse and, thus, that theestates of most (if not all) married dece-dents dying after December 31, 2010, willwant to make the portability election. Asindicated above, because the election isto be made on a timely-filed Form 706,the Treasury Department and the Serviceanticipate a significant increase in thenumber of Forms 706 that will be filedby the estates of decedents dying after

October 17, 2011 516 2011–42 I.R.B.

December 31, 2010, and that many ofthose returns will be filed by the estates ofdecedents whose gross estates have a valuebelow the applicable exclusion amount.

As a result, the Treasury Departmentand the Service believe that the procedurefor making the portability election on theForm 706 should be as straightforward anduncomplicated as possible to reduce therisk of inadvertently missed elections. Tothat end, the Treasury Department and theService have determined that the timelyfiling of a Form 706, prepared in accor-dance with the instructions for that form,will constitute the making of a portabil-ity election by the estate of a decedent dy-ing after December 31, 2010. Thus, bytimely filing a properly-prepared and com-plete Form 706, an estate will be con-sidered to have made the portability elec-tion without the need to make an affir-mative statement, check a box, or oth-erwise affirmatively elect, on the Form706. Until such time as the IRS revises theForm 706 to expressly contain the compu-tation of the deceased spousal unused ex-clusion amount, a timely-filed and com-plete Form 706 that is prepared in accor-dance with the instructions for that formwill be deemed to contain the computa-tion of the deceased spousal unused ex-clusion amount, thereby satisfying the re-quirements in section 2010(c)(5)(A) formaking an effective election.

The Treasury Department and the Ser-vice acknowledge that an estate may notwant to make the portability election. Notfiling a timely Form 706 will prevent themaking of that election. However, if suchan estate is obligated to file a Form 706 be-cause the value of the gross estate exceedsthe applicable exclusion amount, or files aForm 706 for another reason, the execu-tor must follow the instructions for Form706 that will describe the necessary stepsto avoid making the election.

The Treasury Department and the Ser-vice recognize that the due date for filingForm 706 for those decedents dying in thefirst quarter of 2011 is fast approachingand remind executors of the ability to re-quest an automatic 6-month extension byfiling Form 4768 before the due date forfiling Form 706. See § 20.6081–1(a) and(b) of the Estate Tax Regulations.

The Treasury Department and the Ser-vice intend to issue regulations, pursuantto the specific authority provided in sec-

tion 2010(c)(6), to address various issuesarising with respect to implementation ofthe provisions of section 2010(c).

GUIDANCE

1. If the executor of the estate of a dece-dent dying after December 31, 2010, in-tends to make the portability election toallow the decedent’s surviving spouse touse the deceased spousal unused exclusionamount, the executor must file a completeForm 706 within the time prescribed bylaw (including extensions), regardless ofwhether or not the gross estate has a valuein excess of the exclusion amount or oth-erwise is obligated to file a Form 706.

2. The estate of a decedent dying af-ter December 31, 2010, will be deemed tomake the portability election to allow thedecedent’s surviving spouse to use the de-ceased spousal unused exclusion amountby the timely filing of a complete and prop-erly-prepared Form 706. To ensure thecorrect exclusion amount and tax rates, ex-ecutors should use the Form 706 issued forthe year of the decedent’s death. Until suchtime as the IRS revises the Form 706 to ex-pressly contain the computation of the de-ceased spousal unused exclusion amount, acomplete and properly-prepared Form 706will be deemed to contain the computationof the deceased spousal unused exclusionamount.

3. The executor of the estate of a dece-dent dying after December 31, 2010, thattimely files a complete Form 706, butthat chooses not to make the portabilityelection to allow the decedent’s survivingspouse to use the deceased spousal unusedexclusion amount, must follow the in-structions for Form 706 that will describethe steps the executor must take to notifythe Service that the decedent’s estate isnot making the portability election. If theexecutor of such an estate chooses not tomake the portability election and is nototherwise obligated to file a Form 706, nottimely filing a Form 706 will effectivelyprevent the making of that election.

4. The estate of a decedent dying on orbefore December 31, 2010, is not entitledto make a portability election. Any attemptto make a portability election on a Form706 filed for the estate of such a decedentwill be ineffective.

5. The Treasury Department and theService intend to issue regulations to im-plement the provisions of section 2010(c).

REQUEST FOR COMMENTS

Comments are invited on the followingspecific issues, which have been identifiedfor consideration in proposed regulationsto be issued under section 2010(c):

1. The determination in various circum-stances of the deceased spousal unused ex-clusion amount and the applicable exclu-sion amount;

2. The order in which exclusions aredeemed to be used;

3. The effect of the last predeceas-ing spouse limitation described in section2010(c)(4)(B)(i);

4. The scope of the Service’s right toexamine a return of the first spouse to diewithout regard to any period of limitationin section 6501; and

5. Any additional issues that should beconsidered for inclusion in the proposedregulations.

Comments will be considered if submit-ted in writing by October 31, 2011. Allcomments will be available for public in-spection and copying. Comments may besubmitted in one of three ways:

a. By mail to CC:PA:LPD:PR (Notice2011–82), Room 5203, Internal Rev-enue Service, P.O. Box 7604, BenFranklin Station, Washington, DC20044.

b. Electronically [email protected] include “Notice 2011–82” inthe subject line of any electroniccommunications.

c. By hand-delivery Monday throughFriday between the hours of 8 a.m.and 4 p.m. to CC:PA:LPD:PR (Notice2011–82), Courier’s Desk, InternalRevenue Service, 1111 ConstitutionAve., NW, Washington, DC 20224.

EFFECTIVE DATE

This notice is applicable with respectto the estates of decedents dying after De-cember 31, 2010.


The principal author of this noticeis Karlene M. Lesho of the Office ofAssociate Chief Counsel (Passthroughs

2011–42 I.R.B. 517 October 17, 2011

and Special Industries). For furtherinformation regarding this notice, contactKarlene M. Lesho at (202) 622–3090 (nota toll-free call).

26 CFR 601.204: Changes in accounting periods andin methods of accounting.(Also Part I, §§ 446, 448, 481.)

Rev. Proc. 2011–46

SECTION 1. PURPOSE

This revenue procedure provides abook safe harbor method of accountingfor taxpayers using the nonaccrual-ex-perience (NAE) method of accountingunder § 448(d)(5) of the Internal RevenueCode and § 1.448–2 of the Income TaxRegulations. This revenue procedure alsoprovides the procedures by which a tax-payer may obtain automatic consent (1)to change to the NAE book safe harbormethod, and (2) to make certain changeswithin the NAE book safe harbor method.


.01 Section 448(d)(5) provides that cer-tain taxpayers may use the NAE methodto account for amounts to be received forthe performance of services. In general,taxpayers eligible to use a NAE methodare not required to accrue any portion ofamounts that, based on the taxpayer’s ex-perience, will not be collected.

.02 The NAE method is available onlyto a taxpayer using an accrual method ofaccounting that either provides services ina field described in § 448(d)(2)(A) (health,law, engineering, architecture, accounting,actuarial science, performing arts, or con-sulting), or that meets the $5 million an-nual gross receipts test of § 448(c). TheNAE method may not be used for amountsfor which the taxpayer charges interest orpenalties for failure to timely pay. See§ 448(d)(5)(B) and § 1.448–2(c)(1)(ii).

.03 Section 448(d)(5)(C) provides thatthe Secretary shall provide guidance thatpermits taxpayers to use computations andformulas that, based on experience, accu-rately reflect the amount of income that ataxpayer will not collect (the uncollectibleamount).

.04 Section 1.448–2(f) describes safeharbor NAE methods that a taxpayer may

use to determine the uncollectible amount.Section 1.448–2(b) provides that, exceptas provided in other published guidance, ataxpayer that wishes to change to a NAEmethod other than one of the safe har-bor methods must request advance consentfrom the Commissioner.

.05 Rev. Proc. 2011–14, 2011–4 I.R.B.330, provides procedures for a taxpayer toobtain automatic consent of the Commis-sioner to change to a method of accountingdescribed in the Appendix to Rev. Proc.2011–14.

.06 Rev. Proc. 2006–56, 2006–2 C.B.1169, provides procedures for requestingthe consent of the Commissioner to makecertain changes to, from, or within a NAEmethod of accounting and to adopt certainNAE methods.

SECTION 3. SCOPE

This revenue procedure applies to ataxpayer that is eligible to use the NAEmethod of accounting under § 448(d)(5)and § 1.448–2, and has an applicable fi-nancial statement, as defined in section4.02 of this revenue procedure.

SECTION 4. APPLICATION

.01 NAE book safe harbor.(1) In general. A taxpayer within the

scope of this revenue procedure may com-pute its uncollectible amount under theNAE book safe harbor method by mul-tiplying the portion of the year-end al-lowance for doubtful accounts on the tax-payer’s applicable financial statement thatis attributable to current year NAE-eligibleaccounts receivable by 95 percent. A tax-payer using the NAE book safe harbor isgenerally subject to the rules in § 1.448–2;however, the NAE book safe harbor is notsubject to the self-testing requirements of§ 1.448–2(e).

(2) Allowance for doubtful accounts.For purposes of this revenue procedure,an allowance for doubtful accounts on ataxpayer’s applicable financial statementmust represent the amount of outstand-ing accounts receivable the taxpayer antic-ipates it will not collect. Therefore, an al-lowance that is computed to maximize thedeferral of taxable income under this rev-enue procedure and does not represent theamount of outstanding accounts receivablethe taxpayer anticipates it will not collect

in the future does not qualify under thisrevenue procedure.

(3) Current year NAE-eligible accountsreceivable. Current year NAE-eligible ac-counts receivable are accounts receivabledescribed in § 1.448–2(c)(1)(i) that a tax-payer earns during the current taxable year.They do not include accounts receivablefor which a taxpayer is prohibited fromusing the nonaccrual experience method,such as amounts not earned through theperformance of services and amounts forwhich the taxpayer charges interest orpenalties for failure to timely pay. See§ 1.448–2(c)(1)(ii).

(4) Computation of NAE-eligibleamount. A taxpayer may use any reason-able method to determine the amount ofthe taxpayer’s applicable financial state-ment allowance for doubtful accounts thatis attributable to current year NAE-eli-gible accounts receivable. In general, amethod will not be considered reasonableif the method fails to consider relevantinformation that is readily available to thetaxpayer that would produce a result thatis materially different than the methodemployed by the taxpayer.

(5) Periodic system compatibility. TheNAE book safe harbor is a qualifying peri-odic system of accounting for billings un-der Notice 88–51, 1988–1 C.B. 535.

.02 Applicable financial statement.A taxpayer’s applicable financial state-ment is the taxpayer’s financial statementlisted in paragraphs (1) through (3) of thissection 4.02 that has the highest priority(including priority within paragraph (2)).A taxpayer that does not have a finan-cial statement described in this section4.02 does not have an applicable financialstatement for purposes of this revenueprocedure. A taxpayer’s financial state-ment that is properly incorporated into aparent’s consolidated applicable financialstatement that is described in this section4.02 will qualify as an applicable financialstatement. The financial statements are, indescending priority —

(1) A financial statement required tobe filed with the Securities and ExchangeCommission (SEC) (the 10-K or the An-nual Statement to Shareholders);

(2) A certified audited financial state-ment that is accompanied by the report ofan independent CPA (or in the case of aforeign corporation, by the report of a sim-

October 17, 2011 518 2011–42 I.R.B.

ilarly qualified independent professional),that is used for —

(a) Credit purposes,(b) Reporting to shareholders, or(c) Any other substantial non-tax pur-

pose; or(3) A financial statement (other than a

tax return) required to be provided to thefederal or a state government or any fed-eral or state agency (other than the SEC orthe Internal Revenue Service).

.03 Examples.Example 1. Application of NAE book safe har-

bor. (i) On December 31, 2011, the balance sheet incalendar-year Taxpayer’s applicable financial state-ment includes an allowance for doubtful accounts of$1,300,000. Of this balance, $300,000 represents theamount attributable to current year accounts receiv-able that Taxpayer anticipates it will not collect in thefuture.

(ii) Taking into account relevant information thatis readily available, Taxpayer makes a reasonable de-termination that $200,000 of the $300,000 currentyear addition to the financial statement allowance fordoubtful accounts is attributable to its current yearNAE-eligible accounts receivable. Taxpayer com-putes the amount of income that it may exclude un-der the NAE book safe harbor method by multiply-ing the $200,000 increment to the financial statementyear-end allowance for doubtful accounts attributableto current year NAE-eligible accounts receivable by95%. Therefore, the amount of income that Taxpayeris not required to accrue for federal income tax pur-poses under section 448(d)(5) for the taxable yearending December 31, 2011, is $190,000 ($200,000 x95%).

Example 2. Recoveries. (i) On December 31,2011, the balance sheet in Taxpayer’s applicable fi-nancial statement includes an allowance for doubtfulaccounts of $1,300,000, representing outstanding ac-counts receivable that Taxpayer anticipates it will notcollect in the future. During calendar year 2012, Tax-payer collects $100,000 of accounts receivable thathad been included in its allowance for doubtful ac-counts.

(ii) Taking into account relevant informationthat is readily available, Taxpayer determines that$60,000 of the $100,000 financial statement recov-ery from the allowance for doubtful accounts isattributable to recoveries of NAE-eligible accountsreceivable, all or a portion of which Taxpayer hadproperly excluded from income in a prior year underthe NAE rules. As required by § 1.448–2(d)(5),Taxpayer must include the recovered amount in in-come in the taxable year ending December 31, 2012.The amount of additional income that Taxpayermust include under § 1.448–2(d)(5) is equal to theamount of the recovery that Taxpayer previouslyexcluded from income under an NAE method. Thus,if in a prior year Taxpayer excluded 95% of therecovered $60,000 under the NAE book safe harbormethod, Taxpayer is required to include $57,000($60,000 x 95%) in income in the taxable year endingDecember 31, 2012.

SECTION 5. CHANGE IN METHODOF ACCOUNTING

.01 Change to the NAE book safe har-bor.

(1) In general. A change in a taxpayer’smethod of accounting to the NAE booksafe harbor method is a change in methodof accounting to which the provisions of§§ 446 and 481 and the regulations there-under apply. A taxpayer within the scopeof this revenue procedure is granted theconsent of the Commissioner to change tothe NAE book safe harbor method permit-ted under section 4 of this revenue proce-dure if the taxpayer complies with the ap-plicable provisions of Rev. Proc. 2006–56and Rev. Proc. 2011–14 (or any succes-sor).

(2) Scope limitations. The scope lim-itations in section 4.02 of Rev. Proc.2011–14 (or any successor) do not applyfor a taxpayer’s first taxable year endingon or after September 28, 2011. However,if, at the time a taxpayer files a Form3115 for that year with the national of-fice, and the taxpayer’s NAE method isan issue under consideration for a taxableyear under examination, before an ap-peals office, or before a federal court, thenthe audit protection of section 7 of Rev.Proc. 2011–14 (or any successor) doesnot apply. A taxpayer’s NAE method ofaccounting is an issue under considerationfor the taxable years under examination ifthe taxpayer receives written notification(for example, by examination plan, infor-mation document request, or notificationof proposed adjustment, or income taxexamination changes) from the examiningagent(s) specifically citing the treatmentof the NAE method of accounting as anissue under consideration.

.02 Change in applicable financialstatements and allowance for doubtfulaccounts.

(1) In general. A change to a taxpayer’smethod for determining its allowance fordoubtful accounts for its applicable finan-cial statements is a change in method of ac-counting to which the provisions of § 446and the regulations thereunder apply. Ataxpayer within the scope of this revenueprocedure is granted the consent of theCommissioner to change this method if thetaxpayer complies with the applicable pro-visions of Rev. Proc. 2011–14 (or any suc-cessor) and this paragraph 5.02. An adjust-

ment to a taxpayer’s estimates in determin-ing its allowance for doubtful accounts thatdoes not change the base or formula is nota change in the method of determining theallowance for doubtful accounts under thisparagraph 5.02. For example, if a taxpayerestimates that 4% of its receivables are un-collectible in a taxable year, and using thesame methodology estimates that 6% of itsreceivables are uncollectible in the subse-quent taxable year, the adjustment to itsestimate is not a change in the method ofdetermining the allowance for doubtful ac-counts.

(2) Restatement of applicable financialstatements. A taxpayer’s restatement ofits applicable financial statements doesnot invalidate the taxpayer’s method ofaccounting or change its uncollectibleamount determined under the NAE booksafe harbor in earlier taxable years.

(3) Manner of making change.(a) A taxpayer makes a change in

method of accounting under this paragraph5.02 by attaching a statement to its originalreturn for the taxable year of change (orto an amended return if under the limitedrelief for a late application provided insection 6.02(3)(d) of Rev. Proc. 2011–14,or any successor). The taxpayer is not re-quired to file a copy of the statement withthe national office under section 6.02(3)(a)of Rev. Proc. 2011–14 (or any successor).The statement must include the followinginformation:

(i) The taxpayer’s name and taxpayeridentification number for each applicant;

(ii) The beginning and ending dates ofthe year of change;

(iii) For each applicant, the type of ap-plicable financial statement (as defined insection 4.02 of this revenue procedure) thetaxpayer uses;

(iv) A description of the method the tax-payer uses to determine its allowance fordoubtful accounts on its applicable finan-cial statements before and after the change;and

(v) The designated automatic account-ing method change number 35.

(b) A change under this paragraph 5.02is made on a cut-off basis and applies onlyto accounts receivable earned on or afterthe first day of the taxable year of change.A taxpayer must continue to apply its for-mer method to accounts receivable earnedbefore the taxable year of change. Accord-

2011–42 I.R.B. 519 October 17, 2011

ingly, a § 481(a) adjustment is neither per-mitted nor required.

(4) Scope limitations. The scope lim-itation in section 4.02(7) of Rev. Proc.2011–14 (or any successor) does not ap-ply to a change in method of accountingunder this section 5.02. A taxpayer thatis otherwise ineligible to file an automaticmethod change because it is under exam-ination (as defined in section 3.08 of Rev.Proc. 2011–14 (or any successor)) for anyincome tax issue may change its methodof accounting under this paragraph 5.02,however, the audit protection provisions ofsection 7 of Rev. Proc. 2011–14 (or anysuccessor) do not apply.

.03 Change in method of determiningthe NAE-eligible amount.

(1) In general. A change in a taxpayer’smethod for determining the portion of itsapplicable financial statement allowancefor doubtful accounts that is attributableto current year NAE-eligible accounts re-ceivable (as described in section 4.01(4)of this revenue procedure) is a change inmethod of accounting to which the provi-sions of § 446 and the regulations there-under apply. A taxpayer within the scopeof this revenue procedure is granted theconsent of the Commissioner to changethis method if the taxpayer complies withthe applicable provisions of Rev. Proc.2011–14 (or any successor) and this para-graph 5.03.

(2) Manner of making change.(a) A taxpayer makes a change in

method of accounting under this paragraph5.03 by attaching a statement to its originalreturn for the taxable year of change (orto an amended return if under the limitedrelief for a late application provided insection 6.02(3)(d) of Rev. Proc. 2011–14,or any successor). The taxpayer is not re-quired to file a copy of the statement withthe national office under section 6.02(3)(a)of Rev. Proc. 2011–14 (or any successor).The statement must include the followinginformation:

(i) The taxpayer’s name and taxpayeridentification number for each applicant;

(ii) The beginning and ending dates ofthe year of change;

(iii) A description of the method the tax-payer uses to determine its NAE-eligibleamount before and after the change; and

(iv) The designated automatic account-ing method change number 35.

(b) A change under this paragraph 5.03is made on a cut-off basis and applies onlyto accounts receivable earned on or afterthe first day of the taxable year of change.A taxpayer must continue to apply its for-mer method to accounts receivable earnedbefore the taxable year of change. Accord-ingly, a § 481(a) adjustment is neither per-mitted nor required.

(3) Scope limitation. The scope lim-itation in section 4.02(7) of Rev. Proc.2011–14 (or any successor) does not applyto a change in method of accounting underthis section 5.03.

SECTION 6. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2006–56 is modified andamplified to include the NAE book safeharbor method in the safe harbors de-scribed in paragraphs (1), (7), and (8) ofsection 3.01 and in section 3.02. There-fore, a taxpayer may change to the NAEbook safe harbor method using the provi-sions of section 14.04 of the APPENDIXof Rev. Proc. 2011–14 (or any successor)if the taxpayer is otherwise eligible to useRev. Proc. 2011–14.


This revenue procedure is effectivefor taxable years ending on or afterSeptember 28, 2011.

SECTION 8. DRAFTINGINFORMATION

The principal author of this revenueprocedure is W. Thomas McElroy, Jr., ofthe Office of Associate Chief Counsel(Income Tax and Accounting). For furtherinformation regarding this revenue pro-cedure, contact Karla M. Meola at (202)622–4930 (not a toll-free call).

26 CFR 601.105: Examination of returns and claimsfor refund, credit, or abatement; determination ofcorrect tax liability.

(Also: Part I, §§ 62, 162, 267, 274; 1.62–2, 1.162–17,1.267(a)–1, 1.274–5.)

Rev. Proc. 2011–47

SECTION 1. PURPOSE

This revenue procedure updates Rev.Proc. 2010–39, 2010–42 I.R.B. 459, andprovides rules for using a per diem rateto substantiate, under section 274(d) ofthe Internal Revenue Code and section1.274–5 of the Income Tax Regulations,the amount of ordinary and necessarybusiness expenses paid or incurred whiletraveling away from home. Taxpayers arenot required to use a method described inthis revenue procedure. A taxpayer maysubstantiate actual allowable expenses ifthe taxpayer maintains adequate recordsor other sufficient evidence.

This revenue procedure provides rulesfor using a per diem rate to substantiatethe amount of an employee’s expenses forlodging, meal, and incidental expenses,or for meal and incidental expenses only,that a payor (an employer, its agent, or athird party) reimburses. Employees andself-employed individuals that deduct un-reimbursed expenses for travel away fromhome may use a per diem rate for mealsand incidental expenses, or incidental ex-penses only, under this revenue procedure.This revenue procedure does not providerules for using a per diem rate to substan-tiate the amount of lodging expenses only.

Announcement 2011–42, 2011–32I.R.B. 138, advised taxpayers that the In-ternal Revenue Service intends to discon-tinue the high-low substantiation method.Subsequently a number of taxpayers com-mented that they use the high-low substan-tiation method and asked that the Serviceretain it. Accordingly, this revenue proce-dure continues to authorize the high-lowsubstantiation method.

Beginning with the rates for2011–2012, the Service will publish anannual notice that provides the special perdiem rates for purposes of sections 4.04,4.05, and 5 of this revenue procedure andthe list of high-cost localities for purposesof section 5 of this revenue procedure andwill update this revenue procedure only asnecessary.

October 17, 2011 520 2011–42 I.R.B.

SECTION 2. BACKGROUND ANDCHANGES

.01 Section 162(a) allows a deductionfor ordinary and necessary expenses paidor incurred during the taxable year in car-rying on any trade or business, includ-ing expenses for travel away from home.However, under section 262, a taxpayermay not deduct personal travel or livingexpenses.

.02 Section 274(n) generally limits theamount allowable as a deduction undersection 162 for any expense for food, bev-erages, or entertainment to 50 percent ofthe otherwise allowable amount. For an in-dividual during, or incident to, a period ofduty subject to the hours of service limita-tions of the Department of Transportation,section 274(n)(3) provides that, for taxableyears beginning in 2008 or thereafter, thedeductible percentage for these expenses is80 percent.

.03 To deduct expenses for travel awayfrom home, a taxpayer must substantiatethe expenses under section 274(d), whichalso authorizes the Secretary to prescribethat some or all of the substantiation re-quirements do not apply to an expense thatdoes not exceed a particular amount.

.04 Section 1.274–5(g) authorizes theCommissioner to prescribe rules underwhich reimbursement arrangements orper diem allowances are regarded (1) asequivalent to substantiation, by adequaterecords or other sufficient evidence, ofthe amount of travel expenses for pur-poses of section 1.274–5(c), and (2) assatisfying the requirements of an adequateaccounting to the employer of the amountof travel expenses for purposes of section1.274–5(f).

.05 For purposes of determining ad-justed gross income, section 62(a)(2)(A)allows an employee to deduct business ex-penses the employee pays or incurs in per-forming services under a reimbursement orother expense allowance arrangement witha payor.

.06 Section 62(c) provides that an ar-rangement is not treated as a reimburse-ment or other expense allowance arrange-ment for purposes of section 62(a)(2)(A) ifit (1) does not require the employee to sub-stantiate the expenses covered by the ar-rangement to the payor, or (2) allows theemployee to retain any amount in excessof the substantiated expenses covered un-

der the arrangement. Section 62(c) fur-ther provides, however, that substantiationis not required for the expense to the ex-tent provided in regulations under section274(d).

.07 Under section 1.62–2(c), a reim-bursement or other expense allowancearrangement satisfies the requirements ofsection 62(c) if it meets the requirementsof business connection, substantiation, andreturning amounts in excess of expenses.In that case, all amounts paid under thearrangement are treated as paid under anaccountable plan and are excluded fromincome and wages. If an arrangementdoes not meet one or more of these re-quirements, all amounts paid under thearrangement are treated as paid under anonaccountable plan and are included inan employee’s gross income, must be re-ported as wages or compensation on theemployee’s Form W–2, and are subject tothe withholding and payment of employ-ment taxes.

.08 Section 1.62–2(e)(2) provides thatthe amount of a business expense substan-tiated under section 1.274–5(g) is treatedas substantiated for purposes of section1.62–2.

.09 Under section 1.62–2(f)(2), theCommissioner may prescribe rules fortreating an arrangement providing perdiem allowances as satisfying the re-quirement of returning amounts in excessof expenses if the arrangement requiresthe employee to return amounts that re-late to unsubstantiated travel days, eventhough the arrangement does not requirethe employee to return the portion of theallowance that relates to substantiatedtravel days but that exceeds the deemedsubstantiated amount for those days. Theallowance must be reasonably calculatednot to exceed the amount of the em-ployee’s expenses or anticipated expensesand the employee must be required to re-turn within a reasonable period of timeany portion of the allowance that relatesto unsubstantiated travel days. Undersection 1.62–2(h)(2)(i)(B), the portion ofthe allowance that relates to substantiatedtravel days but exceeds the substantiatedamount for those days and that the em-ployee is not required to return is subjectto withholding and payment of employ-ment taxes. See sections 31.3121(a)–3,31.3231(e)–1(a)(5), 31.3306(b)–2, and

31.3401(a)–4 of the Employment TaxRegulations.

.10 Under section 1.62–2(h)(2)(i)(B)(4), the Commissioner may prescribespecial rules for the timing of withholdingand paying employment taxes on per diemallowances.

.11 Section 1.274–5(j)(1) authorizesthe Commissioner to establish a methodallowing a taxpayer to treat a specificamount as paid or incurred for meals whiletraveling away from home instead of sub-stantiating the actual cost.

.12 Section 1.274–5(j)(3) authorizesthe Commissioner to establish a methodallowing a taxpayer to treat a specificamount as paid or incurred for incidentalexpenses while traveling away from homein lieu of substantiating the actual cost.

.13 This revenue procedure includesmodifications to Rev. Proc. 2010–39 asfollows:

(1) The special per diem rates are nowpublished in a separate annual notice. Thenotice provides (1) the special transporta-tion industry meal and incidental expensesrates (M&IE rates), (2) the rate for the in-cidental expenses only deduction, and (3)the rates and list of high-cost localitiesfor purposes of the high-low substantiationmethod. The Service plans to discontinuepublishing this revenue procedure annu-ally but will publish modifications as re-quired. This revenue procedure remains ineffect until superseded.

(2) Section 3.04 clarifies that partnersand volunteers who receive reimburse-ments from payors may use the methodsallowed under this revenue procedure tosubstantiate their expenses.

(3) Under section 5, taxpayers may nowuse the high-low substantiation method inlieu of the meal and incidental expensesonly per diem substantiation method pro-vided in section 4.02 for travel within thecontinental United States.

(4) Transition rules for the last 3 monthsof each calendar year are moved from sec-tions 3.02(1)(a) and 4.04(6) to new section4.06 and from section 5.05 to section 5.04.

SECTION 3. DEFINITIONS

.01 Per diem allowance. The term “perdiem allowance” means a payment under areimbursement or other expense allowancearrangement that is —

2011–42 I.R.B. 521 October 17, 2011

(1) Paid for ordinary and necessarybusiness expenses incurred, or that thepayor reasonably anticipates will be in-curred, by an employee for lodging, meal,and incidental expenses, or for meal andincidental expenses, for travel away fromhome performing services as an employeeof the employer,

(2) Reasonably calculated not to exceedthe amount of the expenses or the antici-pated expenses, and

(3) Paid at or below the applicable fed-eral per diem rate, a flat rate or statedschedule, or in accordance with any otherService-specified rate or schedule.

.02 Federal per diem rate and federalM&IE rate.

(1) In general. The federal per diemrate is equal to the sum of the applicablefederal lodging expense rate and the appli-cable federal M&IE rate for the day andlocality of travel.

(a) CONUS rates. The General Ser-vices Administration (GSA) publishes therates for localities in the continental UnitedStates (CONUS), as noted in Appendix Ato 41 C.F.R. ch. 301. The GSA rates areavailable on the internet at www.gsa.gov.

(b) OCONUS rates. The rates for lo-calities outside the continental UnitedStates (OCONUS) are established by theSecretary of Defense (rates for non-for-eign localities, including Alaska, Hawaii,Puerto Rico, the Northern Mariana Is-lands, and the possessions of the UnitedStates) and by the Secretary of State (ratesfor foreign localities). These rates are pub-lished in the Per Diem Supplement to theStandardized Regulations (GovernmentCivilians, Foreign Areas) (updated on amonthly basis) and are available on theinternet at www.defensetravel.dod.mil andwww.state.gov.

(2) Locality of travel. The term “lo-cality of travel” means the locality wherean employee or self-employed individualtraveling away from home stops for sleepor rest.

(3) Incidental expenses. The term“incidental expenses has the same mean-ing as in the Federal Travel Regulations,41 C.F.R. 300–3.1 (fees and tips givento porters, baggage carriers, bellhops,hotel maids, stewards or stewardessesand others on ships, and hotel servants inforeign countries; transportation betweenplaces of lodging or business and placeswhere meals are taken, if suitable meals

can be obtained at the temporary dutysite; and the mailing cost associated withfiling travel vouchers and payment ofemployer-sponsored charge card billings).Future changes to the definition ofincidental expenses in the Federal TravelRegulations will be announced in theannual notice providing the special perdiem rates.

.03 Flat rate or stated schedule.(1) In general. Except as provided in

section 3.03(2) of this revenue procedure,an allowance is paid at a flat rate or statedschedule if it is provided on a uniformand objective basis for the expenses de-scribed in section 3.01(1) of this revenueprocedure. The allowance may be paidfor the number of days away from homeperforming services as an employee oron any other basis that is consistently ap-plied and in accordance with reasonablebusiness practice. Thus, for example, anhourly payment to cover meal and inci-dental expenses paid to a pilot or flightattendant who is traveling away fromhome performing services as an employeeis an allowance paid at a flat rate or statedschedule. Likewise, a payment based onthe number of miles traveled (such ascents per mile) to cover meal and inci-dental expenses paid to an over-the-roadtruck driver who is traveling away fromhome performing services as an employeeis an allowance paid at a flat rate or statedschedule.

(2) Limitation. An allowance that iscomputed on a basis similar to that usedin computing an employee’s wages orother compensation (such as the numberof hours worked, miles traveled, or piecesproduced) does not meet the business con-nection requirement of section 1.62–2(d),is not a per diem allowance, and is not paidat a flat rate or stated schedule, unless, asof December 12, 1989, (a) the allowancewas identified by the payor either by mak-ing a separate payment or by specificallyidentifying the amount of the allowance,or (b) an allowance computed on that ba-sis was commonly used in the industry inwhich the employee performed services.See section 1.62–2(d)(3)(ii).

.04 Partners and volunteers. Individ-uals subject to the rules of Subchapter K(partners) and individuals performing ser-vices without remuneration (volunteers)who receive reimbursements from payorsmay use the methods allowed under this

revenue procedure to substantiate theirexpenses. The rules of sections 3, 4, 5,and 6 (except section 6.06) of this revenueprocedure apply to reimbursements frompayors to partners or volunteers.

SECTION 4. PER DIEMSUBSTANTIATION METHOD

.01 Per diem allowance. If a payor paysa per diem allowance in lieu of reimburs-ing actual lodging, meal, and incidental ex-penses incurred or to be incurred by anemployee for travel away from home, theamount of the expenses that is deemed sub-stantiated for each calendar day is equal tothe lesser of the per diem allowance forthat day or the amount computed at thefederal per diem rate (see section 3.02 ofthis revenue procedure) for the locality oftravel for that day (or partial day, see sec-tion 6.04 of this revenue procedure). Seesection 4.06(1) of this revenue procedurefor transition rules.

.02 Meal and incidental expenses onlyper diem allowance. If a payor pays aper diem allowance only for meal and in-cidental expenses in lieu of reimbursingactual meal and incidental expenses in-curred or to be incurred by an employee fortravel away from home, the amount of theexpenses that is deemed substantiated foreach calendar day is equal to the lesser ofthe per diem allowance for that day or theamount computed at the federal M&IE ratefor the locality of travel for that day or par-tial day. A per diem allowance is treatedas paid for meal and incidental expensesonly if (1) the payor pays the employee foractual expenses for lodging based on re-ceipts submitted to the payor, (2) the payorprovides the lodging in kind, (3) the payorpays the actual expenses for lodging di-rectly to the provider of the lodging, (4)the payor does not have a reasonable beliefthat the employee will or did incur lodgingexpenses, or (5) the allowance is computedon a basis similar to that used in computingan employee’s wages or other compensa-tion (such as the number of hours worked,miles traveled, or pieces produced). Seesection 4.06(1) of this revenue procedurefor transition rules.

.03 Method for meal and incidental ex-penses only deduction. Instead of the ac-tual expense amount, employees and self-employed individuals may substantiate theamount of deductible meal expenses by

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using an amount computed at the federalM&IE rate for the locality of travel foreach calendar day or partial day the em-ployee or self-employed individual is trav-eling away from home. This amount isdeemed substantiated for purposes of sec-tion 1.274–5T(b)(2)(i) and (c), providedthe employee or self-employed individualsubstantiates the elements of time, place,and business purpose of the travel for thatday or partial day in accordance with thoseregulations. See section 6.05(1) of thisrevenue procedure for rules related to theapplication of the section 274(n) limitationto amounts determined under this section4.03. See section 4.05 of this revenue pro-cedure for a method for substantiating thedeductible amount of incidental expensesthat employees or self-employed individu-als who do not pay or incur meal expensesmay use. See section 4.06(1) of this rev-enue procedure for transition rules.

.04 Special rules for the transportationindustry.

(1) In general. This section 4.04 ap-plies to (a) a payor that pays a per diemallowance only for meal and incidentalexpenses for travel away from home toan employee in the transportation indus-try and computes the amount under section4.02 of this revenue procedure, or (b) anemployee or self-employed individual inthe transportation industry who computesthe deductible amount for meal and inci-dental expenses for travel away from homeunder section 4.03 of this revenue proce-dure.

(2) Transportation industry defined.For purposes of this section 4.04, an em-ployee or self-employed individual is inthe transportation industry only if theemployee’s or self-employed individ-ual’s work (a) is of the type that directlyinvolves moving people or goods by air-plane, barge, bus, ship, train, or truck, and(b) involves regularly traveling away fromhome and stopping during a single tripat localities with differing federal M&IErates. For purposes of the preceding sen-tence, a payor must determine that anemployee or a group of employees is in thetransportation industry by using a methodthat is consistently applied and in accor-dance with reasonable business practice.

(3) Rates. A taxpayer described insection 4.04(1) of this revenue proceduremay use the CONUS and OCONUS spe-cial M&IE rates (published in an annual

notice) for the transportation industry. Apayor that uses either or both of thesespecial rates for an employee must usethe special rate(s) for all amounts deemedsubstantiated under section 4.02 of thisrevenue procedure paid to that employeefor travel away from home within CONUSand/or OCONUS during the calendar year.Similarly, an employee or self-employedindividual who uses either or both of thesespecial rates must use the special rate(s)for all amounts deemed substantiated un-der section 4.03 of this revenue procedurefor travel away from home within CONUSand/or OCONUS during the calendar year.See section 4.06(2) of this revenue proce-dure for transition rules.

(4) Periodic rule. A payor describedin section 4.04(1) of this revenue proce-dure may compute the amount of an em-ployee’s expenses that is deemed substan-tiated under section 4.02 of this revenueprocedure periodically (not less frequentlythan monthly) rather than daily by compar-ing the total per diem allowance paid forthe period to the sum of the amounts com-puted either at the federal M&IE rate(s) forthe localities of travel, or at the special ratedescribed in section 4.04(3), for the daysor partial days the employee is away fromhome during the period.

(5) Examples.(a) Example 1. Taxpayer, an employee in the

transportation industry, travels away from home onbusiness within CONUS for 10 days during a calen-dar month. A payor pays Taxpayer a per diem al-lowance for meal and incidental expenses only thatthe payor computes using section 4.04(3) of this rev-enue procedure. The CONUS special M&IE rate is$59 per day. The amount deemed substantiated un-der section 4.02 of this revenue procedure is equal tothe lesser of the total per diem allowance paid for themonth or $590 (10 days away from home at $59 perday).

(b) Example 2. Taxpayer, a truck driver employeein the transportation industry, is paid a “cents-per-mile” allowance that qualifies as an allowance paidunder a flat rate or stated schedule as defined in sec-tion 3.03 of this revenue procedure. Taxpayer trav-els away from home on business for 10 days. Basedon the number of miles Taxpayer is expected to driveper day, Taxpayer’s employer pays an allowance of$500 for the 10 days of business travel. The CONUSspecial M&IE rate is $59 per day. Taxpayer actuallydrives for 8 days, and does not drive for the other 2days Taxpayer is away from home. Taxpayer is paidunder the periodic rule used for transportation indus-try employers and employees in accordance with sec-tion 4.04(4) of this revenue procedure. The amountdeemed substantiated is the full $500 because thatamount does not exceed $590 (10 days away fromhome at $59 per day).

.05 Method for incidental expenses onlydeduction. Instead of using actual ex-penses in computing the amount allow-able as a deduction for ordinary and nec-essary incidental expenses paid or incurredfor travel away from home, employees andself-employed individuals who pay or in-cur incidental expenses but do not pay orincur meal expenses for a calendar dayor partial day of travel away from homemay use, for each calendar day or par-tial day the employee or self-employed in-dividual is away from home, an amountthat the Service publishes in an annual no-tice. This amount is deemed substantiatedfor purposes of section 1.274–5T(b)(2)(i)and (c), provided the employee or self-employed individual substantiates the el-ements of time, place, and business pur-pose of the travel for that day or partialday in accordance with those regulations.The method authorized by this section 4.05may not be used by payors that reimburseexpenses under section 4.01, 4.02, or 5.01of this revenue procedure, or by employ-ees or self-employed individuals who usethe method described in section 4.03 ofthis revenue procedure to substantiate theamount of deductible meal and incidentalexpenses. See section 6.05(5) of this rev-enue procedure for rules related to the ap-plication of the section 274(n) limitationto amounts determined under this section4.05.

.06 Transition rules.(1) In general. In applying section 4.01,

4.02, or 4.03 of this revenue procedure,taxpayers may continue to use the CONUSrates in effect for the first 9 months ofthe calendar year, instead of the updatedGSA rates, for expenses of all CONUStravel away from home that are paid or in-curred during the last 3 months of the cal-endar year. A taxpayer must use either therates for the first 9 months of the calen-dar year or the updated rates for the periodOctober 1 through December 31 of eachcalendar year consistently.

(2) Special transportation industryrates. Under the calendar-year conven-tion provided in section 4.04(3) of thisrevenue procedure, a taxpayer who usesthe federal M&IE rates during the first 9months of the calendar year to substan-tiate the amount of an individual’s travelexpenses under sections 4.02 or 4.03 ofthis revenue procedure may not use, forthat individual, the special transportation

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industry rates published in an annual no-tice until January 1 of the next calendaryear. Similarly, a taxpayer who uses thespecial transportation industry rates dur-ing the first 9 months of the calendar yearto substantiate the amount of an individ-ual’s travel expenses may not use, for thatindividual, the federal M&IE rates untilJanuary 1 of the next calendar year.

SECTION 5. HIGH-LOWSUBSTANTIATION METHOD

.01 In general. A payor that pays a perdiem allowance in lieu of reimbursing ac-tual expenses an employee pays or incursor will pay or incur for travel away fromhome may use the high-low substantiationmethod described in this section 5 in lieuof the per diem substantiation method de-scribed in section 4.01 of this revenue pro-cedure or the meal and incidental expensesonly method described in section 4.02 ofthis revenue procedure. If a payor usesthe high-low substantiation method, theamount of the expenses that is deemed sub-stantiated for each calendar day is equal tothe lesser of the actual per diem allowancefor that day or the amount computed un-der section 5.02 of this revenue procedure.Employees and self-employed individualsmay not use the high-low substantiationmethod in lieu of the meal and incidentalexpenses only deduction method describedin section 4.03 of this revenue procedure.

.02 Application of high-low method.Under the high-low substantiation method,a high rate applies to localities desig-nated as high-cost localities and a lowrate applies to every other locality withinCONUS (one high rate and one low ratefor lodging, meal, and incidental expensesand one high rate and one low rate formeal and incidental expenses only). Thehigh or low rates, as appropriate, apply asif they were the federal per diem rate orthe federal M&IE rate for the locality oftravel. The high and low rates, amountstreated as meal expenses for purposes of§ 274(n), and a list of high-cost localitiesare published in an annual notice.

.03 Limitation. A payor that uses thehigh-low substantiation method for anemployee must use that method for allamounts paid to that employee for travelaway from home within CONUS duringthe calendar year. The payor may use anypermissible method (actual expenses, the

per diem substantiation method describedin section 4.01 of this revenue procedure,or the meal and incidental expenses onlyper diem substantiation method describedin section 4.02 of this revenue proce-dure) to reimburse that employee for anyOCONUS travel away from home.

.04 Transition rules. For travel in thelast 3 months of a calendar year—

(1) A payor must continue to use thesame method (per diem method under sec-tions 4.01 or 4.02 of this revenue proce-dure, or high-low method) for an employeeas the payor used during the first 9 monthsof the calendar year; and

(2) A payor may use either the rates andhigh-cost localities in effect for the first 9months of the calendar year or the updatedrates and high-cost localities in effect forthe last 3 months of the calendar year ifthe payor uses the same rates and localitiesconsistently for all employees reimbursedunder the high-low method.

.05 Examples.(1) Example 1. Employer pays a per diem al-

lowance for lodging, meal, and incidental expensesto Employee for travel away from home using thehigh-low substantiation method. Employee travelsaway from home for 5 full days to City A withinCONUS. City A is listed as a high-cost locality. Em-ployer reimburses employee at a rate of $225 per dayfor each of employee’s 5 days of travel. The perdiem rate for a high-cost locality is $250. The amountdeemed substantiated under section 5 of this revenueprocedure is $225 per day (the lesser of the per diemallowance for each day ($225) or the per diem rate fora high-cost locality ($250)).

(2) Example 2. Employer pays a per diem al-lowance for meal and incidental expenses only to Em-ployee for travel away from home using the high-lowsubstantiation method. Employee travels away fromhome to City B (within CONUS) each month of Year1. For all of Year 1, Employer reimburses Employeeat a rate of $50 per day for meal and incidental ex-penses only. For the first 9 months of Year 1, City Bis listed as a high-cost locality. The M&IE rate is $60for a high-cost locality and $45 for all other localities.For the last 3 months of Year 1, City B is not listedas a high-cost locality, and the M&IE rate for City Bis $48. Employer chooses to use the rates and list ofhigh-cost localities in effect during the first 9 monthsof Year 1 for the last 3 months of Year 1 (instead ofthe updated rates for the last 3 months of Year 1). IfEmployer uses the rates and high-cost localities in ef-fect during the first 9 months of Year 1 for the last 3months of Year 1 consistently for all employees, theamount deemed substantiated for Employee’s travelto City B during the last 3 months of Year 1 is $50,the lesser of the M&IE rate for a high-cost locality($60) or the employee’s per diem allowance for eachday ($50).

SECTION 6. LIMITATIONS ANDSPECIAL RULES

.01 In general. The federal per diemrate and the federal M&IE rate describedin section 3.02 of this revenue procedurefor the locality of travel apply in the samemanner as they apply under the FederalTravel Regulations, 41 C.F.R. Part 301, ex-cept as provided in sections 6.02 through6.04 of this revenue procedure.

.02 Federal per diem rate. A receiptfor lodging expenses is not required in de-termining the amount of expenses deemedsubstantiated at the federal per diem rate(including lodging, meal, and incidentalexpenses in one rate) under section 4.01or 5.01. See section 7.01 of this revenueprocedure for the requirement that an em-ployee substantiate the time, place, andbusiness purpose of the expense.

.03 Meals provided in kind. A payor isnot required to reduce the federal per diemrate or the federal M&IE rate for the lo-cality of travel for meals provided in kind,provided the payor has a reasonable beliefthat the employee incurred or will incurmeal and incidental expenses during eachday of travel.

.04 Proration of the federal per diemor M&IE rate. Under the Federal TravelRegulations, in determining the federal perdiem rate or the federal M&IE rate for thelocality of travel, the full applicable fed-eral M&IE rate is available for a full dayof travel from 12:01 a.m. to 12:00 mid-night. A taxpayer must use the method de-scribed in section 6.04(1) of this revenueprocedure for purposes of determining theamount deemed substantiated for meal andincidental expenses or for incidental ex-penses only under section 4.03, 4.05, or 5of this revenue procedure for partial daysof travel away from home. For purposesof determining the amount deemed sub-stantiated for a reimbursement for lodging,meal, and incidental expenses under sec-tion 4.01, 4.02, or 5 of this revenue pro-cedure for partial days of travel away fromhome, a payor may use either of the follow-ing methods to prorate the federal M&IErate to determine the federal per diem rateor the federal M&IE rate for the partialdays of travel:

(1) The rate may be prorated using themethod prescribed by the Federal TravelRegulations for meal and incidental ex-penses for partial days, see 41 C.F.R.

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301–11.101, by allocating three-fourths ofthe applicable rate to each partial day oftravel; or

(2) The rate may be prorated using anymethod that is consistently applied and isconsistent with reasonable business prac-tice. For example, if an employee trav-els away from home from 9 a.m. one dayto 5 p.m. the next day, a method of pro-ration that results in an amount equal totwo times the federal M&IE rate is con-sistent with reasonable business practice(even though the Federal Travel Regula-tions allow only one and a half times thefederal M&IE rate).

.05 Application of the appropriate sec-tion 274(n) limitation on meal expenses.Except as provided in section 6.05(5) ofthis revenue procedure, all or part of theamount of an expense deemed substanti-ated under this revenue procedure is sub-ject to the appropriate limitation under sec-tion 274(n) (see section 2.02 of this rev-enue procedure) on the deductibility offood and beverage expenses.

(1) A taxpayer must treat the entireamount computed for meal and incidentalexpenses under section 4.03 of this rev-enue procedure as an expense for food andbeverages.

(2) If a per diem allowance is paid formeal and incidental expenses only, a payormust treat an amount equal to the lesser ofthe allowance or the federal M&IE rate forthe locality of travel for each day or partialday (see section 6.04 of this revenue pro-cedure) as an expense for food and bever-ages.

(3) If a per diem allowance is paid forlodging, meal, and incidental expenses foreach calendar day or partial day an em-ployee is away from home at a rate equalto or in excess of the federal per diem ratefor the locality of travel, a payor must treatan amount equal to the federal M&IE ratefor the locality of travel for each calendarday or partial day as an expense for foodor beverages.

(4) If a per diem allowance is paid forlodging, meal, and incidental expenses foreach calendar day or partial day an em-ployee is away from home at a rate lessthan the federal per diem rate for the lo-cality of travel, a payor must:

(a) Treat an amount equal to the federalM&IE rate for the locality of travel foreach calendar day or partial day or, if less,

the amount of the allowance, as an expensefor food or beverages; or

(b) Treat an amount equal to 40 percentof the allowance as an expense for food orbeverages.

(5) None of the amount for incidentalexpenses computed under section 4.05 ofthis revenue procedure is subject to limita-tion under section 274(n).

.06 No double reimbursement or de-duction. If a payor pays a per diem al-lowance in lieu of reimbursing actual lodg-ing, meal, and incidental expenses, or mealand incidental expenses only, under sec-tion 4 or 5 of this revenue procedure, andthe amount is treated as paid under anaccountable plan, any additional paymentfor those expenses is treated as paid un-der a nonaccountable plan, is included inan employee’s gross income, is reportedas wages or other compensation on theemployee’s Form W–2, and is subject towithholding and payment of employmenttaxes. Similarly, if an employee or self-employed individual computes the amountallowable as a deduction for meal and inci-dental expenses for travel away from homeunder section 4.03 or 4.04 of this revenueprocedure, no other deduction is allowedto the employee or self-employed individ-ual for those expenses. For example, anemployee receives a per diem allowancefrom a payor for meal and incidental ex-penses incurred while traveling away fromhome and the amount is treated as paid un-der an accountable plan. During that trip,the employee pays for dinner for the em-ployee and two business associates. Thepayor reimburses as a business entertain-ment meal expense the meal expense forthe employee and the two business asso-ciates. Because the payor also pays theemployee a per diem allowance for mealand incidental expenses, the amount paidfor the employee’s portion of the businessentertainment meal expense is treated aspaid under a nonaccountable plan, is re-ported as wages or other compensation onthe employee’s Form W–2, and is subjectto withholding and payment of employ-ment taxes.

.07 Related parties. Sections 4.01 and5 of this revenue procedure do not apply ifa payor and an employee are related withinthe meaning of section 267(b), but for thispurpose the percentage of ownership inter-est referred to in section 267(b)(2) is 10percent.

SECTION 7. APPLICATION

.01 An employee satisfies the adequateaccounting and substantiation require-ments of section 1.274–5(c) and (f)(4) andsection 1.274–5T(c) if—

(1) The employee uses this revenueprocedure to substantiate to a payor theamount of the employee’s travel expenses,and

(2) Within a reasonable period of time,the employee also substantiates to thepayor the elements of time, place, andbusiness purpose of the travel in accor-dance with section 1.274–5T(b)(2) and (c)and section 1.274–5(c) (other than section1.274–5(c)(2)(iii)(A)).

.02 An arrangement providing per diemallowances is treated as satisfying the re-quirement of section 1.62–2(f)(2) of re-turning amounts in excess of expenses ifan employee is required to return withina reasonable period of time (as definedin section 1.62–2(g)) any portion of theallowance that relates to unsubstantiatedtravel days, even though the arrangementdoes not require the employee to returnthe portion of the allowance that relatesto substantiated travel days and that ex-ceeds the amount of the employee’s ex-penses deemed substantiated. For exam-ple, a payor provides an employee an ad-vance per diem allowance for meal and in-cidental expenses of $250, based on an an-ticipated 5 days of business travel at $50per day to a locality for which the fed-eral M&IE rate is $46, and the employeesubstantiates 3 full days of business travel.The requirement to return excess amountsis treated as satisfied if the employee is re-quired to return within a reasonable periodof time (as defined in section 1.62–2(g))the portion of the allowance that is attribut-able to the 2 unsubstantiated days of travel($100), even though the employee is notrequired to return the portion of the al-lowance ($12) that exceeds the amount ofthe employee’s expenses deemed substan-tiated under section 4.02 of this revenueprocedure ($138) for the 3 substantiateddays of travel. However, the $12 excessportion of the allowance is treated as paidunder a nonaccountable plan as discussedin section 7.04 of this revenue procedure.

.03 An employee is not required to in-clude in gross income the portion of a perdiem allowance received from a payor thatis less than or equal to the amount deemed

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substantiated under the rules provided insection 4 or 5 of this revenue procedureif the employee substantiates the businesstravel expenses covered by the per diem al-lowance in accordance with section 7.01of this revenue procedure. See section1.274–5T(f)(2)(i). If the remaining re-quirements for an accountable plan pro-vided in section 1.62–2 are satisfied, thatportion of the allowance is treated as paidunder an accountable plan, is not reportedas wages or other compensation on the em-ployee’s Form W–2, and is exempt fromthe withholding and payment of employ-ment taxes. See section 1.62–2(c)(2) and(c)(4).

.04 An employee is required to in-clude in gross income only the portion ofthe per diem allowance received from apayor that exceeds the amount deemedsubstantiated under the rules provided insection 4 or 5 of this revenue procedureif the employee substantiates the businesstravel expenses covered by the per diemallowance in accordance with section 7.01of this revenue procedure. See section1.274–5T(f)(2)(ii). In addition, the excessportion of the allowance is treated as paidunder a nonaccountable plan, is reportedas wages or other compensation on theemployee’s Form W–2, and is subject towithholding and payment of employmenttaxes. See section 1.62–2(c)(3)(ii), (c)(5),and (h)(2)(i)(B).

.05 If the amount of the expenses that isdeemed substantiated under the rules pro-vided in section 4.01, 4.02, or 5 of this rev-enue procedure is less than the amount ofan employee’s business expenses for travelaway from home, an employee may claiman itemized deduction for the amount bywhich the business travel expenses exceedthe amount that is deemed substantiated,provided the employee substantiates all thebusiness travel expenses (not just the ex-cess over the federal per diem rate), in-cludes on Form 2106, “Employee BusinessExpenses,” the deemed substantiated por-tion of the per diem allowance receivedfrom the payor, and includes in gross in-come the portion (if any) of the per diemallowance received from the payor that ex-ceeds the amount deemed substantiated.See section 1.274–5T(f)(2)(iii). However,for purposes of claiming this itemized de-duction for meal and incidental expenses,substantiation of the amount of the ex-penses is not required if the employee is

claiming a deduction that is equal to or lessthan the amount computed under section4.03 of this revenue procedure minus theamount deemed substantiated under sec-tions 4.02 and 7.01 of this revenue proce-dure. The itemized deduction is subject tothe appropriate limitation (see section 2.02of this revenue procedure) on meal and en-tertainment expenses in section 274(n) andthe 2-percent floor on miscellaneous item-ized deductions in section 67.

.06 An employee who pays or incursmeal expenses and does not receive a perdiem allowance for meal and incidental ex-penses may deduct an amount computedunder section 4.03 of this revenue proce-dure only as an itemized deduction. Thisitemized deduction is subject to the ap-propriate limitation on meal and entertain-ment expenses in section 274(n) and the2-percent floor on miscellaneous itemizeddeductions in section 67.

.07 An employee who does not pay orincur amounts for meal expenses and doesnot receive a per diem allowance for in-cidental expenses may deduct an amountcomputed under section 4.05 of this rev-enue procedure only as an itemized deduc-tion. This itemized deduction is subject tothe 2-percent floor on miscellaneous item-ized deductions in section 67.

.08 A self-employed individual whopays or incurs meal expenses for a cal-endar day or partial day of travel awayfrom home may deduct an amount com-puted under section 4.03 of this revenueprocedure in determining adjusted grossincome under section 62(a)(1), subjectto the appropriate limitation on meal andentertainment expenses in section 274(n).

.09 A self-employed individual whodoes not pay or incur meal expenses for acalendar day or partial day of travel awayfrom home may deduct an amount com-puted under section 4.05 of this revenueprocedure in determining adjusted grossincome under section 62(a)(1).

SECTION 8. WITHHOLDING ANDPAYMENT OF EMPLOYMENT TAXES

.01 The portion of a per diem al-lowance, if any, that relates to the daysof business travel substantiated and thatexceeds the amount deemed substanti-ated for those days under section 4.01,4.02, or 5 of this revenue procedure istreated as paid under a nonaccountable

plan and is subject to withholding and pay-ment of employment taxes. See section1.62–2(h)(2)(i)(B).

.02 In the case of a per diem allowancepaid as a reimbursement, the excess de-scribed in section 8.01 of this revenue pro-cedure is subject to withholding and pay-ment of employment taxes in the payrollperiod in which a payor reimburses the ex-penses for the days of travel substantiated.See section 1.62–2(h)(2)(i)(B)(2).

.03 In the case of a per diem allowancepaid as an advance, the excess describedin section 8.01 of this revenue procedureis subject to withholding and payment ofemployment taxes no later than the firstpayroll period following the payroll periodin which the days of travel for which theadvance was paid are substantiated. Seesection 1.62–2(h)(2)(i)(B)(3). If an em-ployee does not substantiate some or allof the days of travel for which the ad-vance was paid within a reasonable pe-riod of time or does not return the por-tion of the allowance that relates to thosedays within a reasonable period of time,the portion of the allowance that relatesto those days is subject to withholdingand payment of employment taxes no laterthan the first payroll period following theend of the reasonable period. See section1.62–2(h)(2)(i)(A).

.04 In the case of a per diem allowanceonly for meal and incidental expenses fortravel away from home paid to an em-ployee in the transportation industry by apayor that uses the rule in section 4.04(4)of this revenue procedure, the excess ofthe per diem allowance paid for the pe-riod over the amount deemed substantiatedfor the period under section 4.02 of thisrevenue procedure (after applying section4.04(4) of this revenue procedure), is sub-ject to withholding and payment of em-ployment taxes no later than the first pay-roll period following the payroll period inwhich the excess is computed. See section1.62–2(h)(2)(i)(B)(4).

.05 For example, an employer pays anemployee a per diem allowance under anarrangement that otherwise meets the re-quirements of an accountable plan to coverbusiness expenses for meals and lodgingfor travel away from home at a rate of 120percent of the federal per diem rate forthe localities to which the employee trav-els. The employer does not require the em-ployee to return the 20 percent by which

October 17, 2011 526 2011–42 I.R.B.

the reimbursement for those expenses ex-ceeds the federal per diem rate. The em-ployee substantiates 6 days of travel awayfrom home: 2 days in a locality where thefederal per diem rate is $150 and 4 daysin a locality where the federal per diemrate is $130. The employer reimbursesthe employee $984 for the 6 days of travelaway from home (2 x (120% x $150) + 4 x(120% x $130)), and does not require theemployee to return the excess payment of$164 (2 days x $30 ($180-$150) + 4 daysx $26 ($156-$130)). For the payroll pe-riod in which the employer reimburses theexpenses, the employer must withhold andpay employment taxes on $164. See sec-tion 8.02 of this revenue procedure.

.06 All payments to an employee undera per diem allowance arrangement aretreated as paid under a nonaccountableplan if the reimbursement arrangementevidences a pattern of abuse. An arrange-ment evidences a pattern of abuse if, forexample, it has no process to determinewhen an allowance exceeds the amountthat may be deemed substantiated and thearrangement routinely pays allowances inexcess of the amount that may be deemedsubstantiated without requiring actual sub-stantiation or repayment of the excessamount, or treating the excess allowancesas wages for employment tax purposes.See section 62(c), section 1.62–2(k), andRev. Rul. 2006–56, 2006–2 C.B. 874.Thus, these payments are included in theemployee’s gross income, are reportedas wages or other compensation on theemployee’s Form W–2, and are subject towithholding and payment of employmenttaxes. See sections 1.62–2(c)(3), (c)(5),and (h)(2).


This revenue procedure is effective forper diem allowances for lodging, meal andincidental expenses, or for meal and inci-dental expenses only that are paid to anemployee on or after October 1, 2011, fortravel away from home on or after Octo-ber 1, 2011. For purposes of computing theamount allowable as a deduction for travelaway from home, this revenue procedure iseffective for meal and incidental expensesor for incidental expenses only paid or in-curred on or after October 1, 2011.

SECTION 10. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2010–39 is modified andamplified and, as modified and amplified,is superseded.


The principal author of this revenueprocedure is Eric D. Brauer of the Officeof Associate Chief Counsel (Income Tax& Accounting). For further informationregarding this revenue procedure, con-tact Mr. Brauer at (202) 622–4970 (not atoll-free call) or the individual identifiedin the most recent annual per diem notice.

26 CFR 601.105. Examination of returns and claimsfor refund, credit or abatement; determination ofcorrect tax liability.(Also Part I, §§ 2053, 6402; 20.2053–1;301.6402–2.)

Rev. Proc. 2011–48

SECTION 1. PURPOSE

This revenue procedure provides guid-ance related to the filing and subsequentresolution of a protective claim for refundof estate tax that is based on a deductionfor a claim or expense under section 2053of the Internal Revenue Code (Code) andthe corresponding regulations.


Final regulations (T.D. 9468, 2009–44I.R.B. 570) under section 2053 of the Codewere published in the Federal Registeron October 20, 2009 (74 FR 53652) toprovide guidance in determining the de-ductible amount of a claim against a dece-dent’s estate under section 2053. The fi-nal regulations provide, with certain ex-ceptions, that the amount deductible fora section 2053 claim or expense is lim-ited to the amount actually paid in settle-ment or satisfaction of that claim or ex-pense (subject to any applicable limita-tions in § 20.2053–1). For amounts thatare not paid or otherwise deductible at thetime of filing the United States Estate (andGeneration-Skipping Transfer) Tax Return(Form 706), § 20.2053–1(d)(5)(i) of theEstate Tax Regulations permits the filingof a protective claim for refund.

Section 20.2053–1(d)(5)(i) provides inpart that a protective claim for refund maybe filed at any time before the expira-tion of the period of limitation prescribedin section 6511(a) to preserve the estate’sright to claim a refund in the case of aclaim or expense that might not be paidor might not otherwise meet the require-ments of deductibility under section 2053and the corresponding regulations until af-ter the expiration of the period of limita-tion for filing a claim for refund. Such aclaim for refund is referred to herein asa “section 2053 protective claim for re-fund.” Section 20.2053–1(d)(5)(i) furtherprovides that a protective claim must iden-tify the outstanding claim or expense thatwould have been deductible under section2053(a) or (b) if such item already hadbeen paid, and must describe the reasonsand contingencies delaying the actual pay-ment of the claim or expense. When thecontingencies delaying actual payment areresolved, § 20.2053–1(d)(5)(i) requires thefiduciary acting on behalf of the estateto notify the Service within a reasonableperiod that the contingency has been re-solved and that the amount deductible un-der § 20.2053–1 has been established. Adeduction will be allowed to the extent theclaim or expense that was the subject of theprotective claim satisfies the requirementsfor deductibility under § 2053 and the cor-responding regulations, subject to any ap-plicable limitations in § 20.2053–1.

Commentators responding to proposedregulations issued under section 2053 ofthe Code (published in the Federal Reg-ister on April 23, 2007 (72 FR 20080))requested detailed guidance on protec-tive claim for refund procedures. Section20.2053–1(d)(5)(i) provides that a pro-tective claim for refund shall be made inaccordance with guidance that may beprovided from time to time by publica-tion in the Internal Revenue Bulletin (see§ 601.601(d)(2)(ii)(b)).

SECTION 3. SCOPE

This revenue procedure applies only tosection 2053 protective claims for refund.Section 4 of this revenue procedure setsforth procedures for filing a section 2053protective claim for refund, and Section 5of this revenue procedure sets forth proce-dures for notifying the Service that a sec-tion 2053 protective claim for refund is

2011–42 I.R.B. 527 October 17, 2011

ready for consideration. A taxpayer thatfiles a protective claim for refund and pro-vides notification for consideration to theService in accordance with the proceduresset forth in this revenue procedure will sat-isfy the generally applicable procedural re-quirements for claiming a refund as wellas the procedural requirements specific tosection 2053 for claiming a refund. A tax-payer that chooses not to follow or failsto comply with the procedures set forth inthis revenue procedure for a section 2053protective claim for refund is subject toall of the generally applicable provisionsgoverning claims for refund as well as tothe specific section 2053 provisions re-lating to claims for refund, and will nothave the benefit of the limited review de-scribed in Notice 2009–84, 2009–44 I.R.B.592, and section 5.01 of this revenue pro-cedure. See §§ 6402, 6511, and 6514;§ 20.2053–1(d)(5).

SECTION 4. PROCEDURE— FILING A SECTION 2053PROTECTIVE CLAIM FOR REFUND

.01 Time period for filing a protectiveclaim for refund. A section 2053 protec-tive claim for refund must be filed beforethe expiration of the period of limitationprescribed in section 6511(a) for the filingof a claim for refund. Section 6511(a) pro-vides, in relevant part, that a claim for re-fund shall be filed by the taxpayer within3 years from the time the return was filedor 2 years from the time the tax was paid,whichever of such periods expires later,or if no return was filed by the taxpayer,within 2 years from the time the tax waspaid. Only if a protective claim for refundwas timely filed may the Internal RevenueService (Service) refund overpaid estatetaxes in those situations where the amountdeductible under § 20.2053–1 is not es-tablished until after the expiration of theperiod of limitation. See §§ 6511(b) and6514(a).

.02 Generally applicable regulatory re-quirements for a claim for refund. Under§ 301.6402–2 of the Procedure and Ad-ministration Regulations, a claim for re-fund must set forth, in a written decla-ration that is executed under penalties ofperjury, each ground upon which a refundis claimed and facts sufficient to apprisethe Commissioner of the exact basis of theclaim. The method under this revenue pro-

cedure for satisfying these requirementswith respect to a section 2053 protectiveclaim for refund requires that the protec-tive claim for refund identify and describein detail the claim or expense for which adeduction may be claimed under section2053 of the Code and otherwise complywith the procedures in this section.

.03 Who can file a protective claimfor refund. A protective claim for refundmust be accompanied by documentaryevidence, including certified copies of theletters testamentary, letters of administra-tion, or other similar evidence, to establishthe legal authority of a fiduciary or otherperson to file and pursue a protectiveclaim for refund on behalf of the estateof a decedent. See § 301.6402–2(e) ofthe Procedure and Administration Regu-lations. In the estate tax context, proof oflegal authority typically is established atthe time of filing the Federal Estate (andGeneration-Skipping Transfer) Tax Return(Form 706). Accordingly, if the fiduciaryor other person filing the protective claimfor refund on behalf of a decedent’s estateis the same fiduciary or other person whofiled the decedent’s Form 706, the protec-tive claim for refund need only include astatement affirming that the fiduciary orother person filing the protective claim forrefund also filed the Form 706 and thatsuch fiduciary or other person is still act-ing in a representative capacity on behalfof the estate. If the fiduciary or other per-son filing the protective claim for refundon behalf of a decedent’s estate is not thesame fiduciary or other person who filedthe decedent’s Form 706, the protectiveclaim for refund must be accompaniedby the necessary documentary evidenceestablishing proof of legal authority. Seesection 5.04 of this revenue procedure forguidance on the authority of a transfereeor other person to represent the estate inpursuing a section 2053 claim for refund.

.04 Manner of filing a section 2053 pro-tective claim for refund.

(1) Methods of filing. To be properlyfiled under this revenue procedure, sec-tion 2053 protective claims for refund thatare filed for decedents dying on or afterJanuary 1, 2012, must be filed using anymethod described in paragraph (a) or (b).For those section 2053 protective claimsfor refund filed for decedents dying afterOctober 19, 2009, and before January 1,2012, the section 2053 protective claims

for refund must be filed using the methoddescribed in paragraph (b). If a taxpayerhas made a filing prior to the issuance ofthis revenue procedure in an effort to makea protective claim for refund under section2053, and if the taxpayer has any concernas to whether the prior filing meets the re-quirements of this revenue procedure, or ifthe taxpayer wants the benefit of section4.06 of this revenue procedure, the tax-payer may replace the initial filing with atimely filing in accordance with this sec-tion 4.04.

(a) Schedule PC with Form 706. A sec-tion 2053 protective claim for refund maybe filed by attaching one or more com-pleted Schedules PC to the estate’s Form706 at the time of filing that return. Sched-ule PC is expected to be first available aspart of the 2012 Form 706. The Form 706should indicate that one or more Sched-ules PC are being filed with the return inorder to facilitate the proper processing ofSchedule(s) PC, in accordance with the in-structions for that schedule.

(b) Form 843. A section 2053 protec-tive claim for refund may be filed by fil-ing a Form 843 where the Form 706 forthe decedent’s estate was previously filed(currently, at the Cincinnati campus), withthe notation “Protective Claim for Refundunder Section 2053” entered across the topof page 1 of the form. For filing a sec-tion 2053 protective claim for refund, theaddress for the “Cincinnati campus” is:Department of Treasury, Internal RevenueService Center, 300 Madison Avenue, Stop823G, Covington, KY 41011, or as oth-erwise specified in the instructions to theform.

(2) Separate protective claim for refundfor each section 2053 claim or expense. Tobe properly filed under this revenue pro-cedure, a separate section 2053 protectiveclaim for refund must be filed as describedin section 4.04(1) of this revenue proce-dure for each claim or expense for whicha deduction may be claimed in the futureunder section 2053 (section 2053 claim orexpense). Specifically, a Form 706 may in-clude more than one Schedule PC. In ad-dition, a section 2053 protective claim forrefund must not include any claim for re-fund not based on a deduction under sec-tion 2053. Each section 2053 protectiveclaim for refund should indicate whetherother protective claims for refund are be-

October 17, 2011 528 2011–42 I.R.B.

ing filed or were previously filed and theapproximate date on which each was filed.

.05 Identification of the claim or ex-pense.

(1) General rule. In order for a sec-tion 2053 protective claim for refund tobe properly filed under this revenue pro-cedure, the outstanding claim or expensethat forms the basis of a potential deduc-tion under section 2053 must be clearlyidentified so that the Service has notice ofeach claim or expense for which a deduc-tion under section 2053 will be claimed. Inaddition, as provided in § 20.2053–1(d)(5),proper identification of the claim or ex-pense must include an explanation of thereasons and contingencies delaying the ac-tual payment to be made in satisfaction ofthe claim or expense. Finally, except asprovided in section 4.05(2) of this revenueprocedure, claims or expenses related tobut separate from a particular section 2053claim or expense must be separately iden-tified. The use of vague or broad languagethat does not describe a specific claim orexpense that would be deductible undersection 2053 does not provide clear identi-fication of a section 2053 claim or expensefor purposes of this revenue procedure.

(2) Related ancillary expenses. A sec-tion 2053 claim or expense that has beenadequately identified in a protective claimfor refund (in accordance with this sec-tion) will be deemed to include, withoutthe need for any further identification, cer-tain related and ancillary expenses relat-ing to resolving, defending, or satisfyingthe identified claim or expense as well ascertain expenses relating to pursuing theclaim for refund for the identified claimor expense. For instance, attorneys’ fees,court costs, appraisal fees, and accountingfees, may be considered as part of the claimfor refund to which it relates, without theneed for separate identification of those re-lated administration or litigation expenses.Note, however, that although no separateidentification for certain related and ancil-lary expenses is required under the proce-dures in this revenue procedure, this proce-dure shall not be construed to concede thatthe expenses are deductible under section2053 in all events. A claim or expense thatis the subject of a section 2053 claim forrefund must meet the substantive require-ments of section 2053 and the correspond-ing regulations in order to be deductible

and the amount of the deduction is subjectto any applicable limitations.

(3) Claims against the estate involv-ing contested matters. To satisfy the re-quirements of this section, each section2053 protective claim for refund involvinga contested claim against the estate mustnotify the Service of the contested mat-ter and the potential liability of the estate.Identification of all of the following facts,as applicable, generally will be sufficientto appropriately identify a claim againstthe estate involving a contested matter: thename or names of the claimant(s), the ba-sis of the claim or other description of thesubject matter of the contested matter, theextent or amount of the liability claimed,and a brief statement reporting the status ofthe contested matter at the time the protec-tive claim for refund is filed with the Ser-vice. For a contested matter that is beinglitigated, attaching a copy of the relevantpleadings and making reference thereto onthe section 2053 protective claim for re-fund generally will be sufficient to identifyappropriately the claim.

(4) Claims or expenses for which de-ductions under § 20.2053–1(d)(4) or§ 20.2053–4(b) or (c) are claimed on Form706. Subject to applicable limitations, anestate may preserve the estate’s right toclaim a refund based on the amount ofany section 2053 claim or expense thatis in addition to the amount claimed as adeduction for that claim or expense under§ 20.2053–1(d)(4) or § 20.2053–4(b) or(c) on Form 706, if the additional amountmight not be paid or might not meet therequirements of § 20.2053–1(d)(4) untilafter the expiration of the period of limita-tion prescribed in section 6511(a) for thefiling of a claim for refund. To be prop-erly filed under this revenue procedure, aprotective claim for refund that is basedupon the potential deductibility of suchan additional amount must satisfy all ofthe procedural, identification, and otherrequirements of this revenue procedure,as applicable. In addition, however, theestate must disclose the amount of thededuction already claimed on Form 706for the subject claim or expense and mustreference the regulatory provision underwhich the deduction was claimed in or-der to identify properly the section 2053claim or expense on a protective claim forrefund.

.06 Period after filing the section 2053protective claim for refund.

(1) Initial processing of section 2053claim for refund by the Service. Althoughthe Service generally will not engage in asubstantive review of a section 2053 pro-tective claim for refund until the amountof the section 2053 claim or expense hasbeen established, when a section 2053 pro-tective claim for refund is received by theService, the Service may reject the claimif it appears that one or more preliminaryprocedural requirements for a valid claimfor refund have not been satisfied. Forexample, the Service may reject a claimthat (a) is not timely filed by a fiduciaryor other person having legal authority tofile a claim for refund on behalf of the es-tate, (b) does not include a properly exe-cuted penalty of perjury statement, or (c)does not adequately describe a claim or ex-pense that, if substantiated at a later time,would support a deduction under section2053. For those section 2053 protectiveclaims for refund that are not initially re-jected by the Service, the Service will ac-knowledge in written correspondence thatthe claim has been received. Note, how-ever, that the Service’s written acknowl-edgement that the claim has been receiveddoes not constitute a determination that thepreliminary procedural requirements for avalid protective claim for refund have beensatisfied. Accordingly, upon considerationof the claim once the amount of the sec-tion 2053 claim or expense has been estab-lished, the Service nevertheless may deter-mine that one or more procedural require-ments are not satisfied and the claim forrefund then may be denied.

(2) Contacting the Service when nocommunication received. Although atimely-filed section 2053 protective claimfor refund will be timely filed even if theService does not acknowledge its receiptand/or process the protective claim, thefiduciary or other person filing the formon behalf of the estate promptly shouldcontact the Service at (866) 699–4083 (orother appropriate number) to inquire intothe Service’s receipt and processing ofthat protective claim for refund if the es-tate does not receive from the Service thewritten acknowledgement of receipt de-scribed in section 4.06(1) of this revenueprocedure within 180 days of filing a sec-tion 2053 protective claim for refund ona Schedule PC attached to the Form 706,

2011–42 I.R.B. 529 October 17, 2011

or within 60 days of filing a section 2053protective claim for refund on a Form 843.A certified mail receipt or other evidenceof delivery to the Service is not sufficientto ensure and confirm the Service’s receiptand processing of the protective claim forpurposes of this revenue procedure. Seesection 4.06(3) of this revenue procedureregarding the possible consequences ofnot contacting the Service within 30 daysafter the expiration of these periods.

(3) Opportunity to cure an inadequatelyidentified section 2053 protective claim forrefund. A section 2053 protective claimfor refund must satisfy the timely-filing re-quirement set forth in section 4.01 of thisrevenue procedure. The failure of a section2053 protective claim for refund to sat-isfy certain other preliminary proceduralrequirements for a valid claim for refund,including the penalty of perjury statementrequirement set forth in section 4.02 ofthis revenue procedure, may be cured be-fore the expiration of the period of limita-tion prescribed in section 6511(a). How-ever, the failure of a section 2053 protec-tive claim for refund to satisfy the identifi-cation requirement set forth in section 4.05of this revenue procedure may be cured, asfurther described below, after the expira-tion of the period of limitation prescribedin section 6511(a), as long as the section2053 protective claim for refund as orig-inally filed was timely and properly exe-cuted under the penalty of perjury. To curethe section 2053 protective claim for re-fund, the fiduciary or other person mustadequately identify the section 2053 claimor expense in accordance with section 4.05of this revenue procedure by submitting acorrected (and signed) protective claim forrefund before the expiration of the periodof limitation prescribed in section 6511(a)or within 45 days after the date of the Ser-vice’s notice, if any, to the fiduciary orother person of the defect, whichever oc-curs later. If the Service fails to provide thewritten acknowledgement of receipt de-scribed in section 4.06(1) of this revenueprocedure and the fiduciary or other per-son who filed the section 2053 protectiveclaim for refund fails to contact the Servicewithin 30 days after the applicable timeperiod described in section 4.06(2) of thisrevenue procedure to confirm the Service’sreceipt and processing of that section 2053protective claim for refund, the fiduciaryor other person will not have the oppor-

tunity to cure the inadequate identificationof the section 2053 protective claim for re-fund after the expiration of the period oflimitation prescribed in section 6511(a).

(4) Effect of section 2053 protectiveclaim for refund on examination of Form706. When a fiduciary or other personhaving authority to file a Form 706 onbehalf of an estate also files a section 2053protective claim for refund on behalf ofthe estate, generally the Service will notsuspend the substantive review and exam-ination of the Form 706 and will not delayissuing a closing letter on the basis that aprotective claim for refund has been filedin that estate. Instead, the Form 706 willbe processed and examined by the Servicein accordance with the regular processingand examination procedures followed forestate tax returns.

SECTION 5. PROCEDURE— NOTIFICATION FORCONSIDERATION OF A SECTION2053 PROTECTIVE CLAIM FORREFUND

.01 In general. The Service will re-fund overpaid estate tax if the Servicedetermines there is an overpayment of taxin connection with a timely-filed section2053 protective claim for refund, eventhough the claim or expense that is thesubject of the claim for refund does not be-come deductible under section 2053 untilafter the expiration of the period of limita-tion prescribed in section 6511(a) for thefiling of a claim for credit or refund. In ac-cordance with Notice 2009–84, 2009–44I.R.B. 592, in determining whether thereis an overpayment of tax based on atimely-filed section 2053 protective claimfor refund that becomes ready for consid-eration after the expiration of the periodof limitation on assessment prescribed insection 6501, generally the Service willlimit its review of the Form 706 to thededuction under section 2053 that wasthe subject of the protective claim. Whenthe section 2053 claim or expense thatwas the subject of the timely-filed section2053 protective claim for refund meetsthe requirements for deductibility under§ 20.2053–1, a taxpayer must provide anotification to the Service that the claimfor refund is ready for consideration asdescribed in section 5.03 of this revenueprocedure, and such notification must be

executed under penalty of perjury, withinthe time period described in section 5.02of this revenue procedure, by the fiduciaryor other person having legal authority tofile and pursue the claim for refund. Thenotification generally should describe therelevant facts that support, and provide ev-idence to substantiate, a deduction undersection 2053 and should claim a refundof the overpayment of tax based on thededuction under section 2053 and the re-sulting recomputation of the estate taxliability.

.02 Time period for providing notifica-tion for consideration of a section 2053protective claim for refund.

(1) General rule. Under§ 20.2053–1(d)(5)(i), a fiduciary or otherperson having legal authority to pursuethe claim for refund must notify theService within a reasonable period thatthe reason or contingency delaying theactual payment of the section 2053 claimor expense has been resolved and/or thatthe amount deductible under § 20.2053–1has been established. For purposes ofthis revenue procedure, this requirementis satisfied when the fiduciary or otherperson having legal authority to pursuethe claim for refund on behalf of theestate notifies the Service within 90 daysafter the date the claim or expense is paidor 90 days after the date on which theamount of the claim or expense becomescertain and is no longer subject to anycontingency, whichever occurs later.When the notification to the Service bythe fiduciary or other person occurs afterthe expiration of that 90-day period, thefiduciary or other person should providean explanation sufficient to establish thatthere is reasonable cause for the delay.The methods by which a fiduciary or otherperson having legal authority to file andpursue the claim for refund must notify theService under this revenue procedure aredescribed in section 5.03 of this revenueprocedure.

(2) Multiple or recurring payments.For a section 2053 claim or expense in-volving multiple payments or a seriesof recurring payments, the payment ofwhich is necessary to claim a deductionbased on that claim or expense (suchas a contingent obligation described in§ 20.2053–4(d)(6)(ii) of the Estate TaxRegulations), the 90-day period describedin section 5.02(1) of this revenue proce-

October 17, 2011 530 2011–42 I.R.B.

dure will begin with regard to the entireamount of the claim or expense on thedate of the last and final payment. Thus,the fiduciary or other person having legalauthority to file and pursue the claim forrefund may notify the Service within 90days after the date the liability for theclaim or expense is fully satisfied, regard-less of the amount of time over whichthe earlier, partial payments were made.Notwithstanding the preceding sentence,however, the fiduciary or other personhaving legal authority to file and pursuethe claim for refund may notify the Ser-vice in accordance with section 5.02(1) ofthis revenue procedure, but not more oftenthan annually (except in the case of a finalpayment) of all payments made since thelast notification for consideration, if any,in partial satisfaction of a liability for asection 2053 claim or expense, and maythereby claim a partial refund attributableto such payment(s).

.03 Manner of notifying the Service forconsideration of a section 2053 claim forrefund.

(1) Methods of filing. To meet the no-tification requirements under this revenueprocedure, whether with regard to the en-tire claim or expense or to partial paymentsas made, a notification for considerationof a section 2053 protective claim for re-fund that is to be filed for a decedent dyingon or after January 1, 2012, must be filedusing any method described in paragraph(a) or (b). For a notification for consid-eration of a section 2053 protective claimfor refund that is to be filed for a dece-dent dying after October 19, 2009, andbefore January 1, 2012, a notification forconsideration of a section 2053 protectiveclaim for refund must be filed usingthe method described in paragraph (b).A notification for consideration of asection 2053 protective claim for refundadditionally must meet the applicablerequirements in section 5.01 and 5.02 ofthis revenue procedure.

(a) Supplemental Form 706. A notifi-cation for consideration of a section 2053protective claim for refund may be filed byfiling, at the same location where the sec-tion 2053 protective claim for refund waspreviously filed, an updated (and signed)Form 706, including each schedule af-fected by the allowance of the deduction(s)whose amount has been established andincluding an updated Schedule PC for each

section 2053 claim or expense that hasbecome deductible. The notation “Sup-plemental Information — Notification forConsideration of Section 2053 ProtectiveClaim(s) for Refund filed on [DATE OFPROTECTIVE CLAIM]” must be enteredacross the top of page 1 of Form 706. Inaddition, a copy of the originally-filedsection 2053 protective claim(s) for refund(filed as described in section 4.04(1) ofthis revenue procedure) that identifies thesection 2053 claims or expenses that nowhave become deductible must be attachedto the Form 706.

(b) Form 843. A notification for consid-eration of a section 2053 protective claimfor refund may be filed by filing, at thesame location where the section 2053 pro-tective claim for refund was previouslyfiled, one or more updated (and signed)Forms 843 with the notation “Notificationfor Consideration of Section 2053 Protec-tive Claim for Refund filed on [DATE OFPROTECTIVE CLAIM]” entered acrossthe top of page 1 of the form(s). A copy ofthe originally-filed section 2053 protectiveclaim(s) for refund (filed as described insection 4.04(1) of this revenue procedure)that identifies the section 2053 claims orexpenses that now have become deductiblemust be attached to the Form(s) 843.

(2) Separate notifications for consider-ation for each section 2053 claim or ex-pense. To be properly filed under this rev-enue procedure, a separate notification forconsideration of a section 2053 protectiveclaim for refund must be filed as describedin section 5.03(1) of this revenue proce-dure for each section 2053 claim or ex-pense for which a section 2053 protectiveclaim for refund was filed. Specifically,an updated Form 706 may include morethan one updated Schedule PC. In addition,a notification for consideration of a sec-tion 2053 protective claim for refund mustnot include any claim not based on a de-duction under section 2053. Each notifi-cation for consideration of a section 2053protective claim for refund should indicatewhether other notifications for considera-tion are being filed contemporaneously orwere previously filed and the approximatedate of each such filing.

.04 Authority of a transferee or otherperson to represent the estate in pursuitof a claim for refund. If a fiduciary isno longer acting on behalf of the estateat the time that the amount deductible un-

der § 20.2053–1 is established and the sec-tion 2053 protective claim for refund isready for consideration, one or more per-sons that are transferees of the probate ornonprobate estate may establish under ap-plicable local law that person’s legal au-thority to pursue the claim for refund onbehalf of the estate. For purposes of thisprovision, any transferee or other personhaving established legal authority to pur-sue the claim for refund shall be deemedto have the authority to pursue the claimfor refund on behalf of all such transfereesor other persons. The transferee or otherperson must attach to the notification forconsideration of a section 2053 protectiveclaim for refund (filed as described in sec-tion 5.03 of this revenue procedure) doc-umentary evidence that substantiates thatperson’s assertion of authority to pursuethe claim. Depending on applicable locallaw, the evidence requirement may be sat-isfied by providing one or more of the fol-lowing: a certified copy of the final ac-counting of the estate showing the sourceof the initial tax payment; relevant testa-mentary instruments of the decedent suchas a will or trust instrument; an affidavitexecuted under penalties of perjury by theexecutor or other appropriate party confer-ring the authority or the right to pursue therefund to one or more transferees or otherpersons; and such other evidence as maybe requested by the Service. The Servicewill pay the refund of tax to the person orindividual who paid the tax, as required bysection 6402(a) and subject to regulationsunder that section.

.05 Consequences of a section 2053claim for refund on the marital and char-itable deduction. Because of the applica-tion of section 20.2053–1(d)(5)(ii), neitherthe charitable deduction nor the maritaldeduction is reduced by the amount of anyclaim or expense that may be the subjectof a section 2053 protective claim for re-fund until the claim or expense has metthe requirements for a deduction undersection 2053. The computation of theamount to be refunded under section 2053,as required on Form 843 or a supplementalForm 706, should identify any necessaryadjustment to the marital and charitabledeductions claimed by the estate, as wellas any other arithmetic adjustments thatresult from the allowance of the deduction.

2011–42 I.R.B. 531 October 17, 2011


This revenue procedure is applicablewith respect to protective claims for refundfiled on behalf of estates of decedents dy-ing on or after October 20, 2009, the datefinal regulations (T.D. 9468) under section2053 were published in the Federal Reg-ister (74 FR 53652), but only to the extent

that the relevant sections of the Code areapplicable to the decedent’s estate.

SECTION 7. DRAFTINGINFORMATION

The principal author of this rev-enue procedure is Karlene M. Lesho ofthe Office of Associate Chief Counsel

(Passthroughs & Special Industries). Forfurther information regarding this revenueprocedure, contact Karlene M. Lesho at(202) 622–3090 (not a toll free call).

October 17, 2011 532 2011–42 I.R.B.

Part IV. Items of General InterestWithdrawal of Notice ofProposed Rulemaking; Noticeof Proposed Rulemaking andNotice of Public Hearing

Section 67 Limitations onEstates or Trusts

REG–128224–06


ACTION: Withdrawal of notice of pro-posed rulemaking; notice of proposed rule-making and notice of public hearing

SUMMARY: This document with-draws the notice of proposed rulemak-ing (REG–128224–06, 2007–2 C.B.551 [72 FR 41243]) that was publishedin the Federal Register on July 27,2007, providing guidance on whichcosts incurred by estates or trusts otherthan grantor trusts (non-grantor trusts)are subject to the 2-percent floor formiscellaneous itemized deductionsunder section 67(a). This documentcontains proposed regulations that provideguidance on which costs incurred byestates or trusts other than grantor trusts(non-grantor trusts) are subject to the2-percent floor for miscellaneous itemizeddeductions under section 67(a). Theregulations affect estates and non-grantortrusts. This document also provides noticeof a public hearing on these proposedregulations.

DATES: Written and electronic commentsmust be received by December 7, 2011.Outlines of topics to be discussed at thepublic hearing scheduled for December 19,2011 must be received by December 7,2011.

ADDRESSES: Send submissions toCC:PA:LPD:PR (REG–128224–06),Room 5203, Internal Revenue Service, POBox 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–128224–06),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,

Washington, DC, or sent electroni-cally via the Federal eRulemaking Por-tal at http://www.regulations.gov/ (IRSREG–128224–06). The public hearingwill be held in the IRS Auditorium,Internal Revenue Building, 1111Constitution Avenue, NW, Washington,DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Jennifer N. Keeney, (202)622–3060; concerning submissions ofcomments, the hearing, or to be placed onthe building access list to attend the hear-ing, Richard A. Hurst, (202) 622–7180(not toll-free numbers).


Background

This document contains proposed reg-ulations amending 26 CFR Part 1 undersection 67 of the Internal Revenue Code(Code) by adding §1.67–4 regarding whichcosts incurred by an estate or a non-grantortrust are subject to the 2-percent floor formiscellaneous itemized deductions undersection 67(a).

Section 67(a) of the Code providesthat, for an individual taxpayer, miscel-laneous itemized deductions are allowedonly to the extent that the aggregate ofthose deductions exceeds 2 percent ofadjusted gross income. Section 67(b) ex-cludes certain itemized deductions fromthe definition of “miscellaneous itemizeddeductions.” Section 67(e) provides that,for purposes of section 67, the adjustedgross income of an estate or trust shall becomputed in the same manner as in thecase of an individual. However, section67(e)(1) provides that the deductions forcosts paid or incurred in connection withthe administration of the estate or trustthat would not have been incurred if theproperty were not held in such estate ortrust shall be treated as allowable in arriv-ing at adjusted gross income. Therefore,deductions described in section 67(e)(1)are not subject to the 2-percent floor formiscellaneous itemized deductions undersection 67(a).

A notice of proposed rulemaking(REG–128224–06, 2007–2 C.B. 551) was

published in the Federal Register (72 FR41243) on July 27, 2007. The proposedregulations provide that a cost is fullydeductible to the extent that the cost isunique to an estate or trust. If a cost is notunique to an estate or trust, such that an in-dividual could have incurred the expense,then that cost is subject to the 2-percentfloor. For this purpose, the proposed regu-lations clarify that it is the type of productor service provided to the estate or trustin exchange for the cost, rather than thedescription of the cost of that product orservice, that is tested to determine theuniqueness of the cost. The proposed reg-ulations also address costs subject to the2-percent floor that are included as partof a comprehensive commission or feepaid to the trustee or executor (“BundledFiduciary Fee”).

Written comments were received in re-sponse to the notice of proposed rulemak-ing. A public hearing was held on Novem-ber 14, 2007, at which several commenta-tors offered comments on the notice of pro-posed rulemaking.

On January 16, 2008, the SupremeCourt of the United States issued its de-cision in Michael J. Knight, Trustee ofthe William L. Rudkin Testamentary Trustv. Commissioner, 552 U.S. 181, 128 S.Ct. 782 (2008), holding that fees paid toan investment advisor by a non-grantortrust or estate generally are subject to the2-percent floor for miscellaneous item-ized deductions under section 67(a). TheCourt reached this decision on a readingof section 67(e) that differed from that inthe proposed regulations. The Court heldthat the proper reading of the languagein section 67(e), which asks whether theexpense “would not have been incurred ifthe property were not held in such trust orestate,” requires an inquiry into whethera hypothetical individual who held thesame property outside of a trust “custom-arily” or “commonly” would incur suchexpenses. Expenses that are “customarily”or “commonly” incurred by individualsare subject to the 2-percent floor.

Following the Supreme Court’s deci-sion in Knight, the Internal Revenue Ser-vice (IRS) and the Treasury Department is-sued Notice 2008–32, 2008–12 I.R.B. 593(March 24, 2008) to provide interim guid-

2011–42 I.R.B. 533 October 17, 2011

ance on the treatment of Bundled Fidu-ciary Fees. The notice provided that tax-payers will not be required to determinethe portion of a Bundled Fiduciary Feethat is subject to the 2-percent floor un-der section 67 for any taxable year be-ginning before January 1, 2008. In thenotice, the IRS and the Treasury Depart-ment reopened the comment period on theproposed regulations with regard to possi-ble factors on which to base safe harborsfor the allocation of a Bundled FiduciaryFee between costs subject to the 2-percentfloor and those exempt from the applica-tion of that floor. Written comments werereceived in response to the notice. TheIRS and the Treasury Department subse-quently issued Notice 2008–116, 2008–52I.R.B. 1372 (December 29, 2008) extend-ing the interim guidance provided in No-tice 2008–32 to taxable years that beginbefore January 1, 2009, Notice 2010–32,2010–16 I.R.B. 594 (April 19, 2010) ex-tending the interim guidance provided inNotice 2008–116 and Notice 2008–32 totaxable years that begin before January 1,2010, and Notice 2011–37, 2011–20 I.R.B.785 (May 16, 2011) extending the existinginterim guidance to taxable years that be-gin before the publication of final regula-tions in the Federal Register.

All comments were considered and areavailable for public inspection. Many ofthe comments recommended that the pro-posed regulations be withdrawn and thatnew proposed regulations be issued to al-low the public to comment on the impactof the Knight decision on the regulations tobe issued under section 67(e). After con-sideration of all of the comments receivedsince the issuance of the proposed regula-tions, the proposed regulations publishedon July 27, 2007, are withdrawn and thisdocument contains new proposed regula-tions.


In General

In Knight, the Supreme Court heldthat the deductibility of an expense undersection 67(e)(1) depends upon whetherthe cost is “commonly” or “customarily”incurred when such property is held in-stead by an individual. In other words,section “67(e)(1) excepts from the 2-per-cent floor only those costs that it would be

uncommon (or unusual, or unlikely) forsuch a hypothetical individual” holdingthe same property to incur (emphasis inoriginal). In applying this interpretation ofthe statute to investment advisory fees in-curred by a trust, the Court held that suchfees generally are not uncommonly in-curred by individual investors and thus aresubject to the 2-percent floor. The Courtnoted, however, that it is conceivable “thata trust may have an unusual investmentobjective, or may require a specialized bal-ancing of the interests of various parties,such that a reasonable comparison withindividual investors would be improper.”The Court went on to provide that, “insuch a case, the incremental cost of expertadvice beyond what would normally berequired for the ordinary taxpayer wouldnot be subject to the 2-percent floor.” TheCourt held that the investment advisoryfees of the trust in Knight properly weresubject to the 2-percent floor, and that thetrustee did not assert any such unusualfacts that would have brought this costwithin the exception.

These proposed regulations reflect thereasoning and holding in Knight and pro-vide guidance relating to the limited por-tion of the cost of investment advice thatis not subject to the 2-percent floor. To theextent that a portion (if any) of an invest-ment advisory fee exceeds the fee gener-ally charged to an individual investor, andthat excess is attributable to an unusual in-vestment objective of the trust or estateor to a specialized balancing of the inter-ests of various parties such that a reason-able comparison with individual investorswould be improper, that excess is not sub-ject to the 2-percent floor. Thus, wherethe costs charged to the trust do not exceedthe costs charged to an individual investor,the cost attributable to taking into accountthe varying interests of current beneficia-ries and remaindermen is included in theusual investment advisory fees and is notthe type of cost that is excluded from the2-percent floor under this narrow excep-tion. Individual investors commonly haveinvestment objectives that may require abalance between investing for income andinvesting for growth and/or a specializedapproach for particular assets. Commentsare requested on the types of incremen-tal charges, as described in this paragraph,that may be incurred by trusts or estates, as

well as a specific description and rationalefor any such charges.

Many of the comments received in re-sponse to Notice 2008–32 highlighted thelegislative intent of the provision imposingthe 2-percent floor for miscellaneous item-ized deductions. The commentators notedthat the intent was to simplify recordkeep-ing, reduce taxpayer errors, ease admin-istrative burdens for the IRS, and reducetaxpayer errors in distinguishing betweennondeductible personal expenditures anddeductible miscellaneous itemized deduc-tions. The IRS and the Treasury Depart-ment recognize the administrative diffi-culty of determining whether every typeof cost incurred by a trust or estate is thetype of cost that would be incurred com-monly or customarily by individuals own-ing the same property. Therefore, the pro-posed regulations provide simplified rulesfor the application of section 67(e).

Several commentators questioned theauthority of the IRS and the Treasury De-partment to require the unbundling of fidu-ciary commissions. However, the Knightdecision posited just such an unbundling inthe case of investment advisory costs ren-dered for certain services, the cost of whichexceeds the costs charged to an individualinvestor. In determining whether a cost issubject to the 2-percent floor, the relevantcost at issue under section 67(e)(1) shouldbe defined by reference to the products orservices that were provided in exchangefor that cost, rather than the label that isgiven to the cost. Therefore, if a fidu-ciary is performing services that are com-monly or customarily performed by an in-vestment advisor retained by an individualinvestor, then the costs attributable to thoseservices are subject to the 2-percent floor.

Many of the comments received in re-sponse to Notice 2008–32 objected to arule that would require any unbundlingof a unitary fee due to the cost and ad-ministrative difficulty of implementing aprocess to track which portions of a sin-gle fee are subject to the 2-percent floor.Some commentators anticipated that sucha rule would require corporate trustees toinvest in expensive software to track andmeasure the value of the various types ofservices provided on a trust-by-trust andyear-by-year basis.

These proposed regulations do not re-quire the allocation described in the July2007 proposed regulations. Instead, the

October 17, 2011 534 2011–42 I.R.B.

proposed regulations apply section 67(e)as interpreted by the Supreme Court inKnight, while also addressing the Govern-ment’s and taxpayers’ interests in reduc-ing the administrative burden of comply-ing with the tax law. The proposed regula-tions limit the costs that are subject to allo-cations pursuant to section 67(e) and allowthe use of any reasonable method to per-form such allocations.

Specifically, the proposed regulationsprovide that the portion of a bundled feeattributable to investment advice (includ-ing any related services that would be pro-vided to any individual investor as part ofthe investment advisory fee) will be sub-ject to the 2-percent floor. In addition, theproposed regulations provide that, exceptfor the portion so allocated to investmentadvice, a fiduciary fee not computed on anhourly basis is fully deductible with cer-tain exceptions. The exceptions are pay-ments made to third parties out of the bun-dled fee that would have been subject tothe 2-percent floor if they had been paiddirectly by the non-grantor trust or estate,and any payments for expenses separatelyassessed (in addition to the usual or ba-sic fiduciary fee or commission) by thefiduciary or other service provider that arecommonly or customarily incurred by anindividual owner of such property. An ex-ample of such a separately assessed ex-pense subject to the 2-percent floor mightbe an additional fee charged by the fidu-ciary for managing rental real estate ownedby the non-grantor trust or estate.

The proposed regulations allow thefiduciary and/or return preparer to useany reasonable method to make these al-locations. However, the amount of eachpayment (if any) out of the fiduciary’sfee or commission to a third party for ex-penses subject to the 2-percent floor, andof each separately assessed expense thatis commonly or customarily incurred byan individual owner of such property, isreadily identifiable without any discretionon the part of the fiduciary. Therefore,the reasonable method standard does notapply to these amounts that are to be de-ducted from the portion of the bundledfiduciary fee that is not subject to the2-percent floor.

Comments are requested on the typesof methods for making a reasonable allo-cation, including possible factors on whicha reasonable allocation is most likely to

be based, and on the related substantiationthat will be needed to satisfy the reason-able method standard proposed in theseregulations. Specifically, the IRS andthe Treasury Department are interestedin methods for reasonably estimating theportion of a bundled fee that is attributableto investment advice. For methods basedin whole or in part on time devoted toproviding investment advice, the IRS andTreasury Department ask for suggestionsfor alternatives to contemporaneous timerecords for specific activities that couldbe used to substantiate the reasonablenessof the allocation. The IRS and TreasuryDepartment have considered commentsregarding possible numerical or percent-age safe harbors in response to Notice2008–32. Commentators noted that, inmany cases, fiduciaries could not rely onsafe harbors because their fiduciary du-ties would require them to make a moreaccurate estimate so as to not harm thetrust or their beneficiaries. In addition,safe harbors could increase complexityby requiring complicated anti-abuse rules.Therefore, comments are requested onmethods other than numerical or percent-age safe harbors.

Effective Applicability Dates

Notice 2011–37 provides that taxpayerswill not be required to determine the por-tion of a Bundled Fiduciary Fee that is sub-ject to the 2-percent floor under section 67for taxable years beginning before the datethat these regulations are published as finalregulations in the Federal Register.

Availability of IRS Documents

The IRS notices cited in the preambleare published in the Cumulative Bulletinand are available at http://www.irs.gov.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It has also been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations, and becausethese regulation do not impose a collec-tion of information on small entities, the

Regulatory Flexibility Act (5 U.S.C. chap-ter 6) does not apply. Pursuant to section7805(f), the notice of proposed rulemak-ing preceding these regulations was sub-mitted to the Chief Counsel for Advocacyof the Small Business Administration forcomment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signed origi-nal and eight (8) copies) or electronic com-ments that are submitted timely to the IRS.The IRS and the Treasury Department alsorequest comments on the clarity of the pro-posed rules and how they can be made eas-ier to understand. All comments will beavailable for public inspection and copy-ing.

A public hearing has been scheduled forDecember 19, 2011, beginning at 10 a.m.in the IRS Auditorium, Internal RevenueBuilding, 1111 Constitution Avenue, NW,Washington, DC. Due to building securityprocedures, visitors must enter at the Con-stitution Avenue entrance. In addition, allvisitors must present photo identificationto enter the building. Because of access re-strictions, visitors will not be admitted be-yond the Internal Revenue Building lobbymore than 30 minutes before the hearingstarts. For information about having yourname placed on the building access list toattend the hearing, see the “FOR FUR-THER INFORMATION CONTACT” sec-tion of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic comments byDecember 7, 2011 and submit an outlineof the topics to be discussed and the timeto be devoted to each topic (signed orig-inal and eight (8) copies) by December 7,2011. A period of 10 minutes will be allot-ted to each person for making comments.An agenda showing the schedule of speak-ers will be prepared after the deadline forreceiving outlines has passed. Copies ofthe agenda will be available free of chargeat the hearing.


The principal author of these regula-tions is Jennifer N. Keeney, Office of theAssociate Chief Counsel (Passthroughs

2011–42 I.R.B. 535 October 17, 2011

and Special Industries). However, otherpersonnel from the IRS and the TreasuryDepartment participated in their develop-ment.

* * * * *

Withdrawal of Notice of ProposedRulemaking

Accordingly, under the authority of26 U.S.C. 7805, the notice of proposedrulemaking amending 26 CFR parts 1 and301 that was published in the FederalRegister on July 27, 2007, 72 FR 41243(REG–128224–06), is withdrawn.

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:



Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.67–4 is added to read

as follows:

§1.67–4 Costs paid or incurred by estatesor non-grantor trusts.

(a) In general. Section 67(e) providesan exception to the 2-percent floor on mis-cellaneous itemized deductions for coststhat are paid or incurred in connection withthe administration of an estate or a trustnot described in §1.67–2T(g)(1)(i) (a non-grantor trust) and which would not havebeen incurred if the property were not heldin such estate or trust. A cost is subject tothe 2-percent floor to the extent that it isincluded in the definition of miscellaneousitemized deductions under section 67(b), isincurred by an estate or non-grantor trust,and commonly or customarily would be in-curred by a hypothetical individual hold-ing the same property.

(b) “Commonly” or “Customarily” In-curred—(1) In general. In analyzing a costto determine whether it commonly or cus-tomarily would be incurred by a hypotheti-cal individual owning the same property, itis the type of product or service rendered tothe estate or non-grantor trust in exchangefor the cost, rather than the description ofthe cost of that product or service, that isdeterminative. In addition to the types of

costs described in paragraphs (b)(2), (3)and (4) of this section, costs that are in-curred commonly or customarily by indi-viduals also include expenses that do notdepend upon the identity of the payor (inparticular, whether the payor is an individ-ual or instead is an estate or trust). Suchcommonly or customarily incurred costsinclude, but are not limited to, costs in-curred in defense of a claim against the es-tate, the decedent, or the non-grantor trustthat are unrelated to the existence, validity,or administration of the estate or trust.

(2) Ownership costs. Ownership costsare costs that are chargeable to or incurredby an owner of property simply by reasonof being the owner of the property, such ascondominium fees, real estate taxes, insur-ance premiums, maintenance and lawn ser-vices, automobile registration and insur-ance costs, and partnership costs deemedto be passed through to and reportable bya partner. For purposes of section 67(e),ownership costs are commonly or custom-arily incurred by a hypothetical individualowner of such property.

(3) Tax preparation fees. The applica-tion of the 2-percent floor to the cost ofpreparing tax returns on behalf of the es-tate, decedent, or non-grantor trust will de-pend upon the particular tax return. Allestate and generation-skipping transfer taxreturns, fiduciary income tax returns, andthe decedent’s final individual income taxreturns are not subject to the 2-percentfloor. The costs of preparing other indi-vidual income tax returns, gift tax returns,and tax returns for a sole proprietorship ora retirement plan, for example, are costscommonly and customarily incurred by in-dividuals and thus are subject to the 2-per-cent floor.

(4) Investment advisory fees. Fees forinvestment advice (including any relatedservices that would be provided to anyindividual investor as part of an invest-ment advisory fee) are incurred commonlyor customarily by a hypothetical individ-ual investor and therefore are subject tothe 2-percent floor. However, certain in-cremental costs of investment advice be-yond the amount that normally would becharged to an individual investor are notsubject to the 2-percent floor. For this pur-pose, such an incremental cost is a special,additional charge added solely because theinvestment advice is rendered to a trust orestate instead of to an individual, that is at-

tributable to an unusual investment objec-tive or the need for a specialized balanc-ing of the interests of various parties (be-yond the usual balancing of the varying in-terests of current beneficiaries and remain-dermen), in each case such that a reason-able comparison with individual investorswould be improper.

(c) Bundled fees—(1) In general. If anestate or a non-grantor trust pays a singlefee, commission, or other expense (such asa fiduciary’s commission, attorney’s fee,or accountant’s fee) for both costs that aresubject to the 2-percent floor and costs (inmore than a de minimus amount) that arenot, then the single fee, commission, orother expense (bundled fee) must be allo-cated, for purposes of computing the ad-justed gross income of the trust or estatein compliance with section 67(e), betweenthe costs subject to the 2-percent floor andthose that are not. Out-of-pocket expensesbilled to the trust or estate are treated asseparate from the bundled fee.

(2) Exception. If a bundled fee is notcomputed on an hourly basis, only the por-tion of that fee that is attributable to in-vestment advice is subject to the 2-percentfloor; the remaining portion is not subjectto that floor. In addition, payments madefrom the bundled fee to third parties thatwould have been subject to the 2-percentfloor if they had been paid directly by thenon-grantor trust or estate are subject tothe 2-percent floor, as are any fees or ex-penses separately assessed by the fiduciaryor other payee of the bundled fee (in addi-tion to the usual or basic bundled fee) forservices rendered to the trust or estate thatare commonly or customarily incurred byan individual.

Example. A corporate trustee charges a percent-age of the value of the trust income and corpus asits annual commission. In addition, the trustee billsa separate amount to the trust each year as compen-sation for leasing and managing the trust’s rentalreal estate. The separate real estate management feeis subject to the 2-percent floor because it is a feecommonly or customarily incurred by an individualowner of rental real estate.

(3) Reasonable Method. Any reason-able method may be used to allocate abundled fee between those costs that aresubject to the 2-percent floor and thosecosts that are not, including without lim-itation the allocation of a portion of afiduciary commission that is a bundledfee to investment advice. The reason-able method standard does not apply to

October 17, 2011 536 2011–42 I.R.B.

determine the portion of the bundled feeattributable to payments made to third par-ties for expenses subject to the 2-percentfloor or to any other separately assessedexpense commonly or customarily in-curred by an individual, because thosepayments and expenses are readily iden-tifiable without any discretion on the partof the fiduciary or return preparer.

(d) Effective/applicability date. Theseregulations apply to taxable years begin-ning on or after the date that these regula-tions are published as final regulations inthe Federal Register.


(Filed by the Office of the Federal Register on September 6,2011, 8:45 a.m., and published in the issue of the FederalRegister for September 7, 2011, 76 F.R. 55322)

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 54 and 602

DEPARTMENT OF LABOREmployee Benefits SecurityAdministration29 CFR Part 2590

DEPARTMENT OF HEALTHAND HUMAN SERVICES45 CFR Part 147

Notice of ProposedRulemaking

Summary of Benefits andCoverage and the UniformGlossary

REG–140038–10

AGENCIES: Internal Revenue Service,Department of the Treasury; EmployeeBenefits Security Administration, Depart-ment of Labor; Centers for Medicare &Medicaid Services, Department of Healthand Human Services.

ACTION: Notice of proposed rulemak-ing.

SUMMARY: This document containsproposed regulations regarding disclosureof the summary of benefits and coverageand the uniform glossary for group healthplans and health insurance coverage in thegroup and individual markets under thePatient Protection and Affordable CareAct. This document implements the dis-closure requirements to help plans andindividuals better understand their healthcoverage, as well as other coverage op-tions. The templates and instructions tobe used in making these disclosures arebeing issued separately in today’s FederalRegister.

DATE: Comment date. Comments are dueon or before October 21, 2011.

ADDRESSES: Written comments may besubmitted to any of the addresses specifiedbelow. Any comment that is submitted toany Department will be shared with theother Departments. Please do not submitduplicates.

All comments will be made availableto the public. WARNING: Do not in-clude any personally identifiable informa-tion (such as name, address, or other con-tact information) or confidential businessinformation that you do not want publiclydisclosed. All comments are posted on theInternet exactly as received, and can beretrieved by most Internet search engines.No deletions, modifications, or redactionswill be made to the comments received, asthey are public records. Comments may besubmitted anonymously.

Department of Labor. Comments to theDepartment of Labor, identified by RIN1210–AB52, by one of the following meth-ods:

• Federal eRulemaking Portal:http://www.regulations.gov. Followthe instructions for submitting com-ments.

• Email: [email protected].• Mail or Hand Delivery: Office of

Health Plan Standards and ComplianceAssistance, Employee Benefits Secu-rity Administration, Room N–5653,U.S. Department of Labor, 200 Con-stitution Avenue NW, Washington, DC20210, Attention: RIN 1210–AB52.

Comments received by the Depart-ment of Labor will be posted withoutchange to http://www.regulations.gov andhttp://www.dol.gov/ebsa, and available forpublic inspection at the Public DisclosureRoom, N–1513, Employee Benefits Se-curity Administration, 200 ConstitutionAvenue, NW, Washington, DC 20210.

Department of Health and Human Ser-vices. In commenting, please refer to filecode CMS–9982–P. Because of staff andresource limitations, we cannot acceptcomments by facsimile (FAX) transmis-sion.

You may submit comments in one offour ways (please choose only one of theways listed):

1. Electronically. You may submitelectronic comments on this regulation tohttp://www.regulations.gov. Follow theinstructions under the “More Search Op-tions” tab.

2. By regular mail. You may mailwritten comments to the following addressONLY:

Centers for Medicare &Medicaid Services,

Department of Health andHuman Services,

Attention: CMS–9982–P,P.O. Box 8016,Baltimore, MD 21244–1850.

Please allow sufficient time for mailedcomments to be received before the closeof the comment period.

3. By express or overnight mail. Youmay send written comments to the follow-ing address ONLY:



Attention: CMS–9982–P,Mail Stop C4–26–05,7500 Security Boulevard,Baltimore, MD 21244–1850.

4. By hand or courier. If you prefer,you may deliver (by hand or courier) yourwritten comments before the close of thecomment period to either of the followingaddresses:

a. For delivery in Washington, DC—

2011–42 I.R.B. 537 October 17, 2011



Room 445-G, Hubert H.Humphrey Building,

200 Independence Avenue, SW,Washington, DC 20201.

(Because access to the interior of theHubert H. Humphrey Building is not read-ily available to persons without Federalgovernment identification, commentersare encouraged to leave their commentsin the CMS drop slots located in the mainlobby of the building. A stamp-in clock isavailable for persons wishing to retain aproof of filing by stamping in and retain-ing an extra copy of the comments beingfiled.)

b. For delivery in Baltimore, MD—



7500 Security Boulevard,Baltimore, MD 21244–1850.

If you intend to deliver your commentsto the Baltimore address, please call (410)786–7195 in advance to schedule your ar-rival with one of our staff members.

Comments mailed to the addresses in-dicated as appropriate for hand or courierdelivery may be delayed and received afterthe comment period.

Submission of comments on paperworkrequirements. You may submit commentson this document’s paperwork require-ments by following the instructions at theend of the “Collection of Information Re-quirements” section in this document.

Inspection of Public Comments: Allcomments received before the close ofthe comment period are available forviewing by the public, including anypersonally identifiable or confidentialbusiness information that is included ina comment. We post all comments re-ceived before the close of the commentperiod on the following website as soonas possible after they have been received:http://www.regulations.gov. Follow thesearch instructions on that Web site toview public comments.

Comments received timely will alsobe available for public inspection as theyare received, generally beginning ap-proximately three weeks after publicationof a document, at the headquarters ofthe Centers for Medicare & MedicaidServices, 7500 Security Boulevard, Balti-more, Maryland 21244, Monday throughFriday of each week from 8:30 a.m. to4 p.m. EST. To schedule an appoint-ment to view public comments, phone1–800–743–3951.

Internal Revenue Service. Commentsto the IRS, identified by REG–140038–10,by one of the following methods:

• Federal eRulemaking Portal:http://www.regulations.gov. Followthe instructions for submitting com-ments.

• Mail: CC:PA:LPD:PR(REG–140038–10), room 5205, Inter-nal Revenue Service, P.O. Box 7604,Ben Franklin Station, Washington, DC20044.

• Hand or courier delivery: Mon-day through Friday between thehours of 8 a.m. and 4 p.m. to:CC:PA:LPD:PR (REG–140038–10),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue,NW, Washington, DC 20224.

All submissions to the IRS will be opento public inspection and copying in room1621, 1111 Constitution Avenue, NW,Washington, DC from 9 a.m. to 4 p.m.

FOR FURTHER INFORMATIONCONTACT: Amy Turner or HeatherRaeburn, Employee Benefits SecurityAdministration, Department of Labor, at(202) 693–8335; Karen Levin, InternalRevenue Service, Department of the Trea-sury, at (202) 622–6080; Jennifer Libsteror Padma Shah, Centers for Medicare &Medicaid Services, Department of Healthand Human Services, at (301) 492–4252.

CUSTOMER SERVICEINFORMATION:Individuals interested in obtaining infor-mation from the Department of Laborconcerning employment-based health cov-erage laws may call the EBSA Toll-Free

Hotline at 1–866–444–EBSA (3272) orvisit the Department of Labor’s web-site (http://www.dol.gov/ebsa). In ad-dition, information from HHS on pri-vate health insurance for consumers canbe found on the Centers for Medicare& Medicaid Services (CMS) website(http://www.cms.hhs.gov/HealthInsRe-formforConsume/01_Overview.asp) andinformation on health reform can be foundat http://www.healthcare.gov.


I. Background

The Patient Protection and AffordableCare Act, Pub. L. 111–148, was enactedon March 23, 2010; the Health Care andEducation Reconciliation Act, Pub. L.111–152, was enacted on March 30, 2010(these are collectively known as the “Af-fordable Care Act”). The Affordable CareAct reorganizes, amends, and adds to theprovisions of part A of title XXVII of thePublic Health Service Act (PHS Act) re-lating to group health plans and health in-surance issuers in the group and individualmarkets. The term “group health plan” in-cludes both insured and self-insured grouphealth plans.1 The Affordable Care Actadds section 715(a)(1) to the EmployeeRetirement Income Security Act (ERISA)and section 9815(a)(1) to the Internal Rev-enue Code (the Code) to incorporate theprovisions of part A of title XXVII ofthe PHS Act into ERISA and the Code,and make them applicable to group healthplans, and health insurance issuers provid-ing health insurance coverage in connec-tion with group health plans. The PHSAct sections incorporated by this referenceare sections 2701 through 2728. PHS Actsections 2701 through 2719A are substan-tially new, though they incorporate someprovisions of prior law. PHS Act sections2722 through 2728 are sections of priorlaw renumbered, with some, mostly minor,changes.

Subtitles A and C of title I of the Af-fordable Care Act amend the requirementsof title XXVII of the PHS Act (changesto which are incorporated into ERISAby section 715). The preemption provi-sions of ERISA section 731 and PHS Act

1 1 The term “group health plan” is used in title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, and is distinct from the term “health plan,” as used in other provisionsof 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 CFR2590.731(a) and 45 CFR 146.143(a)) ap-ply so that the requirements of part 7 ofERISA and title XXVII of the PHS Act,as amended by the Affordable Care Act,are not to be “construed to supersede anyprovision of State law which establishes,implements, or continues in effect anystandard or requirement solely relatingto health insurance issuers in connectionwith group or individual health insurancecoverage except to the extent that suchstandard or requirement prevents the ap-plication of a requirement” of provisionsadded to the PHS Act by the AffordableCare Act. Accordingly, State laws withstricter health insurance issuer require-ments than those imposed by the PHSAct will not be superseded by those pro-visions. Preemption and State flexibilityunder PHS Act section 2715 are discussedmore fully below under section II.D.

The Departments of Health and HumanServices (HHS), Labor, and the Treasury(the Departments) are taking a phased ap-proach to issuing regulations implement-ing the revised PHS Act sections 2701through 2719A and related provisions ofthe Affordable Care Act. These proposedregulations propose standards for imple-menting PHS Act section 2715. As dis-cussed more fully below, templates and in-structions for meeting the disclosure re-quirements of PHS Act section 2715 arebeing issued separately in today’s FederalRegister.

II. Overview of the ProposedRegulations

A. Summary of Benefits and Coverage

1. In General

Section 2715 of the PHS Act, addedby the Affordable Care Act, directs theDepartments to develop standards for useby a group health plan and a health insur-ance issuer in compiling and providing asummary of benefits and coverage (SBC)that “accurately describes the benefitsand coverage under the applicable planor coverage.” The statute directs the De-partments, in developing such standards,to “consult with the National Associationof Insurance Commissioners” (referredto in this preamble as the “NAIC”), “aworking group composed of representa-tives of health insurance-related consumeradvocacy organizations, health insuranceissuers, health care professionals, patientadvocates including those representingindividuals with limited English profi-ciency, and other qualified individuals.”The NAIC convened a working group(NAIC working group) comprised of adiverse group of stakeholders. This work-ing group met frequently each month forover one year while developing its rec-ommendations.3 Throughout the process,NAIC working group draft documentsand meeting notes were displayed on theNAIC’s website for public review, andseveral interested parties filed formal com-ments. In addition to participation fromthe NAIC working group members, con-ference calls and in-person meetings wereopen to other interested parties and indi-viduals and provided an opportunity fornon-member feedback. The Departmentshave received transmittals from the NAIC

that include a recommended template forthe SBC (with instructions and samples tobe used in completing the template) and arecommended uniform glossary.4

These regulations generally proposestandards for group health plans (and theirplan administrators), and health insuranceissuers offering group or individual healthinsurance coverage, that will govern whoprovides an SBC, who receives an SBC,when the SBC will be provided, and how itwill be provided. The Departments invitecomment on the standards of the proposedregulations.

In conjunction with these proposedregulations, the Departments are publish-ing a document today that provides theproposed template for the SBC (with pro-posed instructions and sample languagefor completing the template) and the pro-posed uniform glossary that are identicalto the documents that were developed andagreed to by the entire NAIC workinggroup and then voted on and approved bythe full NAIC. Instead of proposing possi-ble changes to the NAIC’s proposed SBCtemplate and related materials, the docu-ment published today incorporates all ofthe NAIC working group’s recommendedmaterials (with the exception of a samplecoverage example5) and invites publiccomment. The Departments recognizethat changes to the SBC template may beappropriate to accommodate various typesof plan and coverage designs, to provideadditional information to individuals, orto improve the efficacy of the disclosuresrecommended by the NAIC. In addition,the SBC template and related documentswere drafted by the NAIC primarily foruse by health insurance issuers.6

In general, the Departments have heardconcerns about the potential redundancies

2 Code 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 theCode.

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 productwas 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); andhttp://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 ofthe 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 notaddress 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 pricinginformation necessary to perform coverage example calculations for all three coverage examples. HHS will update this information annually.

6 National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010 Letter to the Secretaries. Available 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-ments of the SBC requirement — includ-ing the uniform glossary and the coveragefacts labels — particularly for those plansand group health insurance issuers that al-ready provide a Summary Plan Descrip-tion (SPD) under 29 CFR 2520.104b–2.Comments are solicited on whether theSBC should be allowed to be providedwithin an SPD if the SBC is intact andprominently displayed at the beginning ofthe SPD (for example, immediately after acover page and table of contents), and ifthe timing requirements for providing theSBC (described in paragraph (a) of the pro-posed regulations) are satisfied. The De-partments also welcome further commentson ways the SBC might be coordinatedwith other group health plan disclosurematerials (e.g., application and open sea-son materials) to communicate effectivelywith participants and beneficiaries abouttheir coverage and make it easy for themto compare coverage options while alsoavoiding undue cost or burden on plansand group health insurance issuers.

Consistent with the goals of balancingeffective communication and ease of com-parison for individuals with minimizationof cost and duplication, other sections ofthis preamble outline and invite commenton potential approaches to major elementsof the SBC — the statutorily-required uni-form glossary and the coverage examples— in the interest of streamlining standardsand making implementation of these com-ponents as helpful and user-friendly for in-dividuals, and as workable and efficient aspossible.

As discussed below, PHS Act section2715 generally directs group health plansand health insurance issuers to complywith the SBC requirements beginning onor after March 23, 2012. Comments arerequested regarding factors that may affectthe feasibility of implementation withinthis time frame. After the public commentperiod on these documents, the Depart-ments will finalize the SBC template andinstructions. Consistent with PHS Actsection 2715(c), the Departments willperiodically review and update the docu-ments as appropriate, taking into accountpublic comments.

2. Providing the SBC

Paragraph (a) of the proposed regula-tions implements the general disclosure re-quirement and sets forth the proposed stan-dards for who provides an SBC, to whom,and when. PHS Act section 2715 gener-ally sets forth that an SBC be providedto applicants, enrollees, and policyhold-ers or certificate holders. PHS Act section2715(d)(3) places the responsibility to pro-vide an SBC on “(A) a health insurance is-suer (including a group health plan that isnot a self-insured plan) offering health in-surance coverage within the United States;or (B) in the case of a self-insured grouphealth plan, the plan sponsor or designatedadministrator of the plan (as such termsare defined in section 3(16) of ERISA).”7

Accordingly, these proposed regulationswould interpret PHS Act section 2715 toapply to both group health plans and healthinsurance issuers offering group or indi-vidual health insurance coverage. In addi-tion, consistent with the statute, these pro-posed regulations would make a plan ad-ministrator of a group health plan respon-sible for providing an SBC. Under the pro-posed regulations, the SBC would be pro-vided in writing free of charge.

In general, the proposed rules directthat the SBC be provided when a plan orindividual is comparing health coverageoptions. If the information in the SBCchanges between the time of application,when the coverage is offered, and whena policy is issued (often the case only forindividual market coverage), the proposalwould require that an updated SBC be pro-vided. If the information is unchanged,the SBC does not need to be providedagain, except upon request. This generalapproach is explained more fully below.

a. Provision of the SBC Automatically byan Issuer to a Plan

Paragraph (a)(1)(i) of the proposed reg-ulations provides that a health insurance is-suer offering group health insurance cov-erage provide the SBC to a group healthplan (including, for this purpose, its spon-sor) upon an application or request for in-formation by the plan about the health cov-

erage (see section II.A.2.c. of this pream-ble, below, for a discussion of this pro-posal). Under this proposal, the SBC mustbe provided as soon as practicable follow-ing the request, but in no event later thanseven days following the request. If anSBC is provided upon request for infor-mation about health coverage and the plansubsequently applies for health coverage,a second SBC will be provided automati-cally only if the information in the SBC haschanged. If there is a change to the infor-mation in the SBC before the coverage isoffered, or before the first day of coverage,the issuer must update and provide a cur-rent SBC to the plan no later than the dateof the offer (or no later than the first day ofcoverage, as applicable). The Departmentsrecognize that often the only change to theSBC is a final premium quote (usually inthe individual health insurance market orthe small group market). The Departmentsrequest comments on whether, in such cir-cumstances, premium information can beprovided in another way that is easily un-derstandable and useful to plan sponsorsand individuals, other than by sending anew, full SBC.

An issuer also must provide a newSBC if and when the policy, certificate,or contract (for simplicity, referred to col-lectively as a “policy” in the remainder ofthis preamble) is renewed or reissued. Inthe case of renewal or reissuance, if the is-suer requires written application materialsfor renewal (in either paper or electronicform), it must provide the SBC no laterthan the date the materials are distributed.If renewal or reissuance is automatic, theSBC must be provided no later than 30days prior to the first day of the new policyyear.

b. Provision of the SBC Automaticallyby a Plan or Issuer to Participants andBeneficiaries

Under paragraph (a)(1)(ii) of the pro-posed regulations, a group health plan(including the plan administrator), anda health insurance issuer offering grouphealth insurance coverage, must provide

7 ERISA 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 sodesignated, 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 mayby regulation prescribe.

October 17, 2011 540 2011–42 I.R.B.

an SBC to a participant or beneficiary8

with respect to each benefit package of-fered for which the participant or ben-eficiary is eligible.9 The SBC must beprovided as part of any written applicationmaterials that are distributed by the plan orissuer for enrollment. If the plan does notdistribute written application materials forenrollment, the SBC must be distributedno later than the first date the participantis eligible to enroll in coverage for theparticipant and any beneficiaries. If thereis any change to the information requiredto be in the SBC before the first day ofcoverage, the plan or issuer must updateand provide a current SBC to a participantor beneficiary no later than the first day ofcoverage.

The plan or issuer must also providethe SBC to special enrollees within sevendays of a request for enrollment pursuantto a special enrollment period.10 Addition-ally, the plan or issuer must provide a newSBC if and when the coverage is renewed.Specifically, if written application materi-als are required for renewal (in either paperor electronic form), the SBC must be pro-vided no later than the date the materialsare distributed. If renewal is automatic, theproposed rules provide that the SBC mustbe provided no later than 30 days prior tothe first day of coverage in the new planyear.

c. Provision of the SBC Upon Request

The regulations propose that a healthinsurance issuer offering group health in-surance coverage provide the SBC to agroup health plan (and a plan or issuermust provide the SBC to a participant orbeneficiary) upon request, as soon as prac-ticable, but in no event later than sevendays following the request. Although PHSAct section 2715 does not specificallyreference furnishing SBCs on request,PHS Act section 2715(a) authorizes theDepartments to develop standards for pro-viding the SBC to applicants, enrollees,

policyholders, and certificate holders. TheDepartments believe that this provisionrecognizes that plans and individuals mayneed or desire the information providedin the SBC at times other than those setforth in the statute to ensure that the plansand individuals have continuous accessto coverage and cost information to makeinformed choices about health coverage.11

In addition, while the “upon request”provision may result in some additionaladministrative work for plans and issuers,the Departments have used discretion else-where in these proposed regulations tocreate special rules for avoiding duplica-tion and also propose to reduce burdenby facilitating electronic transmittal of theSBC, where appropriate. Accordingly,the Departments have sought to balanceproviding consumer access to SBCs withminimizing burdens on employers andinsurers.

d. Special Rules to Prevent UnnecessaryDuplication With Respect to Group HealthCoverage

The Departments propose, in paragraph(a)(1)(iii), three rules to streamline provi-sion of the SBC and prevent unnecessaryduplication with respect to group healthplan coverage. First, the requirement toprovide an SBC will be considered satis-fied for all entities if the SBC is providedby any entity, so long as all timing and con-tent requirements are also satisfied. Forexample, if a health insurance issuer offer-ing group health insurance coverage pro-vides a complete, timely SBC to the plan’sparticipants and beneficiaries, the plan’srequirement to provide the SBC will besatisfied.

Second, if a participant and any bene-ficiaries are known to reside at the sameaddress, providing a single SBC to that ad-dress will satisfy the obligation to providethe SBC for all individuals residing at thataddress. However, if a beneficiary’s lastknown address is different than the partic-

ipant’s last known address, a separate SBCmust be provided to the beneficiary at thebeneficiary’s last known address.

Finally, to further reduce unnecessaryduplication with respect to a group healthplan that offers multiple benefit packages,in connection with renewal, the plan andissuer only need to automatically provide anew SBC with respect to the benefit pack-age in which a participant or beneficiary isenrolled. SBCs are not required to be pro-vided automatically with respect to ben-efit packages in which the participant orbeneficiary is not enrolled. However, if aparticipant or beneficiary requests an SBCwith respect to another benefit package forwhich the participant or beneficiary is eli-gible, the SBC must be provided as soon aspracticable, but in no event later than sevendays following the request.

e. Provision of the SBC by an IssuerOffering Individual Market Coverage

Under these regulations, the Secretaryof HHS sets forth proposed standardsapplicable to individual health insurancecoverage for who provides an SBC, towhom, and when. The intent is to parallelthe proposed group market requirementsdescribed above, with only those changesnecessary to reflect the differences be-tween the two markets. For example,individual policyholders and dependentsin the individual market are comparableto group health plan participants and ben-eficiaries. Accordingly, an issuer offeringindividual health insurance coverage mustprovide an SBC as soon as practicableafter receiving a request for application ora request for information, but in no eventlater than seven days after receipt of therequest. If an individual later applies forthe same policy, a second SBC is requiredto be provided only if the information inthe SBC has changed.

An issuer that makes an offer of cover-age must provide an updated SBC only if ithas 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 becomeeligible 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 suchbenefit. 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 sectionII.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 andissuers 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.

11 Moreover, this provision is consistent with requirements under ERISA section 104(b)(4), which requires ERISA-covered group health plans to provide to participants and beneficiaries,upon request, copies of the instruments under which the plan is established or operated.

2011–42 I.R.B. 541 October 17, 2011

individual (including as a result of med-ical underwriting) that are required to bereflected in the SBC. Similarly, when anindividual accepts the offer of coverage, ifany terms are modified before the first dayof coverage, an updated SBC must againbe provided no later than the first day ofcoverage. A health insurance issuer willprovide an SBC annually at renewal, nolater than 30 days before the start of thenew policy year, reflecting any changes ef-fective for the new policy year.

Finally, similar to the group health cov-erage rules, for individual health insurancecoverage that covers more than one indi-vidual (or an application for coverage thatis being made for more than one individ-ual), if all those individuals are known toreside at the same address, a single SBCmay be provided to that address. This sin-gle SBC will satisfy the requirement toprovide the SBC for all individuals resid-ing at that address. However, if an individ-ual’s last known address is different thanthe last known address of the individual re-questing coverage, the policyholder, or adependent of either, a separate SBC mustbe provided to that individual at the indi-vidual’s last known address.

3. Content

PHS Act section 2715(b)(3) generallyprovides that the SBC must include:

a. Uniform definitions of standard insur-ance terms and medical terms so thatconsumers may compare health cov-erage and understand the terms of (orexceptions to) their coverage;

b. A description of the coverage, includ-ing cost sharing, for each categoryof benefits identified by the Depart-ments;

c. The exceptions, reductions, and limi-tations on coverage;

d. The cost-sharing provisions of thecoverage, including deductible, coin-surance, and copayment obligations;

e. The renewability and continuation ofcoverage provisions;

f. A coverage facts label that includesexamples to illustrate common ben-efits scenarios (including pregnancyand serious or chronic medical condi-tions) and related cost sharing based

on recognized clinical practice guide-lines;

g. A statement about whether the planprovides minimum essential coverageas defined under section 5000A(f) ofthe Code, and whether the plan’s orcoverage’s share of the total allowedcosts of benefits provided under theplan or coverage meets applicable re-quirements;

h. A statement that the SBC is only asummary and that the plan document,policy, or certificate of insuranceshould be consulted to determine thegoverning contractual provisions ofthe coverage; and

i. A contact number to call with ques-tions and an Internet web addresswhere a copy of the actual individualcoverage policy or group certificateof coverage can be reviewed and ob-tained.

The proposed regulations generally paral-lel the content elements set forth in thestatute. As discussed above, the Depart-ments are issuing a document that pro-poses to use the NAIC’s recommendedSBC template and instructions to satisfythe SBC content and appearance require-ments of PHS Act section 2715.

A few of the content elements includedin the NAIC’s recommendations warrantfurther explanation and discussion. Thetemplate developed by the NAIC work-ing group and transmitted to the Depart-ments includes four elements not speci-fied in the statute. Consistent with the De-partments’ approach of including all of theNAIC’s recommended materials, the pro-posed regulations include these additionalrecommended elements. The four addi-tional elements are: (1) for plans and is-suers that maintain one or more networksof providers, an Internet address (or similarcontact information) for obtaining a list ofthe network providers; (2) for plans and is-suers that maintain a prescription drug for-mulary, an Internet address where an in-dividual may find more information aboutthe prescription drug coverage under theplan or coverage; (3) an Internet addresswhere an individual may review and ob-tain the uniform glossary; and (4) premi-ums (or cost of coverage for self-insuredgroup health plans).

The Departments have included theseelements in the proposed regulation con-sistent with the NAIC’s recommendations.PHS Act section 2715(a) requires the De-partments to develop regulations for pro-vision of an SBC that accurately describesbenefits and coverage, which includes thestatutory content elements listed above,but the Departments believe they are notlimited to them. The statute also requiresthe Departments to consult with the NAICon the development of the standards forthe SBC, which includes content. TheDepartments’ proposal includes all of theNAIC’s recommendations, including theadditional content, and the Departmentsinvite comments on this approach and thefour additional SBC content elements. Forexample, with respect to the requirementto include an Internet address that may beused to obtain a copy of the uniform glos-sary, the Departments invite commentson whether the SBC also should disclosethe option to receive a paper copy of theuniform glossary upon request.

The NAIC instructions provide thatthe premium generally is the premiumas charged by the issuer (which may beevidenced in a rate table attached to theSBC),12 or the cost of coverage in thecase of self-insured plans. The NAIC in-structions further provide that, in the caseof a group health plan, a participant orbeneficiary should consult the employerfor information regarding the actual costof coverage net of any employer subsidy.This raises issues regarding the ability tocompare premium or cost information be-tween coverage options. The Departmentsrequest comments regarding whether theSBC should include premium or cost in-formation and if so, the extent to whichsuch information should reflect the actualcost to an individual net of any employercontribution, as well as the extent to whichthe cost information should include costsfor different tiers of coverage (for exam-ple, self-only, family). The Departmentsalso request comments on how this in-formation can be provided in a way thatallows individuals and plan sponsors tomake meaningful comparisons about thecost of their coverage options.

With respect to the definitions, the De-partments propose to follow an approach

12 See page 4 of the NAIC Draft Instruction Guide for Group Policies (available 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-ceived from the NAIC.13 Specifically,PHS Act section 2715(b)(3)(A) requiresplans and issuers to include in the SBC“uniform definitions” of common healthinsurance terms that are consistent withthe standards developed under section2715(g). PHS Act section 2715(g) directsthe Departments to “provide for the de-velopment of standards for the definitionsof terms used in health insurance cover-age,” including specified insurance-relatedterms and medical terms, as well as otherterms the Departments determine are im-portant to define.

The NAIC working group adopted atwo-part approach to the definitions. First,it drafted a consumer-friendly uniformglossary, which includes definitions ofhealth coverage terminology, to be pro-vided in connection with the SBC. TheNAIC’s uniform glossary provides simple,general, descriptive definitions designedto help consumers understand terms andconcepts commonly used in health cover-age. For example, “out-of-pocket limit”is defined in the NAIC’s uniform glossaryas:

The most you pay during a policy pe-riod (usually a year) before your healthinsurance or plan begins to pay 100 %of the allowed amount. This limit neverincludes your premium, balance-billedcharges or health care your health in-surance or plan doesn’t cover. Somehealth insurance or plans don’t countall of your co-payments, deductibles,co-insurance payments, out-of-networkpayments or other expenses toward thislimit.

In these proposed regulations, and as de-scribed more fully below under sectionII.C. of this preamble under the heading“Uniform Glossary”, the Departments pro-pose that the NAIC uniform glossary beused to satisfy the requirements of PHSAct 2715(g).

At the same time, these generic glossarydefinitions, alone, would not necessarilyhelp consumers understand what termsmean under a given plan or policy, norwould they support meaningful compar-ison of coverage options under PHS Actsection 2715(b)(3)(A) because the genericterms used in the glossary are not plan-or policy-specific and would not enableconsumers to understand what the termsactually mean in the context of a specificcontract. Therefore, in addition to the uni-form glossary, the NAIC working groupalso developed a “Why this Matters” col-umn for the draft SBC template (withinstructions for plans and issuers to usein completing the SBC template).14 Theinstructions specify how plans and issuersmust describe each coverage componentin the SBC. For example, the instructionsindicate what information must be pro-vided about a plan’s out-of-pocket limiton cost sharing, including whether copay-ments, out-of-network coinsurance, anddeductibles are subject to this limit.

In the Departments’ proposal, the “Whythis Matters” column in the SBC template,together with the instructions for complet-ing this column, constitute the definitionsrequired to be provided under PHS Actsection 2715(b)(3)(A). This approach al-lows plans and issuers flexibility in howthey design benefits and coverage features,but proposes that benefits and features bedescribed in a consistent way so that in-dividuals and employers will understandthem and appreciate differences from oneplan or policy to the next.

With respect to the element of the SBCregarding a statement about whether aplan or coverage provides minimum es-sential coverage (as defined under section5000A(f) of the Code) and whether theplan’s or coverage’s share of the total al-lowed costs of benefits provided underthe plan or coverage meets applicableminimum value requirements (minimum

essential coverage statement),15 becausethis content is not relevant until other el-ements of the Affordable Care Act areimplemented, this statement is not in theNAIC recommendations. For the samereason, these proposed regulations pro-vide that the minimum essential coveragestatement is not required to be in the SBCuntil the plan or coverage is required toprovide an SBC with respect to coveragebeginning on or after January 1, 2014.16

Starting in 2014, certain individualswho purchase health insurance coveragethrough the new Affordable Insurance Ex-changes (“Exchanges”) may be eligiblefor a premium tax credit to help pay for thecost of that coverage. In general, individ-uals offered affordable minimum essentialcoverage under an employer-sponsoredplan will not be eligible to receive a pre-mium tax credit. Correctly establishingwhether an employer is offering affordableminimum essential coverage is importantto individuals, employers, and Exchangesand necessitates the verification of certaininformation about employer coverage, in-cluding the information in the minimumessential coverage statement. The De-partments are exploring several reportingoptions under the Affordable Care Act andother applicable statutory authorities17

to determine how information about em-ployer-provided coverage can be providedand verified in a manner that limits theburden on individuals, employers, andExchanges. Because the statutory SBCelements include the information in theminimum essential coverage statement,the Departments invite comments on howemployers might provide this informationto employees and the Exchanges in a man-ner that minimizes duplication and burden.The Departments also recognize that someof the plan level information that is re-quired to be provided in the SBC is alsorequired to be provided under section 6056of the Code (requiring employers to report


14 National 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.

15 PHS Act section 2715(b)(3)(G) provides that this statement must indicate whether the plan or coverage (1) provides minimum essential coverage (as defined under section 5000A(f) of theCode) 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’ proposalrecognizes 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. TheNAIC will continue to work to develop a recommendation for this SBC requirement and will submit it to the Departments at a later date.

17 In addition to section 2715 of the PHS Act, these authorities include, but are not limited to, section 6056 of the Code, as added by section 1514 of the Affordable Care Act (requiringemployers 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 StandardsAct, 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 toemployer-sponsored health coverage pro-vided to employees) and are coordinatingtheir efforts to determine how and whetherthe same data can be used for multiplepurposes. To help develop a simple, effi-cient system for employers, the TreasuryDepartment and the IRS intend to requestcomments on employer information re-porting required under section 6056 of theCode.

The last SBC content item that mer-its further discussion is the coverage factslabel. The statute requires that an SBCcontain a “coverage facts label.” For easeof reference, the regulations propose touse “coverage examples,” the term rec-ommended by the NAIC, in place of thestatutory term. As specified in the statute,the proposed regulations provide that thecoverage examples illustrate benefits pro-vided under the plan or coverage for com-mon benefits scenarios, including preg-nancy and serious or chronic medical con-ditions. The coverage example would esti-mate what proportion of expenses under anillustrative benefits scenario might be cov-ered by a given plan or policy. Consumersthen could use this information to comparetheir share of the costs of care under dif-ferent plan or coverage options to make aninformed purchasing decision.

Under the proposed regulations, con-sistent with the recommendations of theNAIC working group, a benefits scenariois a hypothetical situation, consisting of asample treatment plan for a specified med-ical condition during a specific period oftime, based on recognized clinical prac-tice guidelines available through the Na-tional Guideline Clearinghouse. 18A ben-efits scenario would include the informa-tion needed to simulate how claims wouldbe processed under the scenario to gener-ate an estimate of cost sharing a consumercould expect to pay under the benefit pack-age. The document published contempo-raneously with these proposed regulationsincludes specific instructions and an HHSwebsite with specific information neces-sary to simulate benefits covered under the

plan or policy for specified benefits scenar-ios.19

These proposed regulations providethat the Departments may identify up to sixcoverage examples that may be requiredin an SBC. A maximum of six coverageexamples was discussed by the NAICworking group, so that consumers mayeasily read, understand, and compare howbenefits are provided for different com-mon medical conditions. In future years,the SBC may include coverage examplesin addition to the three proposed now. TheDepartments propose to limit the numberof coverage examples to no more than sixto limit the burden on plans and issuersand to ensure that there is adequate spacein the SBC to present coverage examplesin a manner that is easy to read and usefulfor individuals. A document publishedcontemporaneously with these proposedregulations adopts a phase-in approachto the coverage examples, and uses thethree coverage examples recommended byNAIC for inclusion first - having a baby(normal delivery), treating breast cancer,and managing diabetes.20

The Departments invite comments onthe proposed coverage examples, whetheradditional benefits scenarios would behelpful and, if so, what those examplesshould be. The Departments also invitecomments on the benefits and costs asso-ciated with developing multiple coverageexamples, as well as how multiple cover-age examples might promote or hinder theability to understand and compare termsof coverage. It is anticipated that anyadditional coverage examples will onlybe required to be provided prospectively,and that plans and issuers will be pro-vided with adequate time for compliance.Additionally, the Departments invite com-ments on whether and how to phase inthe implementation of the requirement toprovide coverage examples. For example,one option would provide that in 2012,coverage examples would only need tobe provided for the SBCs with respect toa subset of all benefits packages offeredby group health plans or health insurance

issuers, with coverage examples requiredto be provided for all benefits packagesin later years. Comments are invited onthese issues.

Comments are also requested onwhether it would be feasible or desir-able to permit plans and issuers to in-put plan- or policy-specific informationinto a central Internet portal, such asthe Federal health care reform website(www.healthcare.gov), that would usethe information to generate the coverageexamples for each plan or policy. Theexamples would then be available on theInternet portal for access by individuals.Alternatively, some have suggestedthat plans and issuers might provideindividuals, in a convenient format inthe SBC, the several items of plan- orpolicy-specific information necessary togenerate the coverage examples and areference to the Internet portal, so thatindividuals could input the informationinto the Internet portal to generate thecoverage examples for the plan or policy.The Departments note that the NAICconsidered and rejected the idea of a“cost calculator” or similar tool. TheDepartments solicit comments on thecost and benefits of these alternatives,including whether such approaches wouldprovide an efficient and effective methodfor individuals, plans, and issuers togenerate or access the coverage examplesand how any such approaches couldadequately serve individuals who do nothave regular access to the Internet (forexample, by disclosing in the SBC theoption to obtain paper copies of coverageexamples generated by the plan or issuer).

4. Appearance.

Section 2715 of the PHS Act sets forththe appearance for the SBC. Specifically,the statute provides that the SBC is to bepresented in a uniform formaţ utilizing ter-minology understandable by the averageplan enrollee, that does not exceed fourpages in length, and does not include printsmaller than 12-point font. The proposedregulations, consistent with the NAIC

18 The National Guideline Clearinghouse, within the Agency for Healthcare Research and Quality (AHRQ), publishes systematically developed statements to assist practitioner and patientdecisions 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 bythe Departments. These instructions, together with specific assumptions for coding data and reimbursement rates published today on HHS’s website comprise the Departments’ instructionsfor 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-pagelimitation as four double-sided pages.21

The Departments’ view is that this ap-proach will enable group health plans,participants and beneficiaries, and indi-viduals in the individual insurance marketto receive enough information to shop for,compare, and make informed decisions re-garding various coverage options that maybe available to them.22 The Departmentsseek comments on this approach.

Consistent with the NAIC recommen-dations provided to the Departments,23 un-der these proposed regulations, a grouphealth plan or a health insurance issuer willprovide the SBC as a stand-alone docu-ment in the form authorized by the Depart-ments and completed in accordance withthe instructions and guidance for complet-ing the SBC that are authorized by the De-partments. As noted earlier in this pream-ble, comments are invited on whether andhow the SBC might best be coordinatedwith the SPD and other group health plandisclosure materials.

5. Form and Manner

a. Group health plan coverage

To facilitate faster and less burdensomedisclosure of the SBC, and consistent withPHS Act section 2715(d)(2), the proposedregulations set forth rules to facilitate elec-tronic transmittal of the SBC, where ap-propriate. Specifically, an SBC providedby a plan or issuer to a participant or ben-eficiary may be provided in paper form.Alternatively, for plans and issuers sub-ject to ERISA or the Code, the SBC maybe provided electronically if the require-ments of the Department of Labor’s elec-tronic disclosure safe harbor at 29 CFR2520.104b–1(c) are met.24 For non-Fed-eral governmental plans, the regulationspropose that the SBC may be providedelectronically if either the substance of theprovisions of the Department of Labor’selectronic disclosure rule are met, or if the

provisions governing electronic disclosurein the individual health insurance market(described below) are met.

With respect to an SBC provided byan issuer to a plan, the SBC may beprovided in paper form or electronically(such as email transmittal or an Inter-net posting on the issuer’s website oron www.healthcare.gov). For electronicforms, the format must be readilyaccessible by the plan; the SBC must beprovided in paper form free of chargeupon request; and for Internet postings,the plan must be notified by paper oremail that the documents are available onthe Internet, and given the web address.The Departments invite comments onwhether any clarifications are neededwith respect to the “readily accessible”standard (for example, whether therequirements for passwords or specialsoftware create a sufficient burden that thedocuments are not “readily accessible”).The Departments also invite commenton whether modifications or adaptationsof the SBC are necessary to facilitate orimprove electronic disclosure.

b. Individual health insurance coverage

With respect to the individual market,the proposed regulations set forth the cir-cumstances in which an issuer offering in-dividual health insurance coverage mayprovide an SBC in either paper or elec-tronic form. Specifically, under these pro-posed regulations, unless specified other-wise by an individual, an issuer wouldbe required to provide an SBC (and anysubsequent SBC) in paper form if, uponthe individual’s request for information orrequest for an application, the individualmakes the request in person, by phone orby fax, or by U.S. mail or courier ser-vice; or if, when submitting an applica-tion, the individual completes the applica-tion for coverage by hand, by phone or byfax, or by U.S. mail or courier service. Asan alternative, the Departments seek com-

ments on whether it might be appropriateto allow issuers to fulfill an individual’s re-quest in electronic form, unless the indi-vidual requests a paper form.

Under this proposed rule, an issuer mayprovide an SBC (and any subsequent SBC)in electronic form (such as through an In-ternet posting or via electronic mail) if anindividual requests information or requestsan application for coverage electronically;or, if an individual submits an applicationfor coverage electronically.

To ensure actual receipt of an SBC pro-vided in electronic form, these proposedregulations would set forth certain safe-guards for electronic disclosure in the in-dividual market. Under the proposed reg-ulations, an issuer that provides the SBCelectronically must:

• Request that an individual acknowl-edge receipt of the SBC;

• Make the SBC available in an elec-tronic format that is readily usable bythe general public;

• If the SBC is posted on the Internet,display the SBC in a location that isprominent and readily accessible to theindividual and provide timely notice,in electronic or non-electronic form, toeach individual who requests informa-tion about, or an application for, cov-erage, that apprises the individual theSBC is available on the Internet and in-cludes the applicable Internet address;

• Promptly provide a paper copy of theSBC upon request without charge,penalty, or the imposition of any othercondition or consequence, and providethe individual with the ability to re-quest a paper copy of the SBC bothby using the issuer’s Web site (such asby clicking on a clearly identified boxto make the request) and by calling areadily available telephone line, thenumber for which is prominently dis-played on the issuer’s Web site, policydocuments, and other marketing mate-

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 foursingle-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 sections2715(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 comparinghealth coverage options.


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 reviewingthe 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 regulationsadopt 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 clearlyidentified as to purpose; and

• Ensure an SBC provided in electronicform is provided in accordance withthe appearance, content, and languagerequirements of this section.

The Departments welcome comments asto whether these or other safeguards areappropriate.

Finally, consistent with the standardsfor electronic disclosure, these proposedregulations seek to reduce the burden ofproviding an SBC to individuals shoppingfor coverage. Specifically, these proposedregulations provide that a health insuranceissuer that complies with the requirementsset forth at 45 CFR 159.120 (75 FR 24470)for reporting to the Federal health carereform insurance Web portal would bedeemed to comply with the requirementto provide the SBC to an individual re-questing information about coverage priorto submitting an application. Any SBCfurnished at the time of application or sub-sequently, however, would be required tobe provided in a form and manner consis-tent with the rules described above.

6. Language

PHS Act section 2715(b)(2) providesthat standards shall ensure that the SBC “ispresented in a culturally and linguisticallyappropriate manner.” These proposed reg-ulations provide that, to satisfy the require-ment to provide the SBC in a culturally andlinguistically appropriate manner, a planor issuer follows the rules for providingappeals notices in a culturally and lin-guistically appropriate manner under PHSAct section 2719, and paragraph (e) of itsimplementing regulations.25 In general,those rules provide that, in specified coun-ties of the United States, plans and issuersmust provide interpretive services, andmust provide written translations of theSBC upon request in certain non-Englishlanguages. In addition, in such counties,English versions of the SBC must disclosethe availability of language services inthe relevant language.26 The counties inwhich this must be done are those in whichat least ten percent of the population re-

siding in the county is literate only in thesame non-English language, as determinedin guidance. The Departments welcomecomments on whether and how to providewritten translations of the SBC in thesenon-English languages. (Note, nothingin these proposed regulations should beconstrued as limiting an individual’s rightsunder Federal or State civil rights statutes,such as Title VI of the Civil Rights Act of1964 (Title VI) which prohibits recipientsof Federal financial assistance, includingissuers participating in Medicare Advan-tage, from discriminating on the basis ofrace, color, or national origin. To ensurenon-discrimination on the basis of nationalorigin, recipients are required to take rea-sonable steps to ensure meaningful accessto their programs and activities by lim-ited English proficient persons. For moreinformation, see, “Guidance to FederalFinancial Assistance Recipients Regard-ing Title VI Prohibition Against NationalOrigin Discrimination Affecting LimitedEnglish Proficient Persons,” availableat http://www.hhs.gov/ocr/civilrights/re-sources/specialtopics/lep/policyguidance-document.html.)

B. Notice of Modifications

Section 2715(d)(4) of the PHS Act di-rects that a group health plan or health in-surance issuer offering group or individualhealth insurance coverage to provide no-tice of a material modification if it makesa material modification (as defined underERISA section 102, 29 U.S.C. 1022) inany of the terms of the plan or coverageinvolved that is not reflected in the mostrecently provided SBC. The proposed reg-ulations interpret the statutory reference tothe SBC to mean that only a material mod-ification that would affect the content ofthe SBC would require plans and issuersto provide this notice. In these circum-stances, the notice must be provided to en-rollees (or, in the individual market, pol-icyholders) no later than 60 days prior tothe date on which such change will be-come effective, if it is not reflected inthe most recent SBC provided and occursother than in connection with a renewal orreissuance of coverage. A material modi-

fication, within the meaning of section 102of ERISA, includes any modification to thecoverage offered under a plan or policythat, independently, or in conjunction withother contemporaneous modifications orchanges, would be considered by an aver-age plan participant (or in the case of in-dividual market coverage, an average indi-vidual covered under a policy) to be an im-portant change in covered benefits or otherterms of coverage under the plan or pol-icy.27 A material modification could be anenhancement of covered benefits or ser-vices or other more generous plan or pol-icy terms. It includes, for example, cover-age of previously excluded benefits or re-duced cost-sharing. A material modifica-tion could also be a material reduction incovered services or benefits, as defined in29 CFR 2520.104b–3(d)(3), or more strin-gent requirements for receipt of benefits.As a result, it also includes changes ormodifications that reduce or eliminate ben-efits, increase premiums and cost-sharing,or impose a new referral requirement.

PHS Act section 2715 and these pro-posed regulations describe the timing forwhen a notice of material modificationmust be provided in situations other thanupon renewal at the end of a plan or pol-icy year when a new SBC is providedunder the rules of paragraph (a) of theproposed rules. To the extent a plan orpolicy implements a mid-year change thatis a material modification, that affectsthe content of the SBC, and that occursother than in connection with a renewal orreissuance of coverage, paragraph (b) ofthe proposed regulations would require anotice of modifications to be provided 60days in advance of the effective date ofthe change. This notice could be satisfiedeither by a separate notice describing thematerial modification or by providing anupdated SBC reflecting the modification.For ERISA-covered group health planssubject to PHS Act section 2715, thisnotice is in advance of the timing underthe Department of Labor’s regulations setforth at 29 CFR 2520.104b–3 that requirethe provision of a summary of materialmodification (SMM) (generally not laterthan 210 days after the close of the planyear 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 materialreduction in covered services or benefits,not later than 60 days after the date ofadoption of the modification or change).In situations where a complete notice isprovided in a timely manner under PHSAct section 2715(d)(4), of course, anERISA-covered plan will also satisfy therequirement to provide an SMM underPart 1 of ERISA. The Departments in-vite comments on this expedited noticerequirement, including whether there areany circumstances where 60-day advancenotice might be difficult. The Depart-ments also solicit comments on the formatof the notice of modification, particularlyfor plans and issuers not subject to ERISA.

C. Uniform Glossary

Section 2715(g)(2) of the PHS Act di-rects the Departments to develop standardsfor definitions for at least the followinginsurance-related terms: co-insurance,co-payment, deductible, excluded ser-vices, grievance and appeals, non-pre-ferred provider, out-of-network co-pay-ments, out-of-pocket limit, preferredprovider, premium, and UCR (usual, cus-tomary and reasonable) fees. Section2715(g)(3) of the PHS Act directs theDepartments to develop standards for def-initions for at least the following medicalterms: durable medical equipment, emer-gency medical transportation, emergencyroom care, home health care, hospiceservices, hospital outpatient care, hospi-talization, physician services, prescriptiondrug coverage, rehabilitation services, andskilled nursing care. Additionally, thestatute directs the Departments to developstandards for such other terms that willhelp consumers understand and comparethe terms of coverage and the extent ofmedical benefits (including any excep-tions and limitations).

The NAIC working group recom-mended,28 and the Departments areproposing to adopt for this purpose, in-clusion of the following additional termsin the uniform glossary: allowed amount,balance billing, complications of preg-nancy, emergency medical condition,emergency services, habilitation services,health insurance, in-network co-insurance,

in-network co-payment, medically nec-essary, network, out-of-network co-insur-ance, plan, preauthorization, prescriptiondrugs, primary care physician, primarycare provider, provider, reconstructivesurgery, specialist, and urgent care. Theuniform glossary proposed by the De-partments is being issued in a documentpublished elsewhere in today’s FederalRegister.

The Departments invite comments onthe uniform glossary, including the contentof the definitions and whether there are ad-ditional terms that are important to includein the uniform glossary so that individualsand employers may understand and com-pare the terms of coverage and the extentof medical benefits (or exceptions to thosebenefits). For example, the Departmentsare considering whether glossary defini-tions of any of the following terms wouldbe helpful: claim, external review, ma-ternity care, preexisting condition, preex-isting condition exclusion period, or spe-cialty drug. It is anticipated that any addi-tional terms would be included in the uni-form glossary prospectively, and that plansand issuers would be provided adequatetime for compliance.

The proposed regulations direct a planor issuer to make the uniform glossaryavailable upon request within seven days.The timing of disclosure is intended to begenerally consistent with the proposed re-quirement, described in section II.A.2.c ofthis preamble. A plan or issuer may sat-isfy this disclosure requirement by provid-ing an Internet address where an individualmay review and obtain the uniform glos-sary, as described in section II.A.3 of thispreamble. This Internet address may be aplace the document can be found on theplan’s or issuer’s website. It may also bea place the document can be found on thewebsite of either the Department of Laboror HHS. However, a plan or issuer mustmake a paper copy of the glossary avail-able upon request. Group health plans andhealth insurance issuers will provide theuniform glossary in the appearance autho-rized by the Departments, so that the glos-sary is presented in a uniform format anduses terminology understandable by theaverage plan enrollee or individual cov-ered under an individual policy.

D. Preemption

Section 2715 of the PHS Act is in-corporated into ERISA section 715, andCode section 9815, and is subject to thepreemption provisions of ERISA sec-tion 731 and PHS Act section 2724 (im-plemented in 29 CFR 2590.731(a) and45 CFR 146.143(a)). These provisionsapply so that the requirements of part7 of ERISA and part A of title XXVIIof the PHS Act, as amended by theAffordable Care Act, are not to be“construed to supersede any provision ofState law which establishes, implements,or continues in effect any standard orrequirement solely relating to healthinsurance issuers in connection with groupor individual health insurance coverageexcept to the extent that such standard orrequirement prevents the application ofa requirement” of part A of title XXVIIof the PHS Act. Accordingly, State lawsthat impose on health insurance issuersrequirements that are stricter than thoseimposed by the Affordable Care Act willnot be superseded by the Affordable CareAct. Moreover, PHS Act section 2715(e)provides that the standards developedunder PHS Act section 2715(a), “shallpreempt any related State standardsthat require [an SBC] that providesless information to consumers than thatrequired to be provided under this section,as determined by the [Departments].”

Reading these two preemption provi-sions together, these proposed regulationswould not prevent States from imposingseparate, additional disclosure require-ments on health insurance issuers. TheDepartments recognize the need to balanceStates’ interest in information disclosureregarding insurance coverage with theprimary objective of PHS Act section2715 (as stated in the section title) of pro-viding for the development and use of ashort, uniform explanation of coveragedocument so that consumers may makeapples-to-apples comparisons of plan andcoverage options.

E. Failure to Provide

PHS Act section 2715(f), incorporatedinto ERISA section 715 and Code section9815, provides that a group health plan (in-


2011–42 I.R.B. 547 October 17, 2011

cluding its administrator), and a health in-surance issuer offering group or individualhealth insurance coverage, that “willfullyfails to provide the information requiredunder this section shall be subject to a fineof not more than $1,000 for each such fail-ure.” In addition, under PHS Act section2715(f), a separate fine may be imposedfor each individual or entity for whomthere is a failure to provide an SBC. Dueto the different enforcement jurisdictionsof the Departments, as well as their differ-ent underlying enforcement structures, themechanisms for imposing the new penaltymay vary slightly, as discussed below.

1. Department of HHS

Enforcement of Part A of Title XXVIIof the PHS Act, including section 2715,is generally governed by PHS Act sec-tion 2723 and corresponding regulationsat 45 C.F.R. 150.101 et seq. Under thoseprovisions, a State has the discretionto enforce the provisions against healthinsurance issuers in the first instance, andthe Secretary of HHS only enforces aprovision after the Secretary determinesthat a State has failed to substantiallyenforce the provision. If a State enforces aprovision such as PHS Act section 2715, ituses its own enforcement mechanisms. Ifthe Secretary enforces, the statute providesfor penalties of up to $100 per day for eachaffected individual.

PHS Act section 2715(f) provides thatan entity that willfully fails to provide theinformation required under PHS Act sec-tion 2715 shall be subject to a fine of notmore than $1,000 for each such failure.Such failure with respect to each enrolleeconstitutes a separate offense. This penaltycan only be imposed by the Secretary.

Paragraph (e) of the regulations pro-posed by HHS clarifies that States haveprimary enforcement authority over healthinsurance issuers for any violations,whether willful or not, using their ownremedies. These proposed regulations alsoclarify that PHS Act section 2715 does notlimit the Secretary’s authority to imposepenalties for willful violations regardlessof State enforcement. However, the Secre-tary intends to use enforcement discretionif the Secretary determines that the State isadequately addressing willful violations.

The Secretary of HHS has direct en-forcement authority for violations bynon-Federal governmental plans, and willuse the appropriate penalty for violationsof section 2715, depending on whetherthe violation is willful. Proposed para-graph (e) of the HHS regulations crossreferences the enforcement regulations at45 CFR 150.101 et seq., and states thatthey relate to any failure, regardless ofintent, by a health insurance issuer ornon-Federal governmental plan, to complywith any requirement of section 2715 ofthe PHS Act.

2. Departments of Labor and the Treasury

The Department of Labor enforces therequirements of part 7 of ERISA and theDepartment of the Treasury enforces therequirements of chapter 100 of the Codewith respect to group health plans main-tained by an entity that is not a governmen-tal entity. Generally the enforcement au-thority under these provisions applies to allnongovernmental group health plans, butthe Department of Labor does not enforcethe requirements of part 7 of ERISA withrespect to church plans.

On April 21, 1999, pursuant to section104 of the Health Insurance Portabilityand Accountability Act of 1996 (HIPAA),Pub. L. 104–191, the Secretaries enteredinto a memorandum of understanding29

that, among other things, established amechanism for coordinating enforcementand avoiding duplication of effort forshared jurisdiction. The memorandumof understanding applies, as appropriate,to health legislation enacted after April21, 1999 over which at least two ofthe Departments share jurisdiction,including section 2715 of the PHS Act asincorporated into ERISA and the Code.Therefore, in enforcing PHS Act section2715, the Departments of Labor andthe Treasury will coordinate to avoidduplication in the case of group healthplans that are not church plans and that arenot maintained by a governmental entity.

a. Department of Labor

The Department of Labor will issueseparate regulations in the future describ-ing the procedures for assessment of thecivil fine provided under PHS Act section

2715(f) as incorporated by section 715of ERISA. In accordance with ERISA502(b)(3), 29 U.S.C. 1132(b)(3), the Sec-retary of Labor is not authorized to assessthis fine against a health insurance issuer.

b. Department of the Treasury

If a group health plan (other than a planmaintained by a governmental entity) failsto comply with the requirements of chap-ter 100 of the Code, an excise tax is im-posed under section 4980D of the Code.The excise tax is generally $100 per dayper individual for each day that the planfails to comply with chapter 100 with re-spect to that individual. Numerous rulesunder section 4980D reduce the amount ofthe excise tax for failures due to reason-able cause and not to willful neglect. Spe-cial rules apply for church plans. Taxpay-ers subject to the excise tax under section4980D are required to report the failuresunder chapter 100 and the amount of theexcise tax on IRS Form 8928. See 26 CFR54.4980D–1, 54.6011–2, and 54.6151–1.

Section 2715(f) of the PHS Act sub-jects a plan sponsor or designated admin-istrator to a fine of not more than $1,000for each failure to provide an SBC. Unlessand until future guidance provides other-wise, group health plans subject to chap-ter 100 of the Code should continue to re-port the excise tax of section 4980D on IRSForm 8928 with respect to failures to com-ply with PHS Act section 2715. The Sec-retaries of Labor and the Treasury will co-ordinate to determine appropriate cases inwhich the fine of section 2715(f) should beimposed on group health plans that are notmaintained by a governmental entity.

F. Applicability

PHS Act section 2715 directs that therequirement for group health plans andhealth insurance issuers to provide an SBC“prior to any enrollment restriction” ap-plies not later than 24 months after thedate of enactment (i.e., beginning on or

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-lier, the statute also directs the Depart-ments to consult with the NAIC in devel-oping the SBC standards. The Depart-ments are appreciative of the detailed andvaluable work the NAIC and its workinggroup has performed in developing recom-mended standards and materials, includingthe NAIC’s extensive efforts to involve nu-merous stakeholder groups in that processfor over a year and to provide drafts of itsevolving materials to the Departments pe-riodically. Accordingly, as noted, the De-partments are appending to the documentaccompanying these proposed regulationsthe NAIC’s SBC work product for publiccomment.

The NAIC transmitted its final materi-als to the Departments on July 29, 2011.In recognition of existing disclosure re-quirements under 29 CFR 2520.104b–2 forthose group health plans that already pro-vide SPDs to participants and concernsraised about providing SBCs by the statu-tory deadline, comments are solicited onwhether and, if so, how practical consid-erations might affect the timing of imple-mentation. In coordination with the re-quest for comment elsewhere in this pre-amble on a potential phase-in of the im-plementation of the requirement to providecoverage examples, comments are invitedalso on how any potential phase-in of thoserequirements could or should be coordi-nated with the timing of the effectivenessof the general SBC standards.

The Departments also request com-ments on whether any special rules arenecessary to accommodate expatriateplans. The Departments note that, in thecontext of group health plan coverage,section 4(b)(4) of ERISA provides that aplan maintained outside the United Statesprimarily for the benefit of persons sub-stantially all of whom are nonresidentaliens is exempt from ERISA title I, in-cluding ERISA section 715. At the same

time, in the Department of HHS’s in-terim final regulations relating to medicalloss ratio (MLR) provisions published at75 FR 74864, a special rule was includedfor expatriate insurance policies. TheDepartments invite comments on whetherany adjustments are needed under PHSAct section 2715 for expatriate plans and,if so, for what types of coverage.

III. Economic Impact and PaperworkBurden

A. Executive Orders 12866 and13563–Department of Labor andDepartment of Health and HumanServices

Executive Orders 12866 and 13563direct agencies to assess all costs and ben-efits of available regulatory alternativesand, if regulation is necessary, to selectregulatory approaches that maximize netbenefits (including potential economic,environmental, public health and safetyeffects; distributive impacts; and equity).Executive Order 13563 emphasizes theimportance of quantifying both costs andbenefits, of reducing costs, of harmonizingrules, and of promoting flexibility. Thisrule has been designated a “significantregulatory action” under section 3(f) ofExecutive Order 12866. Accordingly, therule has been reviewed by the Office ofManagement and Budget.

A regulatory impact analysis (RIA)must be prepared for major rules with eco-nomically significant effects ($100 millionor more in any 1 year). As discussedbelow, the Departments have concludedthat these proposed regulations would nothave economic impacts of $100 million ormore in any one year or otherwise meetthe definition of an “economically signif-icant rule” under Executive Order 12866.Nonetheless, consistent with ExecutiveOrders 12866 and 13563, the Departmentshave provided an assessment of the poten-

tial benefits and the costs associated withthis proposed regulation. The Depart-ments invite comment on this assessment.

1. Current Regulatory Framework

Health plan sponsors and issuers do notcurrently uniformly disclose informationto consumers about benefits and coveragein a simple and consistent way. ERISA-covered group health plan sponsors are re-quired to describe important plan informa-tion concerning eligibility, benefits, andparticipant rights and responsibilities in asummary plan description (SPD). But asthese documents have increased in size andcomplexity — for example, due to the in-sertion of more legalistic language that isdesigned to mitigate the employer’s risk oflitigation — they have become more dif-ficult for participants and beneficiaries tounderstand.31 Indeed, a recent analysis ofSPDs from 40 employer health plans fromacross the United States (varying based ongeography, firm size, and industry sector)found that, on average, SPDs are generallywritten at a first year college reading level(with readability ranging from 9th gradereading level to nearly a college gradu-ate reading level).32 Moreover, the formatsof existing SPDs are not standardized; forexample, while these documents could bedozens of pages long, there is no require-ment that they include an executive sum-mary. Additionally, group health plans notcovered by ERISA, such as plans spon-sored by State and local governments, arenot required to comply with such disclo-sure requirements.

In the individual market, health insur-ance issuers are subject to various, diverseState disclosure laws. For example, Stateslike Massachusetts,33 New York,34 RhodeIsland,35 Utah36 and Vermont37 have es-tablished minimum standards for disclo-sure of health insurance information buteven within such States, consumer disclo-sures vary widely with respect to their re-

30 Section 2715 is applicable to both grandfathered and non-grandfathered health plans. 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 Statedisclosure laws are limited to current en-rollees, so that individuals shopping forcoverage do not receive information abouthealth insurance coverage options. OtherState disclosure requirements only extendto managed care organizations, and not toother segments of the market.38

2. Need for Regulatory Action

Congress added new PHS Act section2715 through the Affordable Care Act toensure that plans and issuers provide ben-efits and coverage information in a moreuniform format that helps consumers tobetter understand their coverage and bet-ter compare coverage options. These pro-posed regulations are necessary to providestandards for a summary of benefits andcoverage and a uniform glossary of termsused in health coverage. This approachis consistent with Executive Order 13563,which directs agencies to “identify andconsider regulatory approaches that reduceburdens and maintain flexibility and free-dom of choice for the public. These ap-proaches include [...] disclosure require-ments as well as provision of informationto the public in a form that is clear and in-telligible.”

The patchwork of consumer disclosurerequirements makes the process of shop-ping for coverage an inefficient, difficult,and time-consuming task. Consumers in-cur significant search costs while tryingto locate reliable cost, coverage and ben-efit data.39 Such search costs arise, in part,due to a lack of uniform information acrossthe various coverage options, particularlyin the individual market but also in somelarge employer plans. Although not di-rectly comparable, in Medigap, a marketwith standardized benefits, the average perbeneficiary search cost was estimated at$72 —far higher than in other insurancemarkets, such as auto insurance.40

Given this difficulty in obtaining rel-evant information, consumers may notalways make informed purchase decisionsthat best meet the health and financialneeds of themselves, their families, ortheir employees. Similarly, workers mayoverestimate or underestimate the value ofemployer-sponsored health benefits, andthus their total compensation; and healthinsurance issuers and employers may faceless pressure to compete on price, benefits,and quality, leading to inefficiency in thehealth insurance and labor markets.

Furthermore, research suggests thatmany consumers do not understand howhealth insurance works. Oftentimes,health insurance contracts and benefit de-scriptions are written in technical languagethat requires a sophisticated level of healthinsurance literacy many people do nothave.41 One study found that consumershave particular difficulty understandingcost sharing and tend to underestimatetheir coverage for mental health, substanceabuse and prescription drug benefits,while overestimating their coverage forlong-term care.42

3. Summary of Impacts

Table 1 below depicts an accountingstatement summarizing the Departments’assessment of potential benefits, costs, andtransfers associated with this regulatoryaction. The Departments have limited theperiod covered by the RIA to 2011–2013.Estimates are not provided for subsequentyears, because there will be significantchanges in the marketplace in 2014 relatedto the offering of new individual and smallgroup plans through the Affordable In-surance Exchanges, and the wide-rangingscope of these changes makes it difficultto project results for 2014 and beyond.

The direct benefits of these proposedregulations come from improved informa-tion, which will enable consumers to better

understand the coverage they have and al-low consumers choosing coverage to moreeasily compare coverage options. As a re-sult, consumers may make better cover-age decisions, which more closely matchtheir preferences with respect to benefitdesign, level of financial protection, andcost. The Departments believe that suchimprovements will result in a more effi-cient, competitive market. These proposedregulations would also benefit consumersby reducing the time they spend searchingfor and compiling health plan and cover-age information.

Under the proposed regulations, grouphealth plans and health insurance issuerswould incur costs to compile and providethe summary of benefits and coveragedisclosures (that includes coverage ex-amples (CEs)) and a uniform glossary ofhealth coverage and medical terms. TheDepartments estimate that the annualizedcost may be around $50 million, althoughthere is uncertainty arising from generaldata limitations and the degree to whicheconomies of scale exist for disclosing thisinformation. The costs estimates employassumptions that we believe fully captureexpected issuer and third-party administra-tor (TPA) costs, and perhaps overestimatethem if, for example, economies of scaleare achievable.

The Departments anticipate that theprovisions of these proposed regulationswill help consumers make better healthcoverage choices and more easily under-stand their coverage. In accordance withExecutive Orders 12866 and 13563, theDepartments believe that the benefits ofthis regulatory action justify the costs.

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-networkcosts, 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 issuinga 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 limitsunder 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.

42 D.W. Garnick, A.M. Hendricks, K.E. Thorpe, J.P. Newhouse, K. Donelan and R.J. Blendon. “How well do Americans understand their health coverage?” Health Affairs, 12(3). 1993:204–12.Available at: http://content.healthaffairs.org/content/12/3/204.full.pdf.

October 17, 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 aresult, make better choices.

Costs: Estimate YearDollar

DiscountRatePercent

Period Covered

$51 2011 7 2011–2013Annualized Monetized($ millions/year)

$47 2011 3 2011–2013

4. Benefits

In developing these proposed regu-lations, the Departments carefully con-sidered their potential effects, includingcosts, benefits, and transfers. Because ofdata limitations, the Departments did notattempt to quantify expected benefits ofthese proposed regulations. Nonetheless,the Departments were able to identify sev-eral benefits, which are discussed below.

These proposed regulations could gen-erate significant economic and socialwelfare benefits to consumers. Underthese proposed regulations, health insur-ance issuers and group health plans wouldprovide clear and consistent informationto consumers. Uniform disclosure is an-ticipated to benefit individuals shoppingfor, or enrolled in, group and individ-ual health insurance coverage and grouphealth plans. The direct benefits of theseproposed regulations come from improvedinformation, which will enable consumersto better understand the coverage theyhave and allow consumers choosing cov-erage to more easily compare options.As a result, consumers will make bettercoverage decisions, which more closelymatch their preferences with respect tobenefit design, level of financial protec-tion, and cost. The Departments believe

that such improvements will result in amore efficient, competitive market.

These proposed regulations would alsobenefit consumers by reducing the timethey spend searching for and compilinghealth plan and coverage information.As stated above, consumers in the indi-vidual market, as well as consumers insome large employer-sponsored plans,have a number of coverage options andmust make a choice using disclosuresand tools that vary widely in content andformat. A growing body of decision-mak-ing research suggests that the abundanceand complexity of information can over-whelm consumers and create a significantnon-price barrier to coverage.43 For ex-ample, a RAND study of California’sindividual market found that reducing bar-riers to information about health insuranceproducts would lead to increases in pur-chase rates comparable to modest pricesubsidies.44 By ensuring consumers haveaccess to readily available, concise, andunderstandable information about theircoverage options, these proposed regu-lations could reduce consumers’ cost ofobtaining information and may increasehealth insurance purchase rates.

Furthermore, greater transparency inpricing and benefits information will allowconsumers to make more informed pur-chasing decisions, resulting in cost-sav-

ings for some value-conscious consumerswho today pay higher premiums becauseof imperfect information about benefits.45

In particular, the use of coverage exam-ples46 called for by these proposed regu-lations would better enable consumers tounderstand how key coverage provisionsoperate in the context of recognizablehealth care situations and more mean-ingfully compare the level of financialprotection offered by a plan or coverage,resulting in potential cost-savings. 47,48

The Departments therefore expect thatuniform disclosures under these proposedregulations would enable consumersto derive more value from their healthcoverage and enhance the ability of plansponsors, particularly small businesses,to purchase products that are appropriateto both their needs and the health andfinancial needs of their employees.

Finally, these proposed regulations areexpected to facilitate consumers’ abilityto understand their coverage. As statedabove, research suggests that consumersdo not understand how coverage works orthe terminology used in health insurancepolicies. Consequently, consumers mayface unexpected medical expenses if theybecome seriously ill. They may also be-come confused by a coverage or paymentdecision made by their plan or issuer, lead-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 actuariallyequivalent 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 athttp://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 insurancecoverage. By making it easier for con-sumers to understand the key features oftheir coverage, these proposed regulationswould enhance consumers’ ability to usetheir coverage. Additionally, the uniformformat will make it easier for consumerswho change jobs or insurance coverage tosee how their new plan or coverage bene-fits are similar to and different from theirprevious coverage.

5. Costs

Section 2715 of the PHS Act and theseproposed regulations direct group healthplans and health insurance issuers to com-pile and provide a summary of benefits andcoverage (SBC) (that includes coverageexamples (CEs)) and a uniform glossaryof health coverage and medical terms. TheDepartments have attempted to quantifyone-time start-up costs as well as mainte-nance costs. However, there is uncertaintyarising from general data limitations andthe degree to which economies of scalecan be realized to reduce costs for issuersand TPAs. The costs estimates employ as-sumptions that we believe more than fullycapture expected issuer and third-partyadministrator costs, and perhaps overesti-mate them if, for example, economies ofscale are achievable. On the basis of suchassumptions, the Departments estimatethat issuers and TPAs will incur approxi-mately $25 million in costs in 2011, $73million in costs in 2012, and $58 millionin costs in 2013. These costs and themethodology used to estimate them arediscussed below, and presented in Tables2–5 below.

General Assumptions

In order to assess the potential admin-istrative costs relating to these proposedregulations, the Departments consultedwith industry experts to gain insight into

the tasks and level of resources required.Based on these discussions, the Depart-ments estimate that there will be twocategories of principal costs associatedwith the standards in these proposed regu-lations: one-time start-up costs and main-tenance costs. The one-time start-up costsinclude costs to develop teams to reviewthe new standards and costs to implementworkflow and process changes, partic-ularly the development of informationtechnology (IT) systems interfaces thatwould generate SBC disclosures throughdata housed in a number of different sys-tems. The maintenance costs include coststo maintain and update IT systems in com-pliance with the proposed standards; toproduce, review, distribute, and updatethe SBC disclosures;49 to produce anddistribute notices of modifications, and toprovide the glossary in paper form uponrequest.

With respect to the individual market,issuers are responsible for generating, re-viewing, updating, and distributing SBCs.With respect to employer-sponsored cov-erage, the Departments assume fully-in-sured plans will rely on health insuranceissuers, and self-insured plans will rely onTPAs, to perform these functions. Whileplans may prepare the SBC disclosures in-ternally, the Departments make this simpli-fying assumption because most plans ap-pear to rely on issuers and TPAs for thepurpose of administrative duties such asenrollment and claims processing.50 Thus,the Departments use health insurance is-suers and TPAs as the unit of analysis forthe purposes of estimating administrativecosts.

As discussed in the Medical Loss Ratio(MLR) interim final rule (75 FR 74918),the Departments estimate there are about440 firms offering comprehensive cov-erage in the individual, small, or largegroup markets, and 75 million coveredlives therein.51 The number of covered

lives includes individuals in the individualmarket as well as those in insured grouphealth plans.

With respect to the self-insured mar-ket, the Departments estimate there are77 million individuals in self-insuredERISA-covered plans and approximately14 million individuals in self-insurednon-Federal governmental plans.52 TheDepartments note that, according to 2007Economic Census data, there are 2,243TPAs providing administrative servicesfor health and/or welfare funds. However,there is some uncertainty as to whetherall of those TPAs serve self-insured plans;many issuers, for example, have subsidiarylines of business through administrativeservices only (ASO) contracts throughwhich they perform third-party adminis-trative functions for self-insured plans.53

Based on conversations with one nationalTPA association, the Departments assumethat about one-third of the total numberof TPAs, or about 748 TPAs, are relevantfor purposes of this analysis. However,given the considerable overlap betweenissuers and TPAs, the Departments recog-nize there may be fewer affected TPAs, sothese estimates should be considered anupper bound of burden estimates. Theseestimates may be adjusted proportionallyin the final regulations based upon addi-tional information about the number ofTPAs serving self-insured plans.

Because the SBC disclosures areclosely related to disclosures that issuersand TPAs provide today as a part of theirnormal operations (e.g., information onpremiums, covered benefits, and cost shar-ing), the incremental costs of compilingand providing such readily available in-formation in the proposed, standardizedformat is estimated to be modest.54 Theper-issuer or -TPA cost will largely bedetermined by its size (based on annualpremium revenues) and current prac-tices-most importantly, whether the issuer

49 Plans 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 CFR2520.104b–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 Stateregulators 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.

54 For example, issuers in the individual and small group markets already report some of the SBC information to HHS for display in the plan finder on the HealthCare.gov website. Issuershave 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 informationon 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 informationtechnology infrastructure, including a planbenefits design database. Moreover, withregard to issuers, administrative costs maybe related to the number of markets inwhich it operates (that is, individual, smallgroup, or large group market); the numberof policies it offers; and the number ofStates and licensed entities through whichit offers coverage.

To account for variations among is-suers, the Departments classify them bysize as small, medium, and large issuersbased on 2009 premium revenue for in-

dividual, small group, and large groupcomprehensive coverage.55 Consistentwith the assumptions that were used in theMLR interim final rule, small issuers aredefined as those earning up to $50 mil-lion in annual premium revenue; mediumissuers as those earning between $50 mil-lion and $1 billion in annual premiumrevenue; and large issuers as those earningmore than $1 billion in annual premiumrevenue. Based on these assumptions, theDepartments estimate there are 140 small,230 medium, and 70 large issuers.

To account for variations among TPAs,the Departments applied the proportions ofsmall, medium, and large issuers to the es-timated 750 TPAs. The Departments ac-knowledge that issuers and TPAs are dif-ferent and may not have the same size vari-ation. Nonetheless, given general data lim-itations, the Departments have adopted thismethodology, and, on its basis, estimatethat there are 240 small, 390 medium, and120 large TPAs. Table 2 below providesa synopsis of the number of issuers andTPAs.

Table 2. Issuer and TPA size classification

Small Medium Large

Issuers 140 230 70

TPAs 240 390 120

Staffing Assumptions

Table 6 below summarizes the Depart-ments’ staffing assumptions, including theestimated number of hours for each taskfor a small, medium, or large issuer/TPAas well as the percentage of time that dif-ferent professionals devote to each task.The following assumptions are based onthe best information available to the De-partments at this time. Particularly, thefollowing series of assumptions are basedon conversations with industry experts, theDepartments’ understanding of the regu-lated community, and previous analysis inthe MLR interim final rule. We welcomecomments that provide better informationor data about any of the following assump-tions.

IT Systems and Workflow ProcessChanges

The Departments estimate that it wouldtake a large issuer/TPA about 960 hoursto implement IT systems and workflowprocess changes, based on discussionswith a large issuer. The Departments as-sume that these IT systems and workflowprocess changes would be implementedonly by IT professionals. Furthermore,the Departments assume that a mediumissuer/TPA would need about 75% of

large issuer’s/TPA’s time, and a small is-suer would need about 50% of a largeissuer’s/TPA’s time, to implement IT sys-tems and workflow process changes.

The Departments estimate that it wouldtake a large issuer/TPA about 160 hoursto develop teams to analyze the new stan-dards in relation to their current workflowprocesses. The Departments assume suchteams would be comprised of IT profes-sionals (45%), benefits/sales profession-als (50%), and attorneys (5%). We scaledown the burden for medium and small is-suers/TPAs by assuming the same relativeproportion as above (that is, 75 percent and50 percent, respectively).

The Departments assume that eachissuer/TPA would incur a maintenancecost to maintain IT systems and addresschanges in regulatory requirements. TheDepartments assume the maintenance costwould equal 15% of the total one-timeburden noted above (for example, theDepartments assume it will take a largeissuer 15% of 1120 hours, or 168 hours).The Departments further assume that theteams to implement the maintenance taskswould be comprised of IT professionals(55%), benefits/sales professionals (40%),and attorneys (5%).

The Departments assume that theone-time and maintenance costs to imple-ment IT systems changes and to address

these regulations would be split betweenthe costs to produce SBCs (50%) and thecosts to produce the CEs (50%).

Production and Review of SBCs and CEs

The Departments estimate that each is-suer/TPA would need 3 hours to produce,and 1 hour to review, SBCs (not includingCEs) for all products. The Departmentsassume that the 3 hours needed to producethe SBCs would be equally divided be-tween IT professionals and benefits/salesprofessionals. The Departments assumethat the 1 hour needed to review theSBCs would be equally divided betweenfinancial managers for benefits/sales pro-fessionals and attorneys.

In 2012 and 2013, issuers and TPAswould produce CEs for three benefits sce-narios. The Departments estimate it willtake each issuer/TPA 90 hours to produce,and 30 hours to review, CEs for all appli-cable products. The Departments assumethat the 90 hours to produce the CEs wouldbe equally divided between IT profession-als and benefits/sales professionals. TheDepartments also assume that the 30 hoursto review the CEs would be equally di-vided between financial managers for ben-efits/sales professionals and attorneys.

The Departments assume that in 2012and 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 copyof the uniform glossary to 2.5% and 5%of covered individuals who receive a glos-sary. The Departments assume that indi-viduals who do not request a paper copyof the glossary will access it electronicallyusing the Internet address provided in theSBC.

For each individual who receives theSBC or uniform glossary in paper form,the Departments estimate that printing anddistributing the paper disclosures wouldtake clerical staff about 1 minute (0.02hours) in the group markets and about2 minutes (0.03 hours) in the individualmarket. The Departments assume that theindividual market has lower economiesof scale and, thus, increased distributioncosts.

Labor Cost Assumptions

Table 7 below presents the Depart-ments’ hourly labor cost assumptions(stated in 2011 dollars) for each staffcategory based on BLS data. The De-partments use mean hourly wage esti-mates from the Bureau of Labor Statis-tics’ (BLS) May 2009 National Occupa-tional Employment and Wage Estimates(accessed at http://www.bls.gov/oes/cur-rent/oes_nat.htm#00–0000) for com-puter systems analysts (Occupation Code15–1051), insurance underwriters (Occu-pation Code 13–2053), financial managers(Occupation Code 23–1011), executivesecretaries and administrative assistants(Occupation Code 43–6011), and attor-neys (Occupation Code 23–1011) as thebasis for estimating labor costs for 2011through 2013 and adjust the hourly wagerate to include a 33% fringe benefit esti-mate for private sector employees.56

Distribution Assumptions

The Departments make the followingassumptions regarding the distribution ofthe SBC disclosures (including CEs).57

These assumptions are based on the bestinformation available to the Departmentsat this time. Particularly, the followingseries of assumptions are based on con-versations with industry experts, the De-partments’ understanding of the regulatedcommunity, and previous analysis in theMLR interim final rule. The distributionassumptions are as follows:

• The SBCs would be limited to one perhousehold for family members locatedat the same residence. According toone large issuer, there are 2.2 coveredlives per family.

• The number of individuals who wouldreceive an SBC before enrolling in theplan or coverage equals 20% of thenumber of enrollees at any point dur-ing the course of a year.58

• In 2013, about 2% of covered individu-als would receive a notice of modifica-tions.59 Further, the burden and cost ofproviding such notices would be pro-portional to the combined burden andcost of providing the SBCs, includingCEs. In 2012, the first year of im-plementation, the number of notices ofmodifications would be negligible.

• Electronic distribution will accountfor 38 percent of all disclosures in thegroup market and 70 percent of all dis-closures in the individual market. Theestimate for the group market is basedon the methodology used to analyzethe cost burden for the DOL claimsprocedure regulation (OMB ControlNumber 1210–0053).60 The estimate

for the individual market is basedon statistics set forth by the NationalTelecommunications and InformationAdministration, which indicate that30% of Americans do not use the In-ternet.61

• SBC disclosures would be distributedwith usual marketing and enrollmentmaterials, thus, costs to mail the doc-uments will be negligible. However,notices of modifications would requiremailing and supply costs as follows:$0.44 postage cost per mailing and$0.05 supply cost per mailing.

• Printing costs $0.03 cents per side ofa page. Thus, it would cost $0.18 toprint a complete SBC (which is sixsides of a page based on the lengthof the NAIC sample completed SBC)and $0.12 cents to print the uniformglossary (which is four sides of a page,based on the length of the NAIC rec-ommended uniform glossary). Thiscost burden is in addition to the 1minute or 2 minutes it would take cler-ical staff to print and distribute theSBC or glossary.

Cost Estimate

The Tables below present costs and bur-den hours for issuers and TPAs associatedthe proposed disclosure requirements ofPHS Act section 2715. Tables 3–5 con-tain cost estimates for 2011, 2012, and2013, derived from the labor hours pre-sented in Table 3 and the hourly rate es-timates presented in Table 7, as well as es-timates of non-labor costs. Labor hour es-timates were developed for each one-timeand maintenance task associated with an-alyzing requirements, developing IT sys-tems, and producing SBCs (that includeCEs).

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.

58 Based on this assumption, the Departments estimated that small issuers or TPAs have about 180,000 shoppers in a given year, medium issuers or TPAs have 3,700,000 shoppers in a givenyear, 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 theplan 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 thatabout 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 aplan 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 planswill 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 thisassumption 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 AffectedEntities

Hour Burden Equivalent Cost

SBC Requirements —Issuers — One Time

440 88,000 $4,600,000

SBC Requirements —TPAs — One-Time

750 150,000 $7,800,000

Coverage ExampleRequirements —Issuers — One Time

440 88,000 $4,600,000

Coverage ExampleRequirements — TPAs — One-Time

750 150,000 $7,800,000

Total 240,000 $25,000,000


Number ofAffectedEntities

Hour Burden Equivalent Cost Cost Burden(non-labor)

Number ofDisclosures

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 ExampleRequirements — Issuers

440 140,000 $7,600,000 $1,500,000 41,000,000

Coverage ExampleRequirements — TPAs

750 240,000 $13,000,000 $1,800,000 49,000,000

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


Number ofAffectedEntities

Hour Burden Equivalent Cost Cost Burden(non-labor)

Number ofDisclosures

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 ExampleRequirements — Issuers

440 79,000 $4,300,000 $1,500,000 41,000,000

Coverage ExampleRequirements — TPAs

750 130,000 $7,200,000 $1,800,000 49,000,000

Notice of MaterialModifications — Issuers

440 10,000 $320,000 $330,000 820,000

Notice of MaterialModifications — TPAs

750 12,000 $400,000 $400,000 1,000,000

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 ofHours by Task

Hours

STAFFING HOURASSUMPTIONS

Small Issuer/TPA

Medium Issuer/TPA

Large Issuer/TPA

IT Development andWorkflow ProcessChange

One-Time

Develop Teams/ AnalyzeRequirements (IT,underwriting /sales)

80 120 160

IT Professionals 45% 36 54 72

Benefits / Sales

Professionals 50% 40 60 80

Attorneys 5% 4 6 8

ImplementingSystems Changes(IT and workflow)

480 720 960


October 17, 2011 556 2011–42 I.R.B.

Maintenance

Updating toAddress Changesin Requirements

84 126 168

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 ofSBCs

1 1 1

FinancialManagers —

50% 0.5 0.5 0.5

Benefits / Sales

Professionals

Attorneys 50% 0.5 0.5 0.5

Producing andDistributing PaperVersion of SBCs(Group Markets)

Clerical Staff 100% 0.02 0.02 0.02

Producing andDistributingPaper Version ofSBCs (IndividualMarket)

Clerical Staff 100% 0.03 0.03 0.02

CE Requirement(maintenance)

Producing 3 CEs 90 90 90


Benefits / Sales


2011–42 I.R.B. 557 October 17, 2011

Internal Review of3 CEs

30 30 30

FinancialManagers —

Benefits / Sales


Attorneys 50% 15 15 15

TABLE 7. Estimated Loaded Hourly Wages for Staff Categories

Staff Category BLS CodeLoaded Hourly

Wage (2011 Dollars)

IT Professionals Computer Systems Analysts(Occupation Code 15–1051)

$53.26

Financial Professionals — Benefits / Sales Insurance Underwriters(Occupation Code 13–2053)

$41.94

Financial Manager Financial Managers(Occupation Code 11–3031)

$75.32

Attorneys Lawyers(Occupation Code 23–1011)

$85.44

Clerical Staff Executive Secretaries and AdministrativeAssistants

(Occupation Code 43–6011)

$29.15

6. Regulatory Alternatives

Several provisions in these proposedregulations involved policy choices. Afirst policy choice involved determininghow to minimize the burden of providingthe SBC to individuals and employersshopping for health insurance coverage.The Departments recognize it may bedifficult for issuers to provide accurateinformation about the terms of coverageprior to underwriting. Accordingly, theproposed regulations provide that issuersoffering health insurance coverage in con-nection with the individual market thatmake information for their standard poli-cies available on the Secretary of HHS’sWeb portal (HealthCare.gov), in com-pliance with 45 CFR 159.120, will havesatisfied the requirement to provide anSBC to individuals who request informa-tion about coverage. The Departmentsbelieve this approach promotes regulatoryefficiency, minimizing the administrativeburden on health insurance issuers withoutlessening the protections under PHS Actsection 2715.

A second choice related to whether, inthe case of covered individuals residing atthe same address, one SBC would satisfythe disclosure requirement with respect toall such individuals, or whether multipleSBCs would be required to be provided.Under the proposed regulations, the De-partments allow a plan or issuer to providea single SBC in circumstances in which aparticipant and any beneficiaries (or, in theindividual market, the primary subscriberand any covered dependents) are known toreside at the same address.

In the group market, the proposed reg-ulations would further limit burden by re-quiring a plan or issuer to provide, at re-newal, a new SBC for only the benefitpackage in which a participant or benefi-ciary is enrolled. That is, if the plan of-fers multiple benefits packages, an SBC isnot required for each benefit package of-fered under the group health plan, whichthe Departments believe would otherwisecreate an undue burden during open sea-son. Participants and beneficiaries wouldbe able to receive upon request an SBCfor any benefits package for which they

are eligible. The Departments believe thisbalanced approach addresses the needs ofplans, issuers, and consumers, at renewal.

A third policy choice related to theinterpretation of the PHS Act section2715(d)(4), which requires notice of anymaterial modification (as defined for pur-poses of section 102 of ERISA) in any ofthe terms of the plan or coverage that isnot reflected in the most recently providedSBC. The Departments note that a mate-rial modification, within the meaning ofsection 102 of ERISA and its implement-ing regulations at 29 CFR 2520.104b–3,is broadly defined to include any modifi-cation to the coverage offered under theplan or policy, that independently, or inconjunction with other contemporaneousmodifications or changes, would be con-sidered by the average plan participant tobe an important change in covered benefitsor other terms of coverage under the planor policy. The proposed regulations wouldinterpret this provision as requiring noticeonly for a material modification that (1)affects the information in the SBC; and(2) occurs other than in connection with

October 17, 2011 558 2011–42 I.R.B.

renewal or reissuance of coverage (that is,a mid-plan or -policy year change). Thisapproach is consistent with the languageof section 2715(d)(4) and is more nar-rowly focused on what we interpret to bethe purpose of that provision.

B. Regulatory Flexibility Act—Departmentof Labor and Department of Health andHuman Services

The Regulatory Flexibility Act (RFA)requires agencies that issue a regulationto analyze options for regulatory relief ofsmall businesses if a proposed rule has asignificant impact on a substantial num-ber of small entities. The RFA generallydefines a ’’small entity’’ as (1) a propri-etary firm meeting the size standards of theSmall Business Administration (SBA), (2)a nonprofit organization that is not domi-nant in its field, or (3) a small governmentjurisdiction with a population of less than50,000. (States and individuals are not in-cluded in the definition of ’’small entity.’’)The Departments use as their measure ofsignificant economic impact on a substan-tial number of small entities a change inrevenues of more than 3 to 5 percent.

As discussed in the Web Portal interimfinal rule (75 FR 24481), HHS examinedthe health insurance industry in depth inthe Regulatory Impact Analysis we pre-pared for the proposed rule on establish-ment of the Medicare Advantage program(69 FR 46866, August 3, 2004). In thatanalysis, HHS determined that there werefew if any insurance firms underwritingcomprehensive health insurance policies(in contrast, for example, to travel insur-ance policies or dental discount policies)that fell below the size thresholds for’’small’’ business established by the SBA.Currently, the SBA size threshold is $7million in annual receipts for both healthinsurers (North American Industry Classi-fication System, or NAICS, Code 524114)and TPAs (NAICS Code 524292).

Additionally, as discussed in the Med-ical Loss Ratio interim final rule (75 FR74918), HHS used a data set created from2009 National Association of InsuranceCommissioners (NAIC) Health and LifeBlank annual financial statement data todevelop an updated estimate of the num-ber of small entities that offer comprehen-sive major medical coverage in the indi-vidual and group markets. For purposes of

that analysis, HHS used total Accident andHealth (A&H) earned premiums as a proxyfor annual receipts. HHS estimated thatthere were 28 small entities with less than$7 million in A&H earned premiums of-fering individual or group comprehensivemajor medical coverage; however, this es-timate may overstate the actual numberof small health insurance issuers offeringsuch coverage, since it does not include re-ceipts from these companies’ other lines ofbusiness. These 28 small entities representabout 6.4 percent of the approximately 440health insurers that are accounted for inthis RIA. Based on this calculation, the De-partments assume that there are an equalpercentage of TPAs that are small entities.That is, 48 small entities represent about6.4 percent of the approximately 750 TPAsthat are accounted for in this RIA.

The Departments estimate that issuersand TPAs earning less than $50 millionin annual premium revenue, including the76 small entities mentioned above, wouldincur costs of approximately $15,000,$26,000, and $15,000 per issuer/TPA in2011, 2012 and 2013, respectively. Num-bers of this magnitude do not approach theamounts necessary to be considered a “sig-nificant economic impact” on firms withrevenues in the order of millions of dol-lars. Additionally, as discussed earlier, theDepartments believe that these estimatesoverstate the number of small entities thatwill be affected by the requirements in thisproposed regulation, as well as the rela-tive impact of these requirements on theseentities, because the Departments havebased their analysis on the affected enti-ties’ total A&H earned premiums (ratherthan their total annual receipts). Accord-ingly, the Departments have determinedand certify that these proposed rules willnot have a significant economic impact ona substantial number of small entities, andthat a regulatory flexibility analysis is notrequired.

C. Special Analyses—Department of theTreasury

For purposes of the Department of theTreasury it has been determined that thisnotice of proposed rulemaking is not asignificant regulatory action as definedin Executive Order 12866. Therefore,a regulatory assessment is not required.It has also been determined that sec-

tion 553(b) of the Administrative Proce-dure Act (5 U.S.C. chapter 5) does notapply to these proposed regulations. Itis hereby certified that the collectionsof information contained in this noticeof proposed rulemaking will not have asignificant impact on a substantial numberof small entities. Accordingly, a regulatoryflexibility analysis under the RegulatoryFlexibility Act (5 U.S.C. chapter 6) isnot required. Section 54.9815–2715 ofthe proposed regulations would requireboth group health insurance issuers andgroup health plans to distribute an SBCand notice of any material modificationsto the plan that affect the informationrequired in the SBC. Under these proposedregulations, if a health insurance issuersatisfies the obligations to distribute anSBC and a notice of modifications, thoseobligations are satisfied not just for theissuer but also for the group health plan.For group health plans maintained bysmall entities, it is anticipated that thehealth insurance issuer will satisfy theseobligations for both the plan and theissuer in almost all cases. For this reason,these information collection requirementswill not impose a significant impact ona substantial number of small entities.Pursuant to section 7805(f) of the Code,this regulation has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

D. Unfunded Mandates ReformAct—Department of Labor andDepartment of Health and HumanServices

Section 202 of the Unfunded Man-dates Reform Act (UMRA) of 1995 statesthat agencies assess anticipated costs andbenefits before issuing any proposed rulethat includes a Federal mandate that couldresult in expenditure in any one year byState, local or Tribal governments, in theaggregate, or by the private sector, of $100million in 1995 dollars updated annuallyfor inflation. In 2011, that threshold levelis approximately $136 million. These pro-posed regulations include no mandates onState, local, or Tribal governments. Theseproposed regulations include directionsto produce standardized consumer disclo-sures that will affect private sector firms(for example, health insurance issuers of-

2011–42 I.R.B. 559 October 17, 2011

fering coverage in the individual and groupmarkets, and third-party administratorsproviding administrative services to grouphealth plans), but we tentatively concludethat these costs will not exceed the $136million threshold. Thus, we tentativelyconclude that these proposed regulationsdo not impose an unfunded mandate onState, local or Tribal governments or theprivate sector. Regardless, consistent withpolicy embodied in UMRA, this notice ofproposed rulemaking has been designedto be the least burdensome alternative forState, local and Tribal governments, andthe private sector while achieving the ob-jectives of the Affordable Care Act.

E. Paperwork Reduction Act

1. Department of Labor and Departmentof the Treasury

Section 2715 of the PHS Act directs theDepartments, in consultation with the Na-tional Association of Insurance Commis-sioners (NAIC) and a working group com-prised of stakeholders, to “develop stan-dards for use by a group health plan anda health insurance issuer in compiling andproviding to applicants, enrollees, and pol-icyholders and certificate holders a sum-mary of benefits and coverage explanationthat accurately describes the benefits andcoverage under the applicable plan or cov-erage.” Plans and issuers are required tobegin providing the disclosure (herein re-ferred to as a “summary of benefits andcoverage” or SBC) no later than March 23,2012.

To implement this provision, collectionof information requirements relate to theprovision of the following:

• Summary of benefits and coverage.• Coverage examples (as components of

each SBC).• A uniform glossary of health coverage

and medical terms (uniform glossary).• Notice of modifications.

In developing these collections of in-formation, the Departments have incorpo-rated the documents recommended by the

NAIC, including the SBC template (withinstructions, samples and a guide for cov-erage examples calculations to be used incompleting the template) and the uniformglossary. These collection instrumentswere developed over a period of severalmonths and agreed to by the entire NAICworking group and recommended to theDepartments by the NAIC.

Currently, the Departments are solicit-ing public comments for 60 days concern-ing these disclosures. The Departmentshave submitted a copy of these interim fi-nal regulations to OMB in accordance with44 U.S.C. 3507(d) for review of the infor-mation collections. The Departments andOMB are particularly interested in com-ments that:

• Evaluate whether the collection of in-formation is necessary for the properperformance of the functions of theagency, including whether the infor-mation will have practical utility;

• Evaluate the accuracy of the agency’sestimate of the burden of the collectionof information, including the validityof the methodology and assumptionsused;

• Enhance the quality, utility, and clarityof the information to be collected; and

• Minimize the burden of the collectionof information on those who are to re-spond, including through the use ofappropriate automated, electronic, me-chanical, or other technological collec-tion techniques or other forms of in-formation technology, for example, bypermitting electronic submission of re-sponses.

Comments should be sent to the Officeof Information and Regulatory Affairs,Attention: Desk Officer for the EmployeeBenefits Security Administration eitherby fax to (202) 395–5806 or by e-mail [email protected]. A copyof the ICR may be obtained by contact-ing the PRA addressee: G. ChristopherCosby, Office of Policy and Research,U.S. Department of Labor, EmployeeBenefits Security Administration, 200

Constitution Avenue, NW, Room N–5718,Washington, DC 20210. Telephone:(202) 693–8410; Fax: (202) 219–4745.These are not toll-free numbers. E-mail:[email protected]. ICRs submitted toOMB also are available at reginfo.gov(http://www.reginfo.gov/public/do/PRA-Main).

The Departments estimate 858 respon-dents each year from 2011–2013. This es-timate reflects approximately 220 issuersoffering comprehensive major medicalcoverage in the small and large group mar-kets, and approximately 638 third-partyadministrators (TPAs).62

To account for variation in firm size, theDepartments estimate a weighted burdenon the basis of issuer’s 2009 total earnedpremiums for comprehensive major med-ical coverage.63 The Departments definesmall issuers as those with total earnedpremiums less than $50 million; mediumissuers as those with total earned premi-ums between $50 million and $999 mil-lion; and large issuers as those with to-tal earned premiums of $1 billion or more.Accordingly, the Departments estimate ap-proximately 70 small, 115 medium, and35 large issuers. Similarly, the Depart-ments estimate approximately 204 small,332 medium, and 102 large TPAs.

2011 Burden Estimate

While the disclosures in these proposedregulations are not required until March2012, the Departments estimate a one-timeadministrative cost of about $36,000,000across the industry and a total of about680,000 burden hours to prepare for theprovisions of these proposed regulations.This calculation is made assuming issuersand TPAs will need to implement twoprincipal tasks: (1) develop teams to an-alyze current workflow processes againstthe new rules and (2) make appropriatechanges to IT systems and processes.

With respect to task (1), the Depart-ments estimate about 97,000 burdenhours and an equivalent cost of about$4,800,000. The Departments calculatethese 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 andTPAs 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 exampleswould 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

Small Issuer / TPA Medium Issuer/TPA Large Issuer/TPAHourlyWageRate

Hours Equivalent Cost Hours Equivalent Cost Hours Equivalent Cost

IT Professionals $53.26 36 $1,900 54 $2,900 72 $3,800

Benefits/SalesProfessionals

$41.94 40 $1,700 60 $2,500 80 $3,400

Attorneys $85.44 4 $340 6 $510 8 $680

Total perissuer/TPA

80 $3,900 120 $5,900 160 $7,900

Total for allissuers/TPAs

22,000 $1,100,000 53,000 $2,600,000 22,000 $1,100,000

With respect to task (2), the Depart-ments estimate about 580,000 burden

hours and an equivalent cost of about $31,000,000. The Departments calculatethese estimates as follows:

Task 2: IT Changes




Total perissuer/TPA

480 $26,000 720 $38,000 960 $51,000


130,000 $7,100,000 320,000 $17,000,000 130,000 $7,000,000

The Departments assume the totalone-time administrative burden will bedivided equally between 2011 and 2012.Thus, in 2011, the Departments estimatea one-time administrative cost of about$18,000,000 across the industry and about340,000 hours. The Departments assumeissuers and TPAs will incur no other costsin 2011 related to the proposed collectionof information.


The estimate hour and cost burden forthe collections of information in 2012 areas follows:

• The Departments estimate that therewill be about 77,000,000 SBC re-sponses.

• The Departments assume that ofthe total number of SBC responses,38% would be sent electronically inthe small and large group markets.Accordingly, the Departments estimatethat about 29,000,000 SBCs would beelectronically distributed, and about48,000,000 SBCs would be distributedin paper form. The Departmentsassume there are no costs associatedwith electronic disclosures; thereare costs only with regard to paperdisclosures.

Summary of Benefits and Cover-age (not including coverage examples)— The estimated hour burden is about820,000 hours, and the estimated total costis about $30,000,000. The Departmentscalculate these estimates as follows:

2011–42 I.R.B. 561 October 17, 2011

Task 1: Equivalent Costs for Producing SBCs



IT Professionals $53.26 1.5 $80 1.5 $80 1.5 $80


$41.94 1.5 $63 1.5 $63 1.5 $63

FinancialManagers

$75.32 0.5 $38 0.5 $38 0.5 $38

Attorneys $85.44 0.5 $43 0.5 $43 0.5 $43

Total perissuer/TPA

4 $220 4 $220 4 $220


1100 $61,000 1800 $100,000 550 $31,000

Task 2: Equivalent Costs for Distributing SBCs

Hourly WageRate

Hours per SBC Total Numberof SBCs

Total Hours Total EquivalentCost

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 — Theestimated hour burden is about 100,000

hours, and the estimated total cost is about $8,700,000. The Departments calculatethese estimates as follows:

Task 2: Equivalent Costs for Producing Coverage Examples





$41.94 45 $1,900 45 $1,900 45 $1,900

FinancialManagers

$75.32 15 $1,100 15 $1,100 15 $1,100

Attorneys $85.44 15 $1,300 15 $1,300 15 $1,300

Total perissuer/TPA

120 $6,700 120 $6,700 120 $6,700


33,000 $1,900,000 53,000 $3,000,000 16,000 $900,000

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-partments assume that in 2012, issuers andTPAs will begin responding to glossaryrequests to covered individuals, and that2.5% of covered individuals, who receivepaper SBCs, will request glossaries. TheDepartments further estimate that the bur-den and cost of providing the notices to be2.5% of the burden and cost of distributingpaper SBCs, plus an additional cost bur-den of $0.49 for each glossary (including$0.44 for first-class postage and $0.05 forsupply costs). Accordingly, in 2012, theDepartments estimate a total cost of about$1,300,000 and 21,000 burden hours asso-ciated with about 1,200,000 glossary re-quests.

Task 4: One-Time AdministrativeCosts — As mentioned above, the Depart-ments estimate a one-time administrativecost of about $36,000,000 across the in-dustry and a total of about 680,000 burdenhours, and assume this burden will beequally divided between 2011 and 2012.Thus, in 2012, the Departments estimatea one-time administrative cost of about$18,000,000 across the industry and about340,000 burden hours.

The total 2012 burden estimate is about$58,000,000. The total number of burdenhours is about 1,300,000.


Task 1: Summary of Benefits andCoverage (not including coverage exam-ples) — The number of SBC responsesis assumed to remain constant. Thus, in2013, the Departments again estimate a to-tal cost of about $30,000,000 and about820,000 burden hours for SBCs (not in-cluding coverage examples).

Task 2: Coverage Examples — TheDepartments again estimate a total costof about $8,700,000 and 100,000 burdenhours for coverage examples.

Task 3: Notices of Modifications —The Departments assume that in 2013,issuers and TPAs would send notices ofmodifications to covered individuals, andthat 2% of covered individuals wouldreceive such notice. The Departmentsfurther estimate that the burden and costof providing the notices to be 2% of thecombined burden and cost of the SBCsincluding the coverage examples, plusan additional cost burden for $0.49 foreach paper notice (including $0.44 forfirst-class postage and $0.05 for supplycosts). Accordingly, in 2013, the De-partments estimate a total cost of about$1,400,000 and 18,000 burden hours as-sociated with about 1,500,000 notices ofmodification.

Task 4: Glossary Requests — The De-partments assume that in 2013, issuers andTPAs will again respond to glossary re-quests to covered individuals, and that 5%of covered individuals, who receive paperSBCs, will request glossaries. The De-partments further estimate that the burdenand cost of providing the glossaries to be5% of the burden and cost of distributingpaper SBCs, plus an additional cost bur-den for $0.49 for each glossary (including$0.44 for first-class postage and $0.05 forsupply costs). Accordingly, in 2013, theDepartments estimate a total cost of about$2,700,000 and 41,000 burden hours asso-ciated with 2,400,000 glossary requests.

Task 5: Maintenance AdministrativeCosts — In 2013, the Departments as-sume that issuers and TPAs will need tomake updates to address changes in stan-dards, and, thus, incur 15% of the one-timeadministrative burden. Accordingly, theestimated hour burden is about 100,000hours, and the estimated total cost is about$5,400,000. The Departments calculatethese estimates as follows:




IT Professionals $53.26 46.2 $2,500 69.3 $3,700 92.4 $4,900

Benefits / SalesProfessionals

$41.94 33.6 $1,800 50.4 $2,700 67.2 $3,600

Attorneys $85.44 4.2 $220 6.3 $340 8.4 $450

Total perissuer/TPA

84 $4,500 126 $6,700 168 $8,900


23,000 $1,200,000 56,000 $3,000,000 23,000 $1,200,000

2011–42 I.R.B. 563 October 17, 2011

The total 2013 cost estimate is about$48,000,000.The total number of burdenhours is about 1,100,000 hours.

The Departments note that persons arenot required to respond to, and generallyare not subject to any penalty for failing to

comply with, an ICR unless the ICR has avalid OMB control number.

The 2012–2013 paperwork burden esti-mates are summarized as follows:

Type of Review: New collection.

Agencies: Employee Benefits Security Administration, Department of Labor; Internal Revenue Service, U.S. Department ofthe 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 (InternalRevenue Service).

Estimated Total Annual Burden Cost: $5,100,000 (Employee Benefits Security Administration); $5,100,000 (Internal RevenueService).

2. Department of Health and HumanServices

The Department estimates 333 respon-dents each year from 2011–2013. This es-timate reflects the approximately 220 is-suers offering comprehensive major med-ical coverage in the individual market andto fully-insured non-federal governmen-tal plans, and 113 TPAs acting as serviceproviders for self-insured non-federal gov-ernmental plans.65

To account for variation in firm size, theDepartment estimates a weighted burdenon the basis of issuer’s 2009 total earnedpremiums for comprehensive major med-ical coverage.66 The Department defines

small issuers as those with total earned pre-miums less than $50 million; medium is-suers as those with total earned premiumsbetween $50 million and $999 million; andlarge issuers as those with total earned pre-miums of $1 billion or more. Accordingly,the Department estimates approximately70 small, 115 medium, and 35 large is-suers. Similarly, the Department estimatesapproximately 36 small, 59 medium, and18 large TPAs.


While the disclosures in these proposedregulations are not required until March2012, the Department estimates a one-time

administrative cost of about $14,000,000across the industry and 270,000 burdenhours to prepare for the provisions of theseproposed regulations. This calculation ismade assuming issuers and TPAs will needto implement two principal tasks: (1) de-velop teams to analyze current workflowprocesses against the new standards and(2) make appropriate changes to IT sys-tems and processes.

With respect to task (1), the Departmentestimates about 38,000 burden hours, andan equivalent cost of about $1,900,000.The Department calculates these estimatesas follows:67

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 Departmentof 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 numberof 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 includingcoverage 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





$41.94 40 $1,700 60 $2,500 80 $3,400

Attorneys $85.44 4 $340 6 $510 8 $680

Total perissuer/TPA

80 $3,900 120 $5,900 160 $7,900


8,500 $420,000 21,000 $1,000,000 8,500 $450,000

With respect to task (2), the Departmentestimates 230,000 burden hours, and an

equivalent cost of out $12,000,000. The Department calculates these estimates asfollows:

Task 2: IT Changes




Total perissuer/TPA

480 $26,000 720 $38,000 960 $51,000


51,000 $2,700,000 125,000 $6,700,000 51,000 $2,700,000

The Department assumes the total one-time administrative burden will be dividedequally between 2011 and 2012. Thus, in2011, the Department estimates a one-timeadministrative cost of about $7,000,000across the industry and 135,000 burdenhours. The Department assumes issuersand TPAs will incur no other costs in 2011related to the proposed collection of infor-mation.


The hour and cost burden for the collec-tions of information are as follows:

• The Department estimates that therewill be about 13,000,000 SBC re-sponses in 2012.

• The Department assumes that 38 per-cent of the SBCs would be sent elec-tronically in the group market, and70 percent of the SBCs would be sentelectronically in the individual mar-ket. Accordingly, the Departmentestimates that about 5,900,000 SBCswould be electronically distributed,and about 7,400,000 SBCs would bedistributed in paper form. The De-partment assumes there are no costs

associated with electronic disclosures,and there are costs only with regard topaper disclosures.

Task 1: Summary of benefits andcoverage (not including coverage ex-amples) — The estimated hour burden isabout 170,000 hours, and the estimatedtotal cost is about $5,900,000. The Depart-ment calculates these estimates as follows:

2011–42 I.R.B. 565 October 17, 2011

Task 1: Equivalent Costs for Producing SBCs



IT Professionals $53.26 1.5 $80 1.5 $80 1.5 $80


$41.94 1.5 $63 1.5 $63 1.5 $63

FinancialManagers

$75.32 0.5 $38 0.5 $38 0.5 $38

Attorneys $85.44 0.5 $43 0.5 $43 0.5 $43

Total perissuer/TPA

4 $220 4 $220 4 $220


420 $24,000 700 $39,000 200 $12,000

Task 1: Equivalent Costs for Distributing SBCs

Hourly WageRate

Hours per SBC Total Numberof SBCs

Total Hours Total EquivalentCost

Clerical Staff, IndividualMarket

$29.15 0.033 2,700,000 89,000 $2,600,000

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 — Theestimated hour burden is about 40,000

hours, and the estimated total cost is about $2,700,000. The Department calculatesthese estimates as follows:

October 17, 2011 566 2011–42 I.R.B.






$41.94 45 $1,900 45 $1,900 45 $1,900

FinancialManagers

$75.32 15 $1,100 15 $1,100 15 $1,100

Attorneys $85.44 15 $1,300 15 $1,300 15 $1,300

Total perissuer/TPA

120 $6,700 120 $6,700 120 $6,700


13,000 $710,000 21,000 $1,200,000 6,400 $350,000

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 — TheDepartment assumes that in 2012, issuersand TPAs will begin responding to glos-sary requests to covered individuals, andthat 2.5% of covered individuals, who re-ceive paper SBCs, will request glossaries.The Departments further estimate that theburden and cost of providing the glossariesto be 2.5% of the burden and cost of dis-tributing paper SBCs, plus an additionalcost burden of $0.49 for each glossary (in-cluding $0.44 for first-class postage and$0.05 for supply costs). Accordingly, in2012, the Department estimates a total costof about $240,000 and 4,300 burden hoursassociated with about 190,000 glossary re-quests.

Task 4: One-Time AdministrativeCosts: As mentioned above, the Depart-ment estimates a one-time administrativecost of about$14,000,000 across the indus-try and a total of 270,000 burden hours,and assumes this burden will be equallydivided between 2011 and 2012. Thus, in2012, the Department estimates a one-timeadministrative cost of about $7,000,000across the industry and 135,000 burdenhours.

The total 2012 burden estimate is about$16,000,000. The total number of burdenhours is 350,000.


Task 1: Summary of benefits andcoverage (not including coverage exam-ples) — The number of SBC responsesis assumed to remain constant. Thus, in2013, the Department again estimates a to-tal cost of about $5,900,000 and 170,000burden hours for SBCs (not including cov-erage examples).

Task 2: Coverage Examples — In2013, the Department again estimates a to-tal cost of about $2,700,000 and 40,320burden hours for coverage examples.

Task 3: Notices of Modifications —The Department assumes that in 2013, is-suers will begin sending notices of modifi-cations to covered individuals, and that 2%of covered individuals will receive suchnotice. The Department further estimatesthat the burden and cost of providing thenotices to be 2% of the combined burdenand cost of the SBCs including the cover-age examples, plus an additional cost bur-den for $0.49 for each paper notice (in-cluding $0.44 for first-class postage and$0.05 for supply costs). Accordingly, in

2013, the Department estimate a total costof about $300,000 and 4,200 burden hoursassociated with about 260,000 notices ofmodification.

Task 4: Glossary Requests — The De-partment assumes that in 2013, issuers andTPAs will again respond to glossary re-quests to covered individuals, and that 5%of covered individuals, who receive paperSBCs, will request glossaries. The Depart-ment further estimates that the burden andcost of providing the glossaries to be 5%of the burden and cost of distributing pa-per SBCs, plus an additional cost burdenof $0.49 for each glossary (including $0.44for first-class postage and $0.05 for sup-ply costs). Accordingly, in 2013, the De-partment estimates a total cost of $470,000and 8,500 burden hours associated with370,000 glossary requests.

Task 5: Maintenance AdministrativeCosts — In 2013, the Department assumethat issuers and TPAs will need to makeupdates to address changes in standards,and, thus, incur 15% of the one-time ad-ministrative burden. Accordingly, theestimated hour burden is about 40,000hours, and the estimated total cost is about$2,000,000. The Departments calculatethese estimates as follows:

2011–42 I.R.B. 567 October 17, 2011




IT Professionals $53.26 46.2 $2,500 69.3 $3,700 92.4 $4,900

Benefits / SalesProfessionals

$41.94 33.6 $1,800 50.4 $2,700 67.2 $3,600

Attorneys $85.44 4.2 $220 6.3 $340 8.4 $450

Total perissuer/TPA

84 $4,500 126 $6,700 168 $8,900


8,900 $470,000 22,000 $1,100,000 8,900 $470,000

The total 2013 cost estimate is about$11,000,000. The total number of burdenhours is about 260,000 hours.

The Department notes that persons arenot required to respond to, and generallyare not subject to any penalty for failing to

comply with, an ICR unless the ICR has avalid OMB control number.

The 2012–2013 paperwork burden esti-mates are summarized as follows:

Type of Review: New collection.

Agency: Department of Health and Human Services.

Title: Affordable Care Act Uniform Explanation of Coverage Documents

OMB Number: 0938–New.

Affected Public: Business; State, Local, or Tribal Governments.

Total Respondents: 333.

Total Responses: 13,000,000.

Frequency of Response: On-going.

Estimated Total Annual Burden Hours: 310,000 hours.

Estimated Total Annual Burden Cost: $1,600,000.

To obtain copies of the supportingstatement and any related forms for theproposed paperwork collections refer-enced above, access CMS’ Web site athttp://www.cms.gov/PaperworkReduc-tionActof1995/PRAL/list.asp#TopOfPageor email your request, including your

address, phone number, OMB number,and CMS document identifier, to [email protected], or call the ReportsClearance Office at 410–786–1326.

If you comment on this information col-lection and recordkeeping requirements,please do either of the following:

1. Submit your comments electron-ically as specified in the ADDRESSESsection of this proposed rule; or

2. Submit your comments to the Officeof Information and Regulatory Affairs, Of-fice of Management and Budget,

Attention: CMS Desk Officer, CMS–9982–P

Fax: 202–395–5806; or

E-mail: [email protected]

E. Federalism Statement-Department ofLabor and Department of Health andHuman Services

Executive Order 13132 outlines fun-damental principles of federalism, and

requires the adherence to specific criteriaby Federal agencies in the process of theirformulation and implementation of poli-cies that have “substantial direct effects”on the States, the relationship between thenational government and States, or on the

distribution of power and responsibilitiesamong the various levels of government.Federal agencies promulgating regulationsthat have federalism implications mustconsult with State and local officials anddescribe the extent of their consultation

October 17, 2011 568 2011–42 I.R.B.

and the nature of the concerns of Stateand local officials in the preamble to theregulation.

In the Departments’ view, these pro-posed rules have federalism implications,because it would have direct effects onthe States, the relationship between na-tional governments and States, or on thedistribution of power and responsibilitiesamong various levels of government re-lating to the disclosure of health insurancecoverage information to consumers. Un-der these proposed rules, all group healthplans and health insurance issuers offeringgroup or individual health insurance cov-erage, including self-funded non-federalgovernmental plans as defined in section2791 of the PHS Act, would be requiredto follow uniform standards for compil-ing and providing a summary of benefitsand coverage to consumers. Such Federalstandards developed under PHS Act sec-tion 2715(a) would preempt any relatedState standards that require a summaryof benefits and coverage that providesless information to consumers than thatrequired to be provided under PHS Actsection 2715(a).

In general, through section 514, ERISAsupersedes State laws to the extent thatthey relate to any covered employee ben-efit plan, and preserves State laws thatregulate insurance, banking, or securi-ties. While ERISA prohibits States fromregulating a plan as an insurance or in-vestment company or bank, the preemp-tion provisions of section 731 of ERISAand section 2724 of the PHS Act (im-plemented in 29 CFR 2590.731(a) and45 CFR 146.143(a)) apply so that theHIPAA requirements (including those ofthe Affordable Care Act) are not to be“construed to supersede any provision ofState law which establishes, implements,or continues in effect any standard orrequirement solely relating to healthinsurance issuers in connection with group

health insurance coverage except to theextent that such standard or requirementprevents the application of a requirement”of a Federal standard. The conferencereport accompanying HIPAA indicatesthat this is intended to be the “narrowest”preemption of State laws (See House Conf.Rep. No. 104–736, at 205, reprintedin 1996 U.S. Code Cong. & Admin.News 2018). States may continue toapply State law requirements except tothe extent that such requirements preventthe application of the Affordable CareAct requirements that are the subject ofthis rulemaking. Accordingly, States havesignificant latitude to impose requirementson health insurance issuers that are morerestrictive than the Federal law. However,under these proposed rules, a State wouldnot be allowed to impose a requirementthat modifies the summary of benefits andcoverage required to be provided underPHS Act section 2715(a), because it wouldprevent the application of this proposedrule’s uniform disclosure requirement.

In compliance with the requirement ofExecutive Order 13132 that agencies ex-amine closely any policies that may havefederalism implications or limit the policymaking discretion of the States, the De-partments have engaged in efforts to con-sult with and work cooperatively with af-fected States, including consulting with,and attending conferences of, the NationalAssociation of Insurance Commissionersand consulting with State insurance offi-cials on an individual basis. It is expectedthat the Departments will act in a similarfashion in enforcing the Affordable CareAct, including the provisions of section2715 of the PHS Act. Throughout theprocess of developing these proposed reg-ulations, to the extent feasible within thespecific preemption provisions of HIPAAas it applies to the Affordable Care Act, theDepartments have attempted to balance theStates’ interests in regulating health insur-

ance issuers, and Congress’ intent to pro-vide uniform minimum protections to con-sumers in every State. By doing so, it isthe Departments’ view that they have com-plied with the requirements of ExecutiveOrder 13132.

Pursuant to the requirements set forthin section 8(a) of Executive Order 13132,and by the signatures affixed to this pro-posed rule, the Departments certify that theEmployee Benefits Security Administra-tion and the Centers for Medicare & Med-icaid Services have complied with the re-quirements of Executive Order 13132 forthe attached proposed rule in a meaningfuland timely manner.

IV. Statutory Authority

The Department of the Treasury pro-posed regulations are proposed to beadopted pursuant to the authority con-tained in sections 7805 and 9833 of theCode.

The Department of Labor proposedregulations are proposed to be adoptedpursuant to the authority contained in29 U.S.C. 1027, 1059, 1135, 1161–1168,1169, 1181–1183, 1181 note, 1185, 1185a,1185b, 1185d, 1191, 1191a, 1191b, and1191c; sec. 101(g), Pub. L.104–191, 110Stat. 1936; sec. 401(b), Pub. L. 105–200,112 Stat. 645 (42 U.S.C. 651 note); sec.512(d), Pub. L. 110–343, 122 Stat. 3881;sec. 1001, 1201, and 1562(e), Pub. L.111–148, 124 Stat. 119, as amendedby Pub. L. 111–152, 124 Stat. 1029;Secretary of Labor’s Order 3–2010, 75 FR55354 (September 10, 2010).

The Department of Health and Hu-man Services proposed regulations areproposed to be adopted pursuant to theauthority contained in sections 2701through 2763, 2791, and 2792 of the PHSAct (42 USC 300gg through 300gg–63,300gg–91, and 300gg–92), as amended.

* * * * *

Sarah Hall Ingram,Acting Deputy Commissioner for

Services and Enforcement,Internal Revenue Service.

Signed this 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 andHuman Services.

CMS–9982–P

BILLING CODE 4120–01–P

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Chapter I

Accordingly, 26 CFR Parts 54 and 602are proposed to be amended as follows:

PART 54—PENSION EXCISE TAXES

Paragraph 1. The authority citation forPart 54 is amended by adding an entry for

§54.9815–2715 in numerical order toread in part as follows:

Authority: 26 U.S.C. 7805. ***Section 54.9815–2715 also issued un-

der 26 U.S.C. 9833.Par. 2. Section 54.9815–2715 is added

to read as follows:

§54.9815–2715 Summary of benefitsand coverage and uniform glossary.

(a) Summary of benefits and coverage— (1) In general. A group health plan(and its administrator as defined in section3(16)(A) of ERISA), and a health insur-ance issuer offering group health insurancecoverage, is required to provide a writtensummary of benefits and coverage (SBC)for each benefit package without charge toentities and individuals described in this

paragraph (a)(1) in accordance with therules of this section.

(i) By a group health insurance issuerto a group health plan — (A) A health in-surance issuer offering group health insur-ance coverage must provide the SBC to agroup health plan (or its sponsor) upon ap-plication or request for information aboutthe health coverage as soon as practicablefollowing the request, but in no event laterthan seven days following the request. Ifan SBC is provided upon request for in-formation about health coverage and theplan (or its sponsor) subsequently appliesfor health coverage, a second SBC must beprovided under this paragraph (a)(1)(i)(A)only if the information required to be in theSBC has changed.

(B) If there is any change in the infor-mation required to be in the SBC before thecoverage is offered, or before the first dayof coverage, the issuer must update andprovide a current SBC to the plan (or itssponsor) no later than the date of the offer(or no later than the first day of coverage,as applicable).

(C) If the issuer renews or reissues thepolicy, certificate, or contract of insur-ance (for example, for a succeeding policyyear), the issuer must provide a new SBCwhen the policy, certificate, or contract isrenewed or reissued.

(1) In the case of renewal or reissuance,if written application is required for re-newal (in either paper or electronic form),the SBC must be provided no later than thedate the materials are distributed.

(2) If renewal or reissuance is auto-matic, the SBC must be provided no laterthan 30 days prior to the first day of thenew policy year.

(D) If a group health plan (or its spon-sor) requests an SBC from a health insur-ance issuer offering group health insurancecoverage, it must be provided as soon aspracticable, but in no event later than sevendays following the request for an SBC.

(ii) By a group health insurance issuerand a group health plan to participantsand beneficiaries — (A) A group healthplan (including its administrator, as de-fined under section 3(16) of ERISA), anda health insurance issuer offering grouphealth insurance coverage, must providean SBC to a participant or beneficiary (asdefined under sections 3(7) and 3(8) ofERISA), and consistent with the rules ofparagraph (a)(1)(iii) of this section) withrespect to each benefit package offered bythe plan or issuer for which the participantor beneficiary is eligible.

(B) The SBC must be provided as partof any written application materials thatare distributed by the plan or issuer for

October 17, 2011 570 2011–42 I.R.B.

enrollment. If the plan does not distrib-ute written application materials for enroll-ment, the SBC must be distributed no laterthan the first date the participant is eligibleto enroll in coverage for the participant orany beneficiaries.

(C) If there is any change to the infor-mation required to be in the SBC beforethe first day of coverage, the plan or issuermust update and provide a current SBC to aparticipant or beneficiary no later than thefirst day of coverage.

(D) The plan or issuer must provide theSBC to special enrollees (as described in§ 54.9801–6) within seven days of a re-quest for enrollment pursuant to a specialenrollment right.

(E) If the plan or issuer requires partic-ipants or beneficiaries to renew in order tomaintain coverage (for example, for a suc-ceeding plan year), the plan or issuer mustprovide a new SBC when the coverage isrenewed.

(1) If written application is requiredfor renewal (in either paper or electronicform), the SBC must be provided no laterthan the date the materials are distributed.

(2) If renewal is automatic, the SBCmust be provided no later than 30 daysprior to the first day of coverage under thenew plan year.

(F) A plan or issuer must provide theSBC to participants or beneficiaries uponrequest, as soon as practicable, but in noevent later than seven days following therequest.

(iii) Special rules to prevent unnec-essary duplication with respect to grouphealth coverage — (A) An entity requiredto provide an SBC under paragraph (a)(1)of this section with respect to an individ-ual satisfies that requirement if anotherparty provides the SBC, but only to theextent that the SBC is timely and com-plete in accordance with the other rulesof this section. Therefore, for example,in the case of a group health plan fundedthrough an insurance policy, the plan sat-isfies the requirement to provide an SBCwith respect to an individual if the issuerprovides a timely and complete SBC tothe individual.

(B) If a participant and any beneficia-ries are known to reside at the same ad-dress, and a single SBC is provided tothat address, the requirement to provide theSBC is satisfied with respect to all individ-uals residing at that address. If a benefi-

ciary’s last known address is different thanthe participant’s last known address, a sep-arate SBC is required to be provided to thebeneficiary at the beneficiary’s last knownaddress.

(C) With respect to a group healthplan that offers multiple benefit packages,the plan or issuer is required to providea new SBC automatically upon renewalonly with respect to the benefit packagein which a participant or beneficiary isenrolled; SBCs are not required to be pro-vided automatically with respect to benefitpackages in which the participant or ben-eficiary are not enrolled. However, if aparticipant or beneficiary requests an SBCwith respect to another benefit package(or more than one other benefit package)for which the participant or beneficiary iseligible, the SBC (or SBCs, in the case of arequest for SBCs relating to more than onebenefit package) must be provided uponrequest in accordance with the rules ofparagraph (a)(1)(ii) of this section, whichrequires the SBC to be provided as soonas practicable, but in no event later thanseven days following the request.

(2) Content — (i) In general. The SBCmust include the following:

(A) Uniform definitions of standard in-surance terms and medical terms so thatconsumers may compare health coverageand understand the terms of (or exceptionsto) their coverage;

(B) A description of the coverage, in-cluding cost sharing, for each categoryof benefits identified by the Secretary inguidance;

(C) The exceptions, reductions, andlimitations of the coverage;

(D) The cost-sharing provisions of thecoverage, including deductible, coinsur-ance, and copayment obligations;

(E) The renewability and continuationof coverage provisions;

(F) Coverage examples, in accordancewith the rules of paragraph (a)(2)(ii) of thissection;

(G) With respect to coverage beginningon or after January 1, 2014, a statementabout whether the plan or coverage pro-vides minimum essential coverage as de-fined under section 5000A(f) and whetherthe plan’s or coverage’s share of the totalallowed costs of benefits provided underthe plan or coverage meets applicable re-quirements;

(H) A statement that the SBC is onlya summary and that the plan document,policy, or certificate of insurance shouldbe consulted to determine the governingcontractual provisions of the coverage;

(I) Contact information for questionsand obtaining a copy of the plan docu-ment or the insurance policy, certificate, orcontract of insurance (such as a telephonenumber for customer service and an Inter-net address for obtaining a copy of the plandocument or the insurance policy, certifi-cate, or contract of insurance);

(J) For plans and issuers that maintainone or more networks of providers, anInternet address (or similar contact infor-mation) for obtaining a list of networkproviders;

(K) For plans and issuers that use a for-mulary in providing prescription drug cov-erage, an Internet address (or similar con-tact information) for obtaining informationon prescription drug coverage;

(L) An Internet address for obtainingthe uniform glossary, as described in para-graph (c) of this section; and

(M) Premiums (or in the case of a self-insured group health plan, cost of cover-age).

(ii) Coverage examples. The SBC mustinclude coverage examples that illustratebenefits provided under the plan or cov-erage for common benefits scenarios (in-cluding pregnancy and serious or chronicmedical conditions) that are identified bythe Secretary in accordance with the fol-lowing:

(A) Number of examples. The Secretarymay identify up to six coverage examplesthat may be required in an SBC.

(B) Benefits scenarios. For purposes ofthis section, a benefits scenario is a hy-pothetical situation, consisting of a sam-ple treatment plan for a specified medi-cal condition during a specific period oftime, based on recognized clinical prac-tice guidelines available through the Na-tional Guideline Clearinghouse, Agencyfor Healthcare Research and Quality. TheSecretary will specify, in guidance, thetypes of services, dates of service, applica-ble billing codes, and allowed charges foreach claim in the benefits scenario.

(C) Demonstration of benefit provided.To demonstrate benefits provided underthe plan or coverage, a plan or issuer simu-lates how claims would be processed underthe scenarios provided by the Secretary to

2011–42 I.R.B. 571 October 17, 2011

generate an estimate of cost sharing a con-sumer could expect to pay under the ben-efit package. The demonstration of bene-fits will take into account any cost sharing,excluded benefits, and other limitations oncoverage, as described by the Secretary inguidance.

(3) Appearance. A group health planand a health insurance issuer must providean SBC as a stand-alone document in theform authorized by the Secretary and com-pleted in accordance with the instructionsfor completing the SBC that are authorizedby the Secretary in guidance. The SBCmust be presented in a uniform format, useterminology understandable by the aver-age plan enrollee, not exceed four dou-ble-sided pages in length, and not includeprint smaller than 12-point font.

(4) Form — (i) An SBC provided byan issuer offering group health insurancecoverage to a plan (or its sponsor), maybe provided in paper form. Alternatively,the SBC may be provided electronically(such as email or an Internet posting) if thefollowing three conditions are satisfied —

(A) The format is readily accessible bythe plan (or its sponsor);

(B) The SBC is provided in paper formfree of charge upon request, and

(C) If the electronic form is an Internetposting, the issuer timely advises the plan(or its sponsor) in paper form or email thatthe documents are available on the Internetand provides the Internet address.

(ii) An SBC provided by a plan or is-suer to a participant or beneficiary may beprovided in paper form. Alternatively, theSBC may be provided electronically if therequirements of 29 CFR 2520.104b–1 aremet.

(5) Language. A group health planor health insurance issuer must providethe SBC in a culturally and linguisti-cally appropriate manner. For purposesof this paragraph (a)(5), a plan or issueris considered to provide the SBC in aculturally and linguistically appropriatemanner if the thresholds and standards of§54.9815–2719T(e) are met as applied tothe SBC.

(b) Notice of modifications. If a grouphealth plan, or health insurance issuer of-fering group health insurance coverage,makes any material modification (as de-fined under section 102 of ERISA) in any

of the terms of the plan or coverage thatwould affect the content of the SBC, that isnot reflected in the most recently providedSBC, and that occurs other than in connec-tion with a renewal or reissuance of cover-age, the plan or issuer must provide noticeof the modification to enrollees not laterthan 60 days prior to the date on whichsuch modification will become effective.The notice of modification must be pro-vided in a form that is consistent with therules of paragraph (a)(4) of this section.

(c) Uniform glossary — (1) In general.A group health plan, and a health insuranceissuer offering group health insurance cov-erage, must make available to participantsand beneficiaries the uniform glossary de-scribed in paragraph (c)(2) of this sectionin accordance with the appearance and for-mat requirements of paragraphs (c)(3) and(c)(4) of this section.

(2) Health-coverage-related terms andmedical terms. The uniform glossary mustprovide uniform definitions, specified bythe Secretary in guidance, for the fol-lowing health-coverage-related terms andmedical terms:

(i) Allowed amount, appeal, bal-ance billing, co-insurance, complicationsof pregnancy, co-payment, deductible,durable medical equipment, emergencymedical condition, emergency medicaltransportation, emergency room care,emergency services, excluded services,grievance, habilitation services, healthinsurance, home health care, hospiceservices, hospitalization, hospital out-patient care, in-network co-insurance,in-network co-payment, medically nec-essary, network, non-preferred provider,out-of-network co-insurance, out-of-net-work co-payment, out-of-pocket limit,physician services, plan, preauthorization,preferred provider, premium, prescriptiondrug coverage, prescription drugs, primarycare physician, primary care provider,provider, reconstructive surgery, reha-bilitation services, skilled nursing care,specialist, usual customary and reasonable(UCR), and urgent care; and

(ii) Such other terms as the Secretarydetermines are important to define so thatindividuals and employers may compareand understand the terms of coverage andmedical benefits (including any exceptionsto those benefits), as specified in guidance.

(3) Appearance. A group health plan,and a health insurance issuer, must pro-vide the uniform glossary with the appear-ance authorized in guidance, ensuring thatthe uniform glossary is presented in a uni-form format and utilizes terminology un-derstandable by the average plan enrollee.

(4) Form and manner. A plan or is-suer must make the uniform glossary de-scribed in this paragraph (c) available uponrequest, in either paper or electronic form(as requested), within seven days of the re-quest. (Under the rules of paragraph (a) ofthis section, the form authorized in guid-ance for the SBC will disclose to partici-pants and beneficiaries their rights to re-quest a copy of the uniform glossary.)

(d) Preemption. With respect to thestandards for providing an SBC requiredunder paragraph (a) of this section, Statelaws that require a health insurance issuerto provide an SBC that supplies less infor-mation than required under paragraph (a)of this section are preempted.

(e) Failure to provide. A group healthplan or health insurance issuer that will-fully fails to provide information requiredunder this section to a participant or bene-ficiary is subject to a fine of not more than$1,000 for each such failure. A failure withrespect to each participant or beneficiaryconstitutes a separate offense for purposesof this paragraph (e).

(f) Applicability date. This section isapplicable beginning March 23, 2012. See§ 54.9815–1251T(d), providing that thissection applies to grandfathered healthplans.

PART 602—OMB CONTROLNUMBERS UNDER THE PAPERWORKREDUCTION ACT

Par. 3. The authority citation for part602 continues to read in part as follows:

Authority: 26 U.S.C. 7805. * * *Par. 4. Section 602.101(b) is amended

by adding the following entry in numericalorder to the table to read as follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

October 17, 2011 572 2011–42 I.R.B.

CFR part or section whereIdentified and described

Current OMBcontrol No.

* * * * *54.9815–2715 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–* * * * *

(Filed by the Office of the Federal Register on August 17,2011, 11:15 a.m., and published in the issue of the FederalRegister for August 22, 2011, 76 F.R. 52446)

Notice of ProposedRulemaking and Notice ofPublic Hearing

Swap Exclusion for Section1256 Contracts

REG–111283–11


ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document contains pro-posed regulations that describe swaps andsimilar agreements that fall within themeaning of section 1256(b)(2)(B) of theInternal Revenue Code (Code). This doc-ument also contains proposed regulationsthat revise the definition of a notionalprincipal contract under §1.446–3 of theIncome Tax Regulations. This documentprovides a notice of public hearing onthese proposed regulations.

DATES: Written or electronic commentsmust be received by December 15, 2011.Outlines of topics to be discussed at thepublic hearing scheduled for January 19,2012, must be received by December 14,2011.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–111283–11), room5203, Internal Revenue Service, POB7604, Ben Franklin Station, WashingtonDC 20044. Submissions may be handdelivered Monday through Friday, be-tween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–111283–11),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, N.W.,Washington, DC. Alternatively, tax-payers may submit comments elec-tronically via the Federal eRulemak-

ing Portal at www.regulations.gov/(IRS-REG–111283–11). The publichearing will be held in the Auditorium,Internal Revenue Building, 1111Constitution Avenue, N.W., Washington,DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposed reg-ulations, K. Scott Brown (202) 622–7454;concerning submissions of comments,the hearing, and/or to be placed on thebuilding access list to attend the hearing,Richard Hurst, (202) 622–7180 (nottoll-free numbers).


Background

This document contains proposedamendments to the Income Tax Regula-tions (26 CFR 1) under sections 1256 and446 of the Code. Section 1256(b)(2)(B)was added to the Code by section 1601 ofthe Dodd-Frank Wall Street Reform andConsumer Protection Act (Public Law No.111–203, §1601, 124 Stat. 1376, 2223(2010)) (the Dodd-Frank Act). Section1256(b)(2)(B) provides that certain swapsand similar agreements are not subjectto section 1256 of the Code. These pro-posed regulations provide guidance onthe category of swaps and similar agree-ments that are within the scope of section1256(b)(2)(B). These proposed regula-tions also revise the definition and scopeof a notional principal contract under§1.446–3 of the Income Tax Regulations.


A. Section 1256(b)(2)(B) Language andLegislative History

Section 1256 provides that contractsclassified as section 1256 contracts aremarked to market and any gain or loss isgenerally treated as 60 percent long-termcapital gain or loss and 40 percentshort-term capital gain or loss. Section1256(b)(1) defines the term “section 1256

contract” as a regulated futures contract,foreign currency contract, nonequity op-tion, dealer equity option, and dealersecurities futures contract. With the ex-ception of a foreign currency contract,a section 1256 contract must be tradedon or subject to the rules of a “qualifiedboard or exchange” as defined in section1256(g)(7).

Section 1601 of the Dodd-Frank Actadded section 1256(b)(2)(B), which ex-cludes swaps and similar agreements fromthe definition of a section 1256 contract.Section 1256(b)(2)(B) provides that theterm “section 1256 contract” shall not in-clude—

any interest rate swap, currency swap,basis swap, interest rate cap, interestrate floor, commodity swap, equityswap, equity index swap, credit defaultswap, or similar agreement.Congress enacted section

1256(b)(2)(B) to resolve uncertaintyunder section 1256 for swap contractsthat are traded on regulated exchanges.The specific uncertainty addressed by theenactment of section 1256(b)(2)(B) wasdescribed in the Conference Report:

The title contains a provision to addressthe recharacterization of income as aresult of increased exchange-trading ofderivatives contracts by clarifying thatsection 1256 of the Internal RevenueCode does not apply to certain deriva-tives contracts transacted on exchanges.

H.R. Conf. Rep. No. 111–517, at 879(2010). Section 1256(b)(2)(B) contem-plates that a swap contract, even if tradedon or subject to the rules of a qualifiedboard or exchange, will not be a section1256 contract.

B. Scope of Swaps Excluded by Section1256(b)(2)(B)

1. Notional principal contracts and creditdefault swaps

Congress incorporated into section1256(b)(2)(B) a list of swaps that paral-lels the list of swaps included under the

2011–42 I.R.B. 573 October 17, 2011

definition of a notional principal contractin §1.446–3(c) with the addition of creditdefault swaps. The parallel language sug-gests that Congress was attempting toharmonize the category of swaps excludedunder section 1256(b)(2)(B) with swapsthat qualify as notional principal contractsunder §1.446–3(c), rather than with thecontracts defined as “swaps” under section721 of the Dodd-Frank Act. Accordingly,§1.1256(b)–1(a) of the proposed regula-tions provides that a section 1256 contractdoes not include a contract that qualifiesas a notional principal contract as definedin proposed §1.446–3(c). As discussedherein, the proposed regulations under§1.446–3 also expressly provide that acredit default swap is a notional principalcontract.

2. Option on a notional principal contract

Section 1256(b)(2)(B) raises questionsas to whether an option on a notionalprincipal contract that is traded on a qual-ified board or exchange would constitutea “similar agreement” or would insteadbe treated as a nonequity option undersection 1256(g)(3). Since an option on anotional principal contract is closely con-nected with the underlying contract, theTreasury Department and the IRS believethat such an option should be treated asa similar agreement within the meaningof section 1256(b)(2)(B). Accordingly,§1.1256(b)–1(a) of the proposed regula-tions also provides that a section 1256contract does not include an option onany contract that is a notional principalcontract defined in §1.446–3(c) of the pro-posed regulations.

3. Ordering rule

The proposed regulations provide anordering rule for a contract that tradesas a futures contract regulated by theCommodity Futures Trading Commission(CFTC), but that also meets the defini-tion of a notional principal contract. TheTreasury Department and the IRS believethat such a contract is not a commodityfutures contract of the kind envisioned byCongress when it enacted section 1256.Accordingly, §1.1256(b)–1(a) of the pro-posed regulations provides that section1256 does not include any contract, oroption on such contract, that is both a sec-tion 1256 contract and a notional principal

contract as defined in §1.446–3(c) of theproposed regulations.

C. Definition of Regulated FuturesContract

Section 1256(g)(1) defines a regulatedfutures contract as “a contract (A) with re-spect to which the amount required to bedeposited and the amount which may bewithdrawn depends on a system of mark-ing to market, and (B) which is traded onor subject to the rules of a qualified boardor exchange.” The apparent breadth of sec-tion 1256(g)(1) has raised questions in thepast as to whether a contract other than afutures contract can be a regulated futurescontract. The Treasury Department andthe IRS have historically limited the scopeof a regulated futures contract to those fu-tures contracts that have the characteristicsof traditional futures contracts. Under theDodd-Frank Act, a “designated contractmarket” may trade both futures contractsand swap contracts, although there will bespecific reporting rules for swap contracts.In order to properly limit section 1256 tofutures contracts that trade on designatedcontract markets, §1.1256(b)–1(b) of theproposed regulations provides that a regu-lated futures contract is a section 1256 con-tract only if the contract is a futures con-tract that is not required to be reported as aswap under the Commodity Exchange Act(7 U.S.C. 1) (the CEA). The reporting pro-visions for swaps under the CEA will notbe effective until the CFTC has publishedfinal rules implementing such provisions.It is anticipated that swap reporting ruleswill be in effect before these regulationsare finalized. If, however, these proposedincome tax regulations are finalized beforethe swap reporting provisions become ef-fective, the Treasury Department and theIRS will evaluate whether the provisionsof §1.1256(b)–1(b) need to be adjusted.

Questions have also been raised as towhether the requirement that a regulatedfutures contract be “traded on or subjectto the rules of” a qualified board or ex-change includes off-exchange transactionssuch as an exchange of a futures contractfor a cash commodity, or an exchange ofa futures contract for a swap, that are car-ried out subject to the rules of a CFTCdesignated contract market. The phrase“traded on or subject to the rules of” ap-pears to have originated under the CEA.

Section 4(a) of the CEA provides, in part,that it is unlawful to engage in any trans-action in, or in connection with, a com-modity futures contract unless such trans-action is conducted on or subject to therules of a board of trade which has beendesignated as a contract market and suchcontract is executed or consummated by orthrough a contract market. Section 5(d)of the CEA, as amended by section 735of the Dodd-Frank Act, provides that therules of a designated contract market mayauthorize, for bona fide business purposes,transfer trades or office trades, or an ex-change of (i) futures in connection witha cash commodity transaction, (ii) futuresfor cash commodities, or (iii) futures forswaps. As such, the Treasury Departmentand the IRS believe that a futures con-tract that results from one of these transac-tions is a regulated futures contract undersection 1256(g)(1) because the contract istraded subject to the rules of a designatedcontract market.

D. Qualified Board or Exchange

Section 1256(g)(7)(C) provides thata qualified board or exchange includesany other exchange, board of trade, orother market which the Secretary deter-mines has rules adequate to carry outthe purposes of section 1256. Section1.1256(g)–1(a) of the proposed regula-tions specifies that such determinationsare only made through published guidancein the Federal Register or in the InternalRevenue Bulletin.

Since section 1256(g)(7) was adopted,the Treasury Department and the IRShave issued determinations for six enti-ties, all of them foreign futures exchanges.See Rev. Rul. 2010–3, 2010–3 I.R.B.272 (London International Financial Fu-tures and Options Exchange), Rev. Rul.2009–24, 2009–36 I.R.B. 306 (ICE Fu-tures Canada), Rev. Rul. 2009–4, 2009–5I.R.B. 408 (Dubai Mercantile Exchange),Rev. Rul. 2007–26, 2007–1 C.B. 970(ICE Futures), Rev. Rul. 86–7, 1986–1C.B. 295 (The Mercantile Division ofthe Montreal Exchange), and Rev. Rul.85–72, 1985–1 C.B. 286 (International Fu-tures Exchange (Bermuda)). The IRS hasfollowed a two step process for makingeach of the six qualified board or exchangedeterminations under section 1256(g)(7).See §601.601(d)(2)(ii)(b).

October 17, 2011 574 2011–42 I.R.B.

In the first step, the exchange submitteda private letter ruling to the IRS request-ing a determination that the exchange isa qualified board or exchange within themeaning of section 1256(g)(7)(C). Oncethe IRS determined that the exchange hadrules sufficient to carry out the purposesof section 1256, the Treasury Departmentand the IRS published a revenue ruling an-nouncing that the named exchange was aqualified board or exchange. The revenuerulings apply to commodity futures con-tracts and futures contract options of thetype described under the CEA that are en-tered into on the named exchange. Therevenue ruling does not apply to contractsthat are entered into on another exchangethat is affiliated with the named exchange.

In determining whether a foreign ex-change is a qualified board or exchangeunder section 1256(g)(7)(C), the TreasuryDepartment and the IRS have looked towhether the exchange received a CFTC“direct access” no-action relief letter per-mitting the exchange to make its electronictrading and matching system available inthe United States, notwithstanding that theexchange was not designated as a contractmarket pursuant to section 5 of the CEA.Section 738 of the Dodd-Frank Act, how-ever, provides the CFTC with authorityto adopt rules and regulations that requireregistration of a foreign board of tradethat provides United States participants di-rect access to the foreign board of trade’selectronic trading system. In formulatingthese rules and regulations, the CFTC is di-rected to consider whether comparable su-pervision and regulation exists in the for-eign board of trade’s home country. Pur-suant to section 738, the CFTC has pro-posed a registration system to replace thedirect access no-action letter process. Un-der the proposed registration system, a for-eign board of trade operating pursuant toan existing direct access no-action reliefletter must apply through a limited appli-cation process for an “Order of Registra-tion” which will replace the foreign boardof trade’s existing direct access no-actionletter. Many of the proposed requirementsfor and conditions applied to a foreignboard of trade’s registration will be basedupon those applicable to the foreign boardof trade’s currently granted direct accessno-action relief letter.

The IRS has conditioned a foreign ex-change’s qualified board or exchange sta-

tus under section 1256(g)(7)(C) on the ex-change continuing to satisfy all CFTC con-ditions necessary to retain its direct accessno-action relief letter. Consequently, ifthe CFTC adopts the proposed registrationsystem, an exchange that has previouslyreceived a qualified board or exchange de-termination under section 1256(g)(7)(C)must obtain a CFTC Order of Registrationin order to maintain its qualified board orexchange status. The IRS will continue toevaluate the CFTC’s rules in this regard todetermine if any changes to the IRS’s sec-tion 1256(g)(7)(C) guidance process arewarranted.

E. Definition and Scope of a NotionalPrincipal Contract

1. Payments under a notional principalcontract

In 1993, the IRS promulgated§1.446–3(c) which defines a notional prin-cipal contract as a financial instrumentthat provides for the payment of amountsby one party to another at specified inter-vals calculated by reference to a specifiedindex upon a notional principal amountin exchange for specified considerationor a promise to pay similar amounts.Questions have arisen as to the proper in-terpretation of this requirement. Sections1.446–3(c)(1)(i) and (ii) of the proposedregulations expressly provide that a no-tional principal contract requires one partyto make two or more payments to a coun-terparty. For this purpose, the fixing of anamount is treated as a payment, even if theactual payment reflecting that amount is tobe made at a later date. Thus, for example,a contract that provides for a settlementpayment referenced to the appreciationor depreciation on a specified number ofshares of common stock, adjusted for ac-tual dividends paid during the term of thecontract, is treated as a contract with morethan one payment with respect to that legof the contract.

2. Credit default swaps

In Notice 2004–52, 2004–2 C.B.168, the Treasury Department and theIRS described four possible character-izations of a credit default swap. See§601.601(d)(2)(ii)(b). These proposedregulations resolve this uncertainty byadding credit default swaps to the list

of swaps categorized as notional prin-cipal contracts governed by the rules of§1.446–3.

3. Weather-related and othernon-financial index based swaps

Since the time that the §1.446–3 reg-ulations were promulgated, markets havedeveloped for contracts based on non-fi-nancial indices. Many of these contractsare structured as swaps, and payments arecalculated based on indices such as tem-perature, precipitation, snowfall, or frost.For example, payments made under aweather derivative may be based on heat-ing degree days and cooling degree days.As a technical matter, a weather-relatedswap currently is not a notional principalcontract because a weather index doesnot qualify as a “specified index” under§1.446–3(c)(2) of the current regulations,which generally require that such index bea financial index.

The Treasury Department and the IRSbelieve that swaps on non-financial indicesshould be treated as notional principal con-tracts. Accordingly, §1.446–3(c)(2)(ii) ofthe proposed regulations expands a speci-fied index to include non-financial indicesthat are comprised of any objectively de-terminable information that is not withinthe control of any of the parties to the con-tract and is not unique to one of the parties’circumstances, and that cannot be reason-ably expected to front-load or back-loadpayments accruing under the contract.

4. Excluded contracts

Section 1.446–3(c)(1)(ii) currently pro-vides that a contract described in section1256(b) and a futures contract are notnotional principal contracts. In order toremove the circularity that would oth-erwise exist between excluded contractsunder §1.446–3(c)(1)(ii) and proposed§1.1256(b)–1, a contract described in sec-tion 1256(b) and a futures contract havebeen deleted from excluded contracts un-der proposed §1.446–3(c)(1)(iv).

5. Conforming Amendments

The definition of a notional principalcontract in §1.446–3(c) of the proposedregulations is intended to be the oper-ative definition for all Federal incometax purposes, except where a different

2011–42 I.R.B. 575 October 17, 2011

or more limited definition is specificallyprescribed. Thus, the regulations undersections 512, 863, 954, and 988 have beenamended to reference the definition of anotional principal contract in §1.446–3(c).

Proposed Effective/Applicability Date

These regulations are proposed to applyto contracts entered into on or after the datethe final regulations are published in theFederal Register.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regu-lations, and because the regulation doesnot impose a collection of informationon small entitles, the Regulatory Flexi-bility Act (5 U.S.C. chapter 6) does notapply. Pursuant to section 7805(f) of theCode, this notice of proposed rulemakingwill be submitted to the Chief Counselfor Advocacy of the Small BusinessAdministration for comment on its impacton small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(a signed original and eight (8) copies)or electronic comments that are sub-mitted timely to the IRS. The TreasuryDepartment and IRS invite commentson the clarity of the proposed rules andhow they can be made easier to under-stand. All comments will be available atwww.regulations.gov or upon request.

A public hearing has been sched-uled for January 19, 2012, beginningat 10 a.m. in the Auditorium, InternalRevenue Building, 1111 ConstitutionAvenue, N.W., Washington, DC. Dueto building security procedures, visitorsmust enter at the Constitution Avenueentrance. In addition, all visitors mustpresent photo identification to enter thebuilding. Because of access restrictions,visitors will not be admitted beyond theimmediate entrance area more than 30

minutes before the hearing starts. Forinformation about having your nameplaced on the building access list to attendthe hearing, see the “FOR FURTHERINFORMATION CONTACT” section ofthis preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic comments byDecember 15, 2011 and an outline of thetopics to be discussed and the time to bedevoted to each topic (a signed originaland eight (8) copies) by December 14,2011. A period of 10 minutes will beallotted to each person for making com-ments. An agenda showing the schedulingof the speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.


The principal author of these proposedregulations is K. Scott Brown, Officeof the Associate Chief Counsel (Finan-cial Institutions and Products). However,other personnel from the IRS and TreasuryDepartment participated in their develop-ment.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:



Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.446–3 is amended by:1. Revising the entries for the table of

contents in §1.446–3(a) for paragraphs (c)and (j).

2. Revising paragraphs (c)(1), (c)(2),and (c)(3).

3. Adding and reserving paragraph(c)(5).

4. Adding paragraph (c)(6).5. Adding two sentences to the end of

paragraph (j).The revisions and additions read as fol-

lows:

§1.446–3 Notional principal contracts.

* * * * *(c) Definitions and scope.(1) Notional principal contract.(i) In general.(ii) Payment defined.(iii) Included contracts.(A) Special rule for credit default

swaps.(B) Special rule for nonfunctional cur-

rency notional principal contracts.(iv) Excluded contracts.(v) Transactions within section 475.(vi) Transactions within section 988.(2) Specified index.(i) Specified financial index.(ii) Specified non-financial index.(3) Notional principal amount.(4) Special definitions.(i) Related person and party to the con-

tract.(ii) Objective financial information.(iii) Dealer in notional principal con-

tracts.(5) [Reserved](6) Examples.

* * * * *(j) Effective/applicability date.

* * * * *(c) Definitions and scope—(1) Notional

principal contract—(i) In general. A no-tional principal contract is a financial in-strument that requires one party to maketwo or more payments to the counterpartyat specified intervals calculated by refer-ence to a specified index upon a notionalprincipal amount in exchange for specifiedconsideration or a promise to pay similaramounts. An agreement between a tax-payer and a qualified business unit (as de-fined in section 989(a)) of the taxpayer, oramong qualified business units of the sametaxpayer, is not a notional principal con-tract because a taxpayer cannot enter intoa contract with itself.

(ii) Payment defined. For purposes ofparagraph (c)(1)(i) of this section, a pay-ment includes an amount that is fixed onone date and paid or otherwise taken intoaccount on a later date. Thus, for exam-ple, a contract that provides for a settle-ment payment referenced to the appreci-ation or depreciation on a specified num-ber of shares of common stock, adjustedfor actual dividends paid during the termof the contract, is treated as a contract with

October 17, 2011 576 2011–42 I.R.B.

more than one payment with respect to thatleg of the contract. See Example 2 of thisparagraph (c).

(iii) Included contracts. Notional prin-cipal contracts governed by this section in-clude contracts commonly referred to asinterest rate swaps, currency swaps, ba-sis swaps, interest rate caps, interest ratefloors, commodity swaps, equity swaps,equity index swaps, credit default swaps,weather-related swaps, and similar agree-ments that satisfy the requirements of para-graph (c)(1)(i). A collar is not itself a no-tional principal contract, but a cap and afloor that comprise a collar may be treatedas a single notional principal contract un-der paragraph (f)(2)(v)(C) of this section.A contract may be a notional principal con-tract governed by this section even thoughthe term of the contract is subject to ter-mination or extension. Each confirma-tion under a master agreement to enterinto an agreement covered by this sectionis treated as a separate notional principalcontract (or as more than one notional prin-cipal contract if the confirmation createsmore than one notional principal contract).Notwithstanding the rule under paragraph(c)(3) of this section—

(A) Special rule for credit defaultswaps. A credit default swap contractthat permits or requires the delivery ofspecified debt instruments in satisfactionof one leg of the contract is a notionalprincipal contract if it otherwise satisfiesthe requirements of paragraph (c)(1)(i) ofthis section.

(B) Special rule for nonfunctional cur-rency notional principal contracts. A no-tional principal contract that permits or re-quires the delivery of specified currency insatisfaction of one or both legs of the con-tract but that otherwise qualifies as a non-functional currency notional principal con-tract under §1.988–1(a)(2)(iii)(B) is a no-tional principal contract.

(iv) Excluded contracts. A forwardcontract, an option, and a guarantee are notnotional principal contracts. An instru-ment or contract that constitutes indebted-ness under general Federal income tax lawis not a notional principal contract. Anoption or forward contract that entitles orobligates a person to enter into a notionalprincipal contract is not a notional prin-cipal contract, but payments made undersuch an option or forward contract may

be governed by paragraph (g)(3) of thissection.

(v) Transactions within section 475. Tothe extent that the rules provided in para-graphs (e) and (f) of this section are incon-sistent with the rules that apply to any no-tional principal contract that is governedby section 475 and the regulations there-under, the rules of section 475 and the reg-ulations thereunder govern.

(vi) Transactions within section 988.To the extent that the rules provided inthis section are inconsistent with the rulesthat apply to any notional principal con-tract that is also a section 988 transactionor that is integrated with other prop-erty or debt pursuant to section 988(d),the rules of section 988 and the regula-tions thereunder govern. The rules of§1.446–3(g)(4) are not considered to beinconsistent with the rules of section 988.See §1.988–2(e)(3)(iv).

(2) Specified index. A specified indexmay be either a specified financial indexor a specified non-financial index.

(i) Specified financial index. A speci-fied financial index is—

(A) A fixed rate, price, or amount;(B) A fixed rate, price, or amount appli-

cable in one or more specified periods fol-lowed by one or more different fixed rates,prices, or amounts applicable in other pe-riods;

(C) An index that is based on objectivefinancial information (as defined in para-graph (c)(4)(ii) of this section); and

(D) An interest rate index that is regu-larly used in normal lending transactionsbetween a party to the contract and unre-lated persons.

(ii) Specified non-financial index. Aspecified non-financial index is any objec-tively determinable information that—

(A) Is not within the control of any ofthe parties to the contract and is not uniqueto one of the parties’ circumstances;

(B) Is not financial information; and(C) Cannot be reasonably expected to

front-load or back-load payments accruingunder the contract.

(3) Notional principal amount. Forpurposes of this section, a notional prin-cipal amount is any specified amount ofmoney or property that, when multipliedby either a specified financial index or aspecified non-financial index, measuresa party’s rights and obligations under thecontract, but is not borrowed, loaned, or

sold between the parties as part of thecontract. The notional principal amountmay vary over the term of the contract,provided that it is set in advance or variesbased on objective financial information(as defined in paragraph (c)(4)(ii) of thissection). If a notional principal contractreferences a notional principal amountthat varies, or that references a differentnotional principal amount for each party,and a principal purpose for entering intothe contract is to avoid the application ofthe rules in this section, the Commissionermay recharacterize the contract accordingto its substance, including by separatingthe contract into a series of notional prin-cipal contracts for purposes of applyingthe rules of this section or by treating thecontract, in whole or in part, as a loan.

* * * * *(5) [Reserved](6) Examples. The following examples

illustrate the application of paragraph (c)of this section.

Example 1. Forward rate agreement. (i) On Jan-uary 1, 2012, A enters into a contract with unrelatedcounterparty B under which on December 31, 2013,A will pay or receive from B, as the case may be,an amount determined by subtracting 6% multipliedby a notional amount of $10 million from 3 monthLIBOR on December 31, 2013 multiplied bythe same notional amount ((3 month LIBOR X$10,000,000) – (6% X $10,000,000)). The contractprovides for no other payments.

(ii) Because this contract provides for a singlenet payment between A and B determined by inter-est rates in effect on the settlement date of the con-tract, the contract is not a notional principal contractdefined in §1.446–3(c)(1)(i).

Example 2. Equity total return contract with div-idend adjustments. (i) On January 1, 2012, A entersinto a contract with unrelated counterparty B underwhich on December 31, 2013, A will receive from Ban amount equal to the appreciation (if any) on a no-tional amount of 1 million shares of XYZ commonstock, plus any dividends or other distributions thatare paid on 1 million shares of XYZ common stockduring the term of the contract. In return, on Decem-ber 31, 2013 A will pay B an amount equal to any de-preciation on 1 million shares of XYZ common stock,and an amount equal to 3 month LIBOR multiplied bythe notional value of 1 million shares of XYZ stockon January 1, 2012 compounded over the term of thecontract. All payments are netted such that A and Bare only liable for the net payment due under the con-tract on December 31, 2013.

(ii) Because both legs of this contract providefor payments that become fixed during the term ofthe contract (the dividend payments and the LIBOR-based payments), each leg of the contract is treatedas providing for more than one payment. In addi-tion, since the indices referenced in the contract arespecified indices described in paragraph (c)(2)(i) ofthis 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 describedin paragraph (c)(3) of this section, the contract is a no-tional principal contract defined in §1.446–3(c)(1)(i).

* * * * *(j) Effective/applicability date. * * *

The rules of paragraph (c) of this sec-tion apply to notional principal contractsentered into on or after the date of publica-tion of a Treasury decision adopting theserules as final regulations in the FederalRegister. Section 1.446–3(c) as containedin 26 CFR part 1 revised April 1, 2011,continues to apply to notional principalcontracts entered into before the dateof publication of a Treasury decisionadopting these rules as final regulations inthe Federal Register.

Par. 3. Section 1.512(b)–(1) isamended by:

1. Revising paragraph (a)(1).2. Adding two sentences to the end of

paragraph (a)(3).The revision and addition read as fol-

lows:

§1.512(b)–1 Modifications.

* * * * *(a) Certain Investment Income—(1) In

general. Dividends, interest, paymentswith respect to securities loans (as definedin section 512(a)(5)), annuities, incomefrom notional principal contracts (as de-fined in §1.446–3(c)), other substantiallysimilar income from ordinary and routineinvestments to the extent determined bythe Commissioner, and all deductions di-rectly connected with any of the foregoingitems of income shall be excluded in com-puting unrelated business taxable income.

* * * * *(3) * * * The rules of paragraph (a)(1)

of this section apply to notional principalcontracts as defined in §1.446–3(c) that areentered into on or after the date of pub-lication of a Treasury decision adoptingthese rules as final regulations in the Fed-eral Register. Section 1.512(b)–1(a)(1) ascontained in 26 CFR part 1 revised April 1,2011, continues to apply to notional princi-pal contracts entered into before the date ofpublication of a Treasury decision adopt-ing these rules as final regulations in theFederal Register.

* * * * *Par. 4. Section 1.863–7 is amended by:

1. Revising the third sentence and re-moving the fourth sentence of paragraph(a)(1).

2. Adding two sentences to the end ofparagraph (a)(2).

The revision and addition read as fol-lows:

§1.863–7 Allocation of incomeattributable to certain notional principalcontracts under section 863(a).

(a) Scope—(1) Introduction. * * * No-tional principal contract income is incomeattributable to a notional principal contractas defined in §1.446–3(c). * * *

(2) * * * The rules of this section ap-ply to notional principal contracts as de-fined in §1.446–3(c) that are entered intoon or after the date of publication of a Trea-sury decision adopting these rules as finalregulations in the Federal Register. Sec-tion 1.863–7 as contained in 26 CFR part1 revised April 1, 2011, continues to applyto notional principal contracts entered intobefore the date of publication of a Treasurydecision adopting these rules as final reg-ulations in the Federal Register.

* * * * *Par. 5. Section 1.954–2 is amended by:1. Revising paragraph (h)(3)(i).2. Adding paragraph (h)(3)(iii).The revision and addition read as fol-

lows:

§1.954–2 Foreign personal holdingcompany income.

* * * * *(3) Notional principal contracts—(i)

In general. Income equivalent to interestincludes income from notional principalcontracts (as defined in §1.446–3(c)) de-nominated in the functional currency ofthe taxpayer (or a qualified business unit ofthe taxpayer, as defined in section 989(a)),the value of which is determined solelyby reference to interest rates or interestrate indices, to the extent that the incomefrom such transactions accrues on or afterAugust 14, 1989.

* * * * *(iii) Effective/applicability date. The

rules of paragraph (h)(3) of this section ap-ply to notional principal contracts as de-fined in §1.446–3(c) that are entered into

on or after the date of publication of a Trea-sury decision adopting these rules as finalregulations in the Federal Register. Sec-tion 1.954–2(h)(3) as contained in 26 CFRpart 1 revised April 1, 2011, continues toapply to notional principal contracts en-tered into before the date of publication ofa Treasury decision adopting these rules asfinal regulations in the Federal Register.

* * * * *Par. 6. Section 1.988–1 is amended by:1. Revising paragraph (a)(2)(iii)(B)(2).2. Adding two sentences to the end of

paragraph (a)(2)(iii)(C).The revision and addition read as fol-

lows:

§1.988–1 Certain definitions and specialrules.

(a) * * *(2) * * *(iii) * * *(B) * * *(2) Definition of notional principal con-

tract. Generally, the term “notional princi-pal contract” means a contract defined in§1.446–3(c). However, a “notional princi-pal contract” shall only be considered asdescribed in paragraph (a)(2)(iii)(B)(1) ofthis section if the underlying property towhich the instrument ultimately relates ismoney (for example, functional currency),nonfunctional currency, or property thevalue of which is determined by referenceto an interest rate. Thus, the term “notionalprincipal contract” includes a currencyswap as defined in §1.988–2(e)(2)(ii), butdoes not include a swap referenced to acommodity or equity index.

(C) * * * The rules of this paragraph(a)(2)(iii) apply to notional principal con-tracts as defined in §1.446–3(c) that are en-tered into on or after the date of publicationof a Treasury decision adopting these rulesas final regulations in the Federal Reg-ister. Section 1.988–1(a)(2)(iii) as con-tained in 26 CFR part 1 revised April 1,2011, continues to apply to notional princi-pal contracts entered into before the date ofpublication of a Treasury decision adopt-ing these rules as final regulations in theFederal Register.

* * * * *Par. 7. Section 1.1256(b)–1 is added to

read as follows:

October 17, 2011 578 2011–42 I.R.B.

§1.1256(b)–1 Section 1256 contractdefined.

(a) General rule. A section 1256 con-tract does not include any contract, oroption on such contract, that is a no-tional principal contract as defined in§1.446–3(c). A contract that is definedas both a notional principal contract in§1.446–3(c) and as a section 1256 con-tract in section 1256(b)(1) is treated as anotional principal contract and not as asection 1256 contract.

(b) Regulated futures contract. A regu-lated futures contract is a section 1256 con-tract only if the contract is a futures con-tract—

(1) With respect to which the amountrequired to be deposited and the amountwhich may be withdrawn depends on asystem of marking to market;

(2) That is traded on or subject to therules of a qualified board or exchange; and

(3) That is not required to be reportedas a swap under the Commodity ExchangeAct.

(c) Effective/applicability date. Therules of this section apply to contractsentered into on or after the date the finalregulations are published in the FederalRegister.

Par. 8. Section 1.1256(g)–1 is added toread as follows:

§1.1256(g)–1 Qualified board orexchange defined.

(a) General rule. A qualified board orexchange means a national securities ex-change registered with the Securities Ex-change Commission, a domestic board oftrade designated as a contract market by

the Commodity Futures Trading Commis-sion, or any other exchange, board of trade,or other market for which the Secretarydetermines in published guidance in theFederal Register or in the Internal Rev-enue Bulletin (see §601.601(d)(2)(ii) ofthis chapter) that such market has rules ad-equate to carry out the purposes of section1256.

(b) Effective/applicability date. Therule of this section applies to taxableyears ending on or after the date the finalregulations are published in the FederalRegister.


(Filed by the Office of the Federal Register onSeptember 15, 2011, 8:45 a.m., and published in the issue ofthe Federal Register for September 16, 2011, 76 F.R. 57684)

2011–42 I.R.B. 579 October 17, 2011

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

October 17, 2011 i 2011–42 I.R.B.

Numerical Finding List1

Bulletins 2011–27 through 2011–42

Announcements:

2011-37, 2011-27 I.R.B. 37

2011-38, 2011-28 I.R.B. 45

2011-39, 2011-28 I.R.B. 46

2011-40, 2011-29 I.R.B. 56

2011-41, 2011-28 I.R.B. 47

2011-42, 2011-32 I.R.B. 138

2011-43, 2011-35 I.R.B. 198

2011-44, 2011-33 I.R.B. 164

2011-45, 2011-34 I.R.B. 178

2011-46, 2011-34 I.R.B. 178

2011-47, 2011-34 I.R.B. 178

2011-48, 2011-36 I.R.B. 227

2011-49, 2011-36 I.R.B. 228

2011-50, 2011-38 I.R.B. 409

2011-51, 2011-38 I.R.B. 409

2011-52, 2011-38 I.R.B. 409

2011-53, 2011-38 I.R.B. 409

2011-54, 2011-38 I.R.B. 409

2011-55, 2011-38 I.R.B. 409

2011-56, 2011-38 I.R.B. 409

2011-57, 2011-38 I.R.B. 409

2011-58, 2011-38 I.R.B. 410

2011-59, 2011-37 I.R.B. 335

2011-61, 2011-39 I.R.B. 453

2011-62, 2011-40 I.R.B. 483

2011-63, 2011-41 I.R.B. 503

2011-64, 2011-41 I.R.B. 503

Notices:

2011-47, 2011-27 I.R.B. 34

2011-50, 2011-27 I.R.B. 35

2011-51, 2011-27 I.R.B. 36

2011-52, 2011-30 I.R.B. 60

2011-53, 2011-32 I.R.B. 124

2011-54, 2011-29 I.R.B. 53

2011-55, 2011-29 I.R.B. 53

2011-56, 2011-29 I.R.B. 54

2011-57, 2011-31 I.R.B. 84

2011-58, 2011-31 I.R.B. 85

2011-59, 2011-31 I.R.B. 86

2011-60, 2011-31 I.R.B. 90

2011-61, 2011-31 I.R.B. 91

2011-62, 2011-32 I.R.B. 126

2011-63, 2011-34 I.R.B. 172

2011-64, 2011-37 I.R.B. 231

2011-65, 2011-34 I.R.B. 173

2011-66, 2011-35 I.R.B. 184

2011-67, 2011-34 I.R.B. 174

2011-68, 2011-36 I.R.B. 205

2011-69, 2011-39 I.R.B. 445

2011-70, 2011-32 I.R.B. 135

Notices— Continued:

2011-71, 2011-37 I.R.B. 233

2011-72, 2011-38 I.R.B. 407

2011-73, 2011-40 I.R.B. 474

2011-74, 2011-41 I.R.B. 496

2011-75, 2011-40 I.R.B. 475

2011-76, 2011-40 I.R.B. 479

2011-78, 2011-41 I.R.B. 497

2011-79, 2011-41 I.R.B. 498

2011-81, 2011-42 I.R.B. 513

2011-82, 2011-42 I.R.B. 516

Proposed Regulations:

REG-128224-06, 2011-42 I.R.B. 533

REG-137128-08, 2011-28 I.R.B. 43

REG-112805-10, 2011-40 I.R.B. 482

REG-120391-10, 2011-39 I.R.B. 451

REG-125592-10, 2011-32 I.R.B. 137

REG-131491-10, 2011-36 I.R.B. 208

REG-140038-10, 2011-42 I.R.B. 537

REG-101352-11, 2011-30 I.R.B. 75

REG-109006-11, 2011-37 I.R.B. 334

REG-111283-11, 2011-42 I.R.B. 573

REG-118809-11, 2011-33 I.R.B. 162

REG-122813-11, 2011-35 I.R.B. 197

REG-126519-11, 2011-39 I.R.B. 452

Revenue Procedures:

2011-38, 2011-30 I.R.B. 66

2011-39, 2011-30 I.R.B. 68

2011-40, 2011-37 I.R.B. 235

2011-41, 2011-35 I.R.B. 188

2011-42, 2011-37 I.R.B. 318

2011-43, 2011-37 I.R.B. 326

2011-44, 2011-39 I.R.B. 446

2011-45, 2011-39 I.R.B. 449

2011-46, 2011-42 I.R.B. 518

2011-47, 2011-42 I.R.B. 520

2011-48, 2011-42 I.R.B. 527

Revenue Rulings:

2011-14, 2011-27 I.R.B. 31

2011-15, 2011-30 I.R.B. 57

2011-16, 2011-32 I.R.B. 93

2011-17, 2011-33 I.R.B. 160

2011-18, 2011-39 I.R.B. 428

2011-19, 2011-36 I.R.B. 199

2011-20, 2011-36 I.R.B. 202

2011-21, 2011-40 I.R.B. 458

2011-22, 2011-41 I.R.B. 489

2011-24, 2011-41 I.R.B. 485

Treasury Decisions:

9527, 2011-27 I.R.B. 1

9528, 2011-28 I.R.B. 38

9529, 2011-30 I.R.B. 57

Treasury Decisions— Continued:

9530, 2011-31 I.R.B. 77

9531, 2011-31 I.R.B. 79

9532, 2011-32 I.R.B. 95

9533, 2011-33 I.R.B. 139

9534, 2011-33 I.R.B. 144

9535, 2011-39 I.R.B. 415

9536, 2011-39 I.R.B. 426

9537, 2011-35 I.R.B. 181

9538, 2011-37 I.R.B. 229

9539, 2011-35 I.R.B. 179

9540, 2011-38 I.R.B. 341

9541, 2011-39 I.R.B. 438

9542, 2011-39 I.R.B. 411

9543, 2011-40 I.R.B. 470

9544, 2011-40 I.R.B. 458

9545, 2011-41 I.R.B. 490

9546, 2011-42 I.R.B. 505

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin2011–26, dated June 27, 2011.

2011–42 I.R.B. ii October 17, 2011

Finding List of Current Actions onPreviously Published Items1

Bulletins 2011–27 through 2011–42

Announcements:

2007-47

Updated and superseded by

Ann. 2011-59, 2011-37 I.R.B. 335

Notices:

2006-101

Amplified and superseded by

Notice 2011-64, 2011-37 I.R.B. 231

2007-93

Obsoleted by

T.D. 9545, 2011-41 I.R.B. 490

2010-23

Modified and supplemented by

Notice 2011-54, 2011-29 I.R.B. 53

2010-81

Amended and supplemented by

Notice 2011-63, 2011-34 I.R.B. 172

2010-88

Modified by

Ann. 2011-40, 2011-29 I.R.B. 56

Proposed Regulations:

REG-118761-09

Hearing scheduled by

Ann. 2011-38, 2011-28 I.R.B. 45

REG-151687-10

Hearing scheduled by

Ann. 2011-48, 2011-36 I.R.B. 227

Revenue Procedures:

72-36

Amplified and modified by

Rev. Proc. 2011-42, 2011-37 I.R.B. 318

2004-29


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


Rev. Proc. 2011-42, 2011-37 I.R.B. 318

2008-24

Modified and superseded by

Rev. Proc. 2011-38, 2011-30 I.R.B. 66

2008-32

Superseded by

Rev. Proc. 2011-39, 2011-30 I.R.B. 68

Revenue Procedures— Continued:

2010-39

Amplified, modified, and superseded by

Rev. Proc. 2011-47, 2011-42 I.R.B. 520

2011-4

Modified by

Rev. Proc. 2011-44, 2011-39 I.R.B. 446

2011-14

Modified by

Rev. Proc. 2011-43, 2011-37 I.R.B. 326

2011-35


Rev. Proc. 2011-42, 2011-37 I.R.B. 318

Revenue Rulings:

58-225

Obsoleted by

Rev. Rul. 2011-15, 2011-30 I.R.B. 57

Treasury Decisions:

9527

Corrected by

Ann. 2011-49, 2011-36 I.R.B. 228

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

October 17, 2011 iii 2011–42 I.R.B.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

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