Part I. Rulings — Internal Revenue Bulletin 2008-47

Section 141.—Private Activity Bond; Qualified Bond

26 CFR 1.141–4: Private security or payment test.

T.D. 9429

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Treatment of Payments in Lieu of Taxes Under Section 141

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations which modify the standards for treating certain payments in lieu of taxes or other tax equivalency payments (PILOTs) as generally applicable taxes for purposes of the private security or payment test under section 141 of the Internal Revenue Code (Code). This action is being taken in order to provide issuers of tax-exempt bonds with guidance on whether PILOTs are eligible to be treated as generally applicable taxes for this purpose. The regulations affect State and local governmental issuers of tax-exempt bonds.

DATES: Effective Date: These regulations are effective on October 24, 2008.

Applicabilitys Dates: For dates of applicability, see §1.141–15(k).

FOR FURTHER INFORMATION CONTACT: Carla Young at (202) 622–3980 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends the Income Tax Regulations (26 CFR part 1) under section 141 to modify and clarify the standards for treating PILOTs as generally applicable taxes for purposes of the private security or payment test under section 141.

Final regulations under section 141 were published in the Federal Register on January 16, 1997 (T.D. 8712, 1997–1 C.B. 15 [62 FR 2275]) (1997 Regulations), to provide comprehensive guidance on most aspects of the private activity bond restrictions. On October 19, 2006, the IRS published a notice of proposed rulemaking in the Federal Register (REG–136806–06, 2006–2 C.B. 950 [71 FR 61693]) (Proposed Regulations) regarding the standards for treating PILOTs as generally applicable taxes for purposes of the private security or payment test under section 141. In the Proposed Regulations, the Treasury Department and the IRS solicited public comments and invited interested parties to a public hearing scheduled for February 13, 2007. On January 30, 2007, the Treasury Department and the IRS cancelled the public hearing because no requests to speak at the hearing were received, and published a notice of such cancellation in the Federal Register (Published in the IRB as Announcement 2007–19, 2007–7 I.R.B. 521 [72 FR 4220]).

The Treasury Department and the IRS received a number of written comments on the Proposed Regulations. After consideration of the written comments, the Proposed Regulations are adopted, with revisions, as final regulations by this Treasury decision (Final Regulations). The revisions are discussed in the preamble.

Explanation of Provisions

I. Introduction

In general, interest on State and local governmental bonds is excludable from gross income under section 103 of the Code. Interest on a private activity bond, other than a qualified bond under section 141(e), is not excludable from gross income. Section 141(a) classifies a bond as a private activity bond if it is part of an issue that meets both the private business use test under section 141(b)(1) (private business use test) and the private security or payment test under section 141(b)(2) (private payment test). In addition, section 141(a) independently treats a bond as a private activity bond if it is part of an

issue that meets the private loan test under section 141(c).

Section 141(b)(2) provides generally that an issue meets the private payment test if the payment of the debt service on more than 10 percent of the proceeds of such issue is (under the terms of such issue or any underlying arrangement) directly or indirectly (1) secured by any interest in property used or to be used for a private business use, or payments in respect of such property, or (2) to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, used or to be used for a private business use.

II. Private Payment Test in General

Sections 1.141–4(c) and 1.141–4(d) of the 1997 Regulations provide general rules for purposes of application of the private payment test. Private payments generally include any payments made, directly or indirectly, by any nongovernmental person that is a private business user of proceeds during a period of private business use and any payments made with respect to property financed with proceeds of an issue during a period of private business use, whether or not made by a private business user. In addition, private payments include property and payments in respect of property that are used or to be used for private business use to the extent that any interest in that property or payments serves as security for the payment of debt service on an issue.

III. Generally Applicable Taxes Exception

Section 1.141–4(e) of the 1997 Regulations provides an exception to the otherwise broad scope of payments taken into account under the private payment test in the case of generally applicable taxes. Thus, §1.141–4(e)(1) provides that for purposes of the private security or payment test, generally applicable taxes are not taken into account (that is, are not payments from a nongovernmental person and are not payments in respect of property used for a private business use). In general, the purpose of the generally

2008–47 I.R.B. 1167 November 24, 2008

mensurate standard to provide generally that an eligible PILOT payment must represent a fixed percentage of, or reflect a fixed adjustment to, the amount of generally applicable taxes in each year, based on comparable current valuation assessments. Commentators suggested that the proposed commensurate standard was unduly restrictive and suggested allowing fixed-payment PILOTs. The Treasury Department and the IRS decline to adopt this suggestion to allow fixed-payment PILOTs. The Final Regulations generally continue the approach to the commensurate standard in the Proposed Regulations because the Treasury Department and the IRS continue to believe that this approach will better ensure a reasonably close relationship between eligible PILOTs and generally applicable taxes.

The Final Regulations refine the commensurate standard in certain technical respects in response to public comments. The Proposed Regulations proposed to permit only a single change in the measure of a PILOT in relation to an underlying generally applicable tax following completion of the development of the subject property. Commentators suggested allowing broader flexibility for phased adjustments to PILOTs during the development, construction, or initial start-up period of the property. The Final Regulations adopt this comment.

The Proposed Regulations also proposed to treat any payment based in any way on debt service on an issue as impermissible under the commensurate standard. Commentators suggested that this limitation is overly broad and could prohibit any use of PILOTs to pay debt service on an issue. The Final Regulations do not prohibit any use of PILOTs to pay debt service on an issue, but provide that a PILOT is not commensurate with a generally applicable tax if the PILOT is set at a fixed dollar amount (for example, fixed debt service on a bond issue) that cannot vary with changes in the level of the generally applicable tax on which it is based.

Section 1.141–4(e)(5) of the 1997 Regulations and the Proposed Regulations require designation of PILOTs for a “public purpose.” Section 1.141–4(e)(2) of the 1997 Regulations requires use of generally applicable taxes for “governmental purposes.” These references to

applicable taxes exception is to allow eligible tax payments made with respect to property or services to be used to pay debt service on an issue without causing private payments. For this purpose, §1.141–4(e)(2) of the 1997 Regulations defines a generally applicable tax to mean an enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power that is imposed and collected for the purpose of raising revenue to be used for governmental purposes. To qualify as a generally applicable tax, a tax must have a uniform rate that is applied to all persons of the same classification in the appropriate jurisdiction, and the tax must have a generally applicable manner of determination and collection.

Section 1.141–4(e)(4)(i) provides that a tax does not have a generally applicable manner of determination and collection to the extent that one or more taxpayers make any impermissible agreements relating to the payment of those taxes. Section 1.141–4(e)(4)(ii) and (iii) of the 1997 Regulations set forth permissible and impermissible agreements for this purpose. An example of a permissible agreement that does not cause a tax to fail to have a generally applicable manner of determination and collection includes an agreement to reduce or limit the amount of taxes collected to further a bona fide governmental purpose. For example, an agreement to abate taxes to encourage a property owner to rehabilitate property in a distressed area is a permissible agreement.

Section 1.141–4(e)(3) of the 1997 Regulations provides that a payment does not qualify as a generally applicable tax if it is a special charge for a special privilege granted or service rendered. This provision further provides that special assessments paid by property owners benefiting from financed improvements are not generally applicable taxes. This provision includes an example that a tax or PILOT that is limited to the property or persons benefited by an improvement is not a generally applicable tax.

The Proposed Regulations generally did not address the special charge limitation on generally applicable taxes. Commentators suggested clarifying the scope of this special charge limitation and its application in the context of PILOTs.

The Final Regulations clarify and illustrate the scope of the special charge

limitation on generally applicable taxes. The Final Regulations provide that a special charge includes a payment for a special privilege granted or regulatory function (for example, a license fee), a service rendered (for example, a sanitation services fee), a use of property (for example, rent), or a payment in the nature of a special assessment to finance capital improvements that is imposed on a limited class of persons based on benefits received from the capital improvements financed with the assessment. The Final Regulations illustrate that a special assessment to finance infrastructure improvements in a new industrial park (such as sidewalks, streets, streetlights, and utility infrastructure improvements) that is imposed on a limited class of persons composed of property owners within the industrial park who benefit from those improvements is a special charge. The Final Regulations also illustrate that, by contrast, an otherwisequalified generally applicable tax (for example, a generally applicable ad valorem tax on all real property within a governmental taxing jurisdiction) or an eligible PILOT that is based on such a generally applicable tax is not treated as a special charge merely because the taxes or PILOTs received are used for governmental or public purposes in a manner that benefits particular property owners.

IV. Certain Payments in Lieu of Taxes Treated as Generally Applicable Taxes

Section 1.141–4(e)(5) of the 1997 Regulations treats PILOTs as generally applicable taxes if: (1) The payments are commensurate with and not greater than the amounts imposed by the statute for a tax of general application; and (2) The payments are designated for a public purpose and are not special charges (as described in §1.141–4(e)(3)). Section 1.141–4(e)(5) of the 1997 Regulations further provides an example which states that a PILOT made in consideration for the use of property financed with tax-exempt bonds is treated as a special charge.

The Proposed Regulations proposed to clarify and to tighten the commensurate standard for PILOTs to better ensure a reasonably close relationship between eligible PILOTs and generally applicable taxes. In particular, the Proposed Regulations proposed to define the com

November 24, 2008 1168 2008–47 I.R.B.

does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal authors of these regulations are Carla Young and James Polfer, Office of Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and the Treasury Department participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAX

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.141–0 is amended by adding a new entry for §1.141–15(k) to read as follows:

§1.141–0 Table of contents .

§1.141–15 Effective dates .

- - - (k) Effective/applicability dates for certain regulations relating to generally applicable taxes and payments in lieu of tax.
- - - Par. 3. Section 1.141–4 is amended by:

Paragraph (e)(2) the first sentence is revised.
Paragraphs (e)(3), (e)(5), (e)(5)(i), (e)(5)(ii) are revised and adding new paragraphs (e)(5)(iii) and (e)(5)(iv).

The revisions and additions read as follows:

the designation of PILOTs for a public purpose and to the use of generally applicable taxes for governmental purposes were intended to refer to the same standard. In this regard, longstanding Revenue Rulings on the definition of generally applicable taxes under section 164 on which the section 141 definition was based have consistently required the use of generally applicable taxes for “public or governmental purposes.” See, for example, Rev. Rul. 71–49, 1971–1 C.B. 103; Rev. Rul. 61–152, 1961–2 C.B. 42 (see §601.601(d)(2)(ii)( b )). To clarify the intended uniform standard for the use of generally applicable taxes and eligible PILOTs, the Final Regulations adopt consistent terminology to state this uniform standard.

The 1997 Regulations and the Proposed Regulations require “designation” of eligible PILOTs for public purposes. Commentators suggested clarifying this designation principle to require “application” of PILOTs for public purposes or to deem PILOTs as duly designated upon commingling with other governmental taxes or revenues. In response to this comment, the Final Regulations require use of an eligible PILOT for governmental or public purposes for which the underlying generally applicable tax on which it is based may be used.

The Proposed Regulations proposed to eliminate the example in the last sentence of §1.141–4(e)(5)(ii) of the 1997 Regulations, which illustrated that a PILOT made in consideration of the use of property financed with tax-exempt bonds is treated as a special charge. Most commentators supported this proposed change and one commentator objected to this proposed change. The Final Regulations remove this example, but address the issue raised in this example separately in clarifying guidance on the “special charge” limitation on generally applicable taxes under §1.141–4(e)(3). A payment made “in consideration for the use of property” is more properly characterized as rent or an installment sale payment for the use of property. The Final Regulations clarify that, among other special charges, a payment for the use of property (for example, rent) is treated as a special charge under §1.141–4(e)(3). Further, the reference to tax-exempt bond financing in the referenced example caused confusion because

the presence or absence of tax-exempt bond financing properly is irrelevant to the determination of whether a payment, in substance, is in the nature of a special charge for the use of property or a generally applicable tax. The above-described revision with respect to the referenced example represents a technical clarification rather than a substantive change.

Effective/Applicability Dates

The Proposed Regulations were published on October 19, 2006, and were proposed to apply to bonds sold on or after February 16, 2007. This proposed effective date was intended to accommodate completion of bond issues for projects in progress under the 1997 Regulations. Commentators indicated that the proposed effective date of the Proposed Regulations was insufficient to accommodate completion of bond issues for projects substantially in progress. Commentators also requested transitional relief for refundings of bonds issued before the effective date of the Proposed Regulations.

The Final Regulations generally apply to bonds sold on or after October 24, 2008.

In response to public comments, the Final Regulations provide a transitional rule for refundings. Under this transitional rule, the 1997 Regulations may continue to be applied to certain refundings of bonds that were sold before the dates of applicability of the Final Regulations if they meet a prescribed weighted average maturity test set forth in the Final Regulations.

In addition, in response to public comments, the Final Regulations also provide a transitional rule for certain bonds for projects substantially in progress at the time of the promulgation of the Proposed Regulations. Under this transitional rule, the 1997 Regulations may continue to be applied to certain bonds issued within a prescribed time to finance certain projects that meet prescribed conditions set forth in the Final Regulations.

Special Analyses

2008–47 I.R.B. 1169 November 24, 2008

1.141–4(e)(3) and 1.141–4(e)(5) apply to bonds sold on or after October 24, 2008, that are otherwise subject to the 1997 Regulations (defined in paragraph (b)(1) of this section).

(2) Transitional rule for certain refund- ings . Paragraph (k)(1) does not apply to bonds that are issued to refund bonds if—

(i) Either— (A) The refunded bonds (or the original bonds in a series of refundings) were sold before October 24, 2008, or

(B) The refunded bonds (or the original bonds in a series of refundings) satisfied the transitional rule for projects substantially in progress under paragraph (k)(3) of this section; and

(ii) The weighted average maturity of the refunding bonds does not exceed the remaining weighted average maturity of the refunded bonds.

(3) Transitional rule for certain projects substantially in progress . Paragraph (k)(1) of this section does not apply to bonds issued for projects for which all of the following requirements are met:

(i) A governmental person (as defined in §1.141–1) took official action evidencing its preliminary approval of the project before October 19, 2006, and the plan of finance for the project in place at that time contemplated financing the project with tax-exempt bonds to be paid or secured by PILOTs.

(ii) Before October 19, 2006, significant expenditures were paid or incurred with respect to the project or a contract was entered into to pay or incur significant expenditures with respect to the project.

(iii) The bonds for the project (excluding refunding bonds) are issued on or before December 31, 2009.

Steven Miller, Deputy Commissioner for Services and Enforcement.

Approved October 16, 2008.

Eric Solomon, Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on October 20, 2008, 4:15 p.m., and published in the issue of the Federal Register for October 24, 2008, 73 F.R. 63372)

§1.141–4 Private Security or Payment Test .

- - - (e) - * (2) * * * A generally applicable tax is an enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power that is imposed and collected for the purpose of raising revenue to be used for governmental or public purposes.
- (3) Special charges . A special charge (as defined in this paragraph (e)(3)) is not a generally applicable tax. For this purpose, a special charge means a payment for a special privilege granted or regulatory function (for example, a license fee), a service rendered (for example, a sanitation services fee), a use of property (for example, rent), or a payment in the nature of a special assessment to finance capital improvements that is imposed on a limited class of persons based on benefits received from the capital improvements financed with the assessment. Thus, a special assessment to finance infrastructure improvements in a new industrial park (such as sidewalks, streets, streetlights, and utility infrastructure improvements) that is imposed on a limited class of persons composed of property owners within the industrial park who benefit from those improvements is a special charge. By contrast, an otherwise qualified generally applicable tax (such as a generally applicable ad valorem tax on all real property within a governmental taxing jurisdiction) or an eligible PILOT under paragraph (e)(5) of this section that is based on such a generally applicable tax is not treated as a special charge merely because the taxes or PILOTs received are used for governmental or public purposes in a manner which benefits particular property owners.
- - - (5) Payments in lieu of taxes . A tax equivalency payment or other payment in lieu of a tax (“PILOT”) is treated as a generally applicable tax if it meets the requirements of paragraphs (e)(5)(i) through (iv) of this section—

(i) Maximum amount limited by under- lying generally applicable tax . The PILOT is not greater than the amount imposed by a statute for a generally applicable tax in each year.

(ii) Commensurate with a generally ap- plicable tax . The PILOT is commensurate with the amount imposed by a statute for a generally applicable tax in each year under the commensurate standard set forth in this paragraph (e)(5)(ii). For this purpose, except as otherwise provided in this paragraph (e)(5)(ii), a PILOT is commensurate with a generally applicable tax only if it is equal to a fixed percentage of the generally applicable tax that would otherwise apply in each year or it reflects a fixed adjustment to the generally applicable tax that would otherwise apply in each year. A PILOT based on a property tax does not fail to be commensurate with the property tax as a result of changes in the level of the percentage of or adjustment to that property tax for a reasonable phase-in period ending when the subject property is placed in service (as defined in §1.150–2(c)). A PILOT based on a property tax must take into account the current assessed value of the property for property tax purposes for each year in which the PILOT is paid and that assessed value must be determined in the same manner and with the same frequency as property subject to the property tax. A PILOT is not commensurate with a generally applicable tax, however, if the PILOT is set at a fixed dollar amount (for example, fixed debt service on a bond issue) that cannot vary with changes in the level of the generally applicable tax on which it is based.

(iii) Use of PILOTs for governmental or public purposes . The PILOT is to be used for governmental or public purposes for which the generally applicable tax on which it is based may be used.

(iv) No special charges . The PILOT is not a special charge under paragraph (e)(3) of this section.

- - - Par. 4. Section 1.141–15 is amended by adding paragraph (k) to read as follows:

§1.141–15 Effective Dates .

- - - (k) Effective/applicability dates for certain regulations relating to generally applicable taxes and payments in lieu of tax —(1) In general . Except as otherwise provided in paragraphs (k)(2) and (k)(3) of this section, revised §§1.141–4(e)(2),

November 24, 2008 1170 2008–47 I.R.B.

Section 582.—Bad Debts, Losses, and Gains With Respect to Securities Held by Financial Institutions

Application of section 301 of the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110–343, 122 Stat. 3765, in situations where the applicable financial institution is a partner in a partnership which held the applicable preferred stock. See Rev. Proc. 2008-64, page 1195.

Section 702.—Income and Credits of Partner

Section 995.—Taxation of DISC Income to Shareholders

2008 base period T-bill rate. The “base period T-bill rate” for the period ending September 30, 2008, is published as required by section 995(f) of the Code.

Rev. Rul. 2008–51

Section 995(f)(1) of the Internal Revenue Code provides that a shareholder of a DISC shall pay interest each taxable year in an amount equal to the product of the shareholder’s DISC-related deferred tax liability for the year and the “base period T-bill rate.” Under section 995(f)(4), the base period T-bill rate is the annual rate of interest determined by the Secretary to be equivalent to the average of the 1-year constant maturity Treasury yields, as published by the Board of Governors of the Federal Reserve System, for the 1-year period ending on September 30 of the calendar year ending with (or of the most recent calendar year ending before) the close of the taxable year of the shareholder. The base period T-bill rate for the period ending September 30, 2008, is 2.48 percent.

Pursuant to section 6222 of the Code, interest must be compounded daily. The table below provides factors for compounding the base period T-bill rate daily for any number of days in the shareholder’s taxable year (including a 52–53 week accounting period) for the 2008 base

period T-bill rate. To compute the amount of the interest charge for the shareholder’s taxable year, multiply the amount of the shareholder’s DISC-related deferred tax liability (as defined in section 995(f)(2)) for that year by the base period T-bill rate factor corresponding to the number of days in the shareholder’s taxable year for which the interest charge is being computed. Generally, one would use the factor for 365 days. One would use a different factor only if the shareholder’s taxable year for which the interest charge being determined is a short taxable year, if the shareholder uses the 52–53 week taxable year, or if the shareholder’s taxable year is a leap year.

For the base period T-bill rates for the periods ending in prior years, see Rev. Rul. 2007–64, 2007–45 I.R.B. 953; Rev. Rul. 2006–54, 2006–2 C.B. 834; Rev. Rul. 2005–70, 2005–2 C.B. 919; Rev. Rul. 2004–99, 2004–2 C.B. 720; Rev. Rul. 2003–2, 2003–1 C.B. 251; Rev. Rul. 2002–68, 2002–2 C.B. 808; Rev. Rul. 2001–56, 2001–2 C.B. 500; and Rev. Rul. 2000–52, 2000–2 C.B. 516.

DRAFTING INFORMATION

The principal author of this revenue ruling is Teresa B. Hughes of the Office of Associate Chief Counsel (International). For further information regarding this revenue ruling, contact Teresa B. Hughes at (202) 622–3850 (not a toll-free call).

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

1 .000067760 2 .000135524 3 .000203292 4 .000271066 5 .000338844

6 .000406626 7 .000474413 8 .000542205 9 .000610001 10 .000677802

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

11 .000745608 12 .000813418 13 .000881233 14 .000949052 15 .001016876

16 .001084704 17 .001152537 18 .001220375 19 .001288217 20 .001356064

21 .001423915 22 .001491771 23 .001559632 24 .001627497 25 .001695367

26 .001763242 27 .001831121 28 .001899004 29 .001966893 30 .002034785

31 .002102683 32 .002170585 33 .002238492 34 .002306403 35 .002374319

36 .002442239 37 .002510164 38 .002578094 39 .002646028 40 .002713967

41 .002781910 42 .002849858 43 .002917811 44 .002985768 45 .003053730

46 .003121697 47 .003189668 48 .003257643 49 .003325624 50 .003393609

2008–47 I.R.B. 1171 November 24, 2008

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

131 .008915712 132 .008984076 133 .009052444 134 .009120817 135 .009189195

136 .009257577 137 .009325964 138 .009394355 139 .009462752 140 .009531152

141 .009599558 142 .009667968 143 .009736382 144 .009804802 145 .009873226

146 .009941654 147 .010010087 148 .010078525 149 .010146968 150 .010215415

151 .010283867 152 .010352323 153 .010420784 154 .010489250 155 .010557720

156 .010626195 157 .010694674 158 .010763159 159 .010831648 160 .010900141

161 .010968639 162 .011037142 163 .011105649 164 .011174162 165 .011242678

166 .011311200 167 .011379726 168 .011448256 169 .011516792 170 .011585332

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

51 .003461598 52 .003529592 53 .003597591 54 .003665594 55 .003733602

56 .003801615 57 .003869632 58 .003937654 59 .004005680 60 .004073711

61 .004141747 62 .004209787 63 .004277832 64 .004345881 65 .004413935

66 .004481994 67 .004550057 68 .004618125 69 .004686197 70 .004754275

71 .004822356 72 .004890443 73 .004958534 74 .005026629 75 .005094729

76 .005162834 77 .005230943 78 .005299057 79 .005367176 80 .005435299

81 .005503427 82 .005571560 83 .005639697 84 .005707838 85 .005775985

86 .005844136 87 .005912291 88 .005980451 89 .006048616 90 .006116786

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

91 .006184960 92 .006253138 93 .006321322 94 .006389510 95 .006457702

96 .006525899 97 .006594101 98 .006662307 99 .006730518 100 .006798734

101 .006866954 102 .006935179 103 .007003408 104 .007071643 105 .007139881

106 .007208125 107 .007276373 108 .007344625 109 .007412883 110 .007481144

111 .007549411 112 .007617682 113 .007685958 114 .007754238 115 .007822523

116 .007890813 117 .007959107 118 .008027406 119 .008095709 120 .008164017

121 .008232330 122 .008300648 123 .008368970 124 .008437296 125 .008505627

126 .008573963 127 .008642304 128 .008710649 129 .008778999 130 .008847353

November 24, 2008 1172 2008–47 I.R.B.

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

251 .017152518 252 .017221440 253 .017290366 254 .017359297 255 .017428233

256 .017497173 257 .017566119 258 .017635068 259 .017704023 260 .017772982

261 .017841946 262 .017910915 263 .017979888 264 .018048866 265 .018117848

266 .018186835 267 .018255827 268 .018324824 269 .018393825 270 .018462831

271 .018531842 272 .018600857 273 .018669877 274 .018738901 275 .018807931

276 .018876965 277 .018946003 278 .019015047 279 .019084095 280 .019153147

281 .019222205 282 .019291267 283 .019360334 284 .019429405 285 .019498481

286 .019567562 287 .019636647 288 .019705737 289 .019774832 290 .019843932

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

171 .011653876 172 .011722425 173 .011790979 174 .011859538 175 .011928101

176 .011996669 177 .012065241 178 .012133818 179 .012202400 180 .012270986

181 .012339577 182 .012408173 183 .012476773 184 .012545378 185 .012613988

186 .012682602 187 .012751221 188 .012819845 189 .012888473 190 .012957106

191 .013025743 192 .013094386 193 .013163032 194 .013231684 195 .013300340

196 .013369001 197 .013437666 198 .013506336 199 .013575011 200 .013643691

201 .013712375 202 .013781063 203 .013849757 204 .013918455 205 .013987157

206 .014055865 207 .014124577 208 .014193293 209 .014262015 210 .014330741

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

211 .014399471 212 .014468206 213 .014536946 214 .014605691 215 .014674440

216 .014743194 217 .014811953 218 .014880716 219 .014949484 220 .015018256

221 .015087033 222 .015155815 223 .015224602 224 .015293393 225 .015362189

226 .015430989 227 .015499794 228 .015568604 229 .015637419 230 .015706238

231 .015775062 232 .015843890 233 .015912723 234 .015981561 235 .016050404

236 .016119251 237 .016188103 238 .016256959 239 .016325820 240 .016394686

241 .016463556 242 .016532432 243 .016601311 244 .016670196 245 .016739085

246 .016807979 247 .016876877 248 .016945780 249 .017014688 250 .017083601

2008–47 I.R.B. 1173 November 24, 2008

Section 1367.—Adjust- ments to Basis of Stock of Shareholders, etc.

26 CFR 1.1367–2: Adjustments to basis of indebted- ness to shareholder.

T.D. 9428

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Section 1367 Regarding Open Account Debt

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the treatment of open account debt between S corporations and their shareholders. These final regulations provide rules regarding the definition of open account debt and the adjustments in basis of any indebtedness of an S corporation to a shareholder under section 1367(b)(2) of the Internal Revenue Code (Code) for shareholder advances and repayments on advances of open account debt. The regulations affect shareholders of S corporations and are necessary to provide guidance needed to comply with the applicable tax law.

DATES: Effective Date: These regulations are effective on October 20, 2008.

Applicability Date: For dates of applicability, see §1.1367–3.

FOR FURTHER INFORMATION CONTACT: Stacy L. Short or Deane M. Burke, (202) 622–3070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends §1.1367–2 of the Income Tax Regulations (26 CFR part

regarding the definition of open account debt and adjustments in basis of indebtedness for shareholder advances and repayments on advances of open account debt.

Section 1367(a)(1) provides that the basis of each shareholder’s stock in an

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

291 .019913036 292 .019982145 293 .020051258 294 .020120377 295 .020189499

296 .020258627 297 .020327759 298 .020396896 299 .020466038 300 .020535184

301 .020604335 302 .020673491 303 .020742651 304 .020811816 305 .020880986

306 .020950161 307 .021019340 308 .021088524 309 .021157712 310 .021226905

311 .021296103 312 .021365306 313 .021434513 314 .021503725 315 .021572942

316 .021642163 317 .021711389 318 .021780620 319 .021849855 320 .021919095

321 .021988340 322 .022057590 323 .022126844 324 .022196103 325 .022265366

326 .022334634 327 .022403907 328 .022473185 329 .022542467 330 .022611754

2008 ANNUAL RATE, COMPOUNDED DAILY

2.480 PERCENT

DAYS FACTOR

331 .022681046 332 .022750343 333 .022819644 334 .022888949 335 .022958260

336 .023027575 337 .023096895 338 .023166220 339 .023235549 340 .023304883

341 .023374222 342 .023443565 343 .023512913 344 .023582266 345 .023651623

346 .023720986 347 .023790352 348 .023859724 349 .023929100 350 .023998481

351 .024067867 352 .024137257 353 .024206653 354 .024276052 355 .024345457

356 .024414866 357 .024484280 358 .024553699 359 .024623122 360 .024692550

361 .024761983 362 .024831420 363 .024900862 364 .024970309 365 .025039760

366 .025109217 367 .025178678 368 .025248143 369 .025317614 370 .025387089

371 .025456569

November 24, 2008 1174 2008–47 I.R.B.

broad and should be withdrawn. Two commentators suggested that amending the regulations for open account debt is not an appropriate approach for the Treasury Department and the IRS to address concerns regarding transactions similar to that in Brooks . Instead, the commentators asserted, such concerns should be addressed through established judicial doctrines such as substance over form, business purpose, sham transaction, and economic substance. One commentator alternatively recommended a narrowly tailored anti-abuse rule targeting open account debt instead of broader rules that would apply to all such debt.

The Treasury Department and the IRS continue to believe that regulatory guidance on open account debt is necessary. The Treasury Department and the IRS believe that the treatment of open account debt as interpreted in Brooks permits tax consequences that are inconsistent with the original purpose of §1.1367–2 and is not conducive to sound tax administration. Neither established judicial doctrines alone nor a narrowly tailored anti-abuse rule suggested by the commentators would adequately address these concerns, though the Treasury Department and the IRS continue to recognize the applicability of the judicial doctrines in appropriate cases in addition to these final regulations.

Aggregate Principal Threshold Amount

The proposed regulations defined open account debt as shareholder advances not evidenced by separate written instruments for which the principal amount of the aggregate advances (net of repayments on advances) did not exceed $10,000 per shareholder at the close of any day during the S corporation’s taxable year. Shareholders were required to determine for open account debt purposes whether shareholder advances and repayments on the advances exceeded the $10,000 aggregate principal threshold on any day during the S corporation’s taxable year. To make such a determination, shareholders were required to maintain a “running balance” of shareholder advances and repayments on advances, and the outstanding principal amount of the open account debt. If the resulting aggregate principal of the running balance exceeded $10,000 at the close of any day during the S corporation’s taxable

S corporation is increased by the shareholder’s pro rata share of the S corporation’s income (separately and nonseparately computed items of income) and the excess of the deductions for depletion over the basis of the property subject to depletion. Section 1367(a)(2) provides that the basis of each shareholder’s stock in the S corporation is decreased by the shareholder’s distributions not includible in income of the shareholder by reason of section 1368 (nontaxable distributions), and the shareholder’s pro rata share of the losses and deductions (separately and nonseparately computed losses), any expense of the corporation that is not deductible and not properly chargeable to capital account, and certain deductions for depletion for any oil and gas property held by the S corporation. Under section 1367(b)(2)(A), if for any taxable year the amounts specified in section 1367(a)(2) (other than distributions) exceed the amount which reduces the shareholder’s basis to zero, such excess losses and deductions shall be applied to reduce (but not below zero) the shareholder’s basis in any indebtedness of the S corporation to the shareholder. Section 1367(b)(2)(B) provides that if a shareholder’s basis in indebtedness is reduced for any taxable year, any net increase (the amount by which the items described in section 1367(a)(1) exceed the items described in section 1367(a)(2)) for any subsequent taxable year is applied to restore the reduction in basis in indebtedness before any of the excess is used to increase basis in stock.

On January 3, 1994, the Treasury Department and the IRS published final regulations under section 1367 of the Code (T.D. 8508, 1994–1 C.B. 219 [59 FR 12], amended on December 22, 1999 (T.D. 8852, 2000–1 C.B. 253 [64 FR 71641])). Those final regulations relate, in part, to adjustments to basis in both stock of shareholders and indebtedness of an S corporation to its shareholders. Section 1.1367–2 of the Income Tax Regulations provides specific rules for required adjustments (reductions and restorations) to basis in any indebtedness of an S corporation to a shareholder. Section 1.1367–2(a) also provides that for purposes of adjustments to basis of indebtedness to shareholders, shareholder advances not evidenced by separate written instruments and repay

ments on the advances (open account debt) are treated as a single indebtedness. The basis adjustment rules under the final regulations apply to all indebtedness of an S corporation to a shareholder, whether the indebtedness is evidenced by a written instrument or is open account debt. Taxpayers should also remember that all advances to an S corporation by a shareholder are subject to the general tax principles for debt, whether evidenced by a written instrument or not.

On August 25, 2005, the Tax Court issued its decision in Brooks v. Commis- sioner, TC Memo. 2005–204, involving open account debt. Under its interpretation of §1.1367–2, the court in Brooks held “that the basis of the open account indebtedness is properly computed by netting at the close of the year advances of open account debt during the year and repayments of open account debt during the year.” This allowed the taxpayer in Brooks to defer indefinitely the recognition of income on any repayment of his open account debt over the several years during which the taxpayer and the S corporation made advances and repayments, respectively.

On April 12, 2007, the Treasury Department and the IRS published a notice of proposed rulemaking and a notice of public hearing (REG–144859–04, 2007–20 I.R.B. 1245) in the Federal Register (72 FR 18417) proposing amendments to the regulations relating to the treatment of open account debt between S corporations and their shareholders. A public hearing on the proposed regulations was scheduled for July 31, 2007, but was cancelled because no one requested to speak. However, comments responding to the proposed regulations were received. After consideration of these comments, the proposed regulations are adopted as revised by this Treasury decision. These final regulations generally retain the provisions of the proposed regulations with the modifications discussed in the preamble.

Summary of Comments and Explanation of Revisions

Need for Regulatory Change

All of the comments received in response to the proposed regulations suggested that the regulations were overly

2008–47 I.R.B. 1175 November 24, 2008

this “cliff” effect, the final regulations should adopt a second prong to the aggregate principal threshold amount test so that advances would fail to meet the definition of open account debt only if both the aggregate principal of the running balance exceeded the applicable aggregate principal threshold dollar amount on any given day of the year and the balance at the end of the year exceeded the average of the daily balances throughout the year. The commentator provided examples of intended beneficiaries of such an “averaging” rule, for example, shareholders who need to advance their S corporation more funds on a short-time basis but end the year with an outstanding principal amount of the open account debt below the threshold level.

After careful consideration of these comments, the Treasury Department and the IRS have concluded that extending the period for which a shareholder determines whether shareholder advances and repayments exceed the aggregate principal threshold dollar amount for open account debt would reduce both the complexity of the regulations and any perceived burden on shareholders in making such determinations. In addition, such a modified rule should alleviate concerns over any potential “cliff” effect resulting from a day-to-day determination of threshold amount as required in the proposed regulations. The Treasury Department and the IRS also recognize that shareholder advances made to an S corporation and subsequently repaid during the same taxable year of the S corporation are not available for inclusion in the shareholder’s basis in the indebtedness for purposes of passing through additional losses to the shareholder at the end of the taxable year.

Therefore, the final regulations do not adopt a daily determination of whether shareholder advances and repayments on the advances exceed the $25,000 threshold amount. Instead, the final regulations provide that a determination of whether the threshold balance of $25,000 is exceeded will be made at the end of the taxable year of the S corporation. Under these final regulations, however, if open account debt is disposed of in whole or in part before the end of the S corporation’s taxable year, the determination of whether the advances and repayments have exceeded the designated aggregate principal threshold amount must

year, the entire principal amount of the indebtedness would no longer constitute open account debt effective at the close of that day.

Commentators suggested that the proposed regulations’ aggregate principal threshold of $10,000 was too low for most businesses. One commentator asserted that establishing any aggregate principal threshold dollar amount for open account debt in final regulations would be arbitrary and would impose a certain compliance burden on smaller businesses. However, that commentator also suggested that increasing the aggregate principal threshold dollar amount would mitigate the compliance burden. The commentators suggested that if the final regulations adopt any threshold dollar amount for open account debt, such a threshold amount should be increased to an amount ranging from $100,000 to $1 million.

After considering the comments on the aggregate principal threshold dollar amount, and on recognizing customary business practices as noted by the commentators, the Treasury Department and the IRS have concluded that the aggregate principal threshold dollar amount for open account debt should be increased and that other changes are necessary. Therefore, the final regulations adopt a $25,000 aggregate principal threshold amount per shareholder for open account debt. For example, an S corporation with ten shareholders could receive up to $250,000 of open account debt as long as no single shareholder advanced more than $25,000. The Treasury Department and the IRS believe that the $25,000 threshold, together with certain other changes noted below, balances concerns over deferral potential with normal business practices. Under the final regulations, for any particular shareholder advances and repayments on those advances for which, as of the specified determination date, the aggregate principal balance exceeds the $25,000 aggregate principal threshold amount will no longer constitute open account debt, but instead will be treated as debt evidenced by a separate written instrument subject to the basis adjustment and repayment accounting rules applicable to S corporation shareholder debt generally.

As noted in the preamble to the proposed regulations, the $10,000 aggregate principal threshold amount for open ac

count debt for purposes of §1.1367–2 was modeled after section 7872(c)(3) and the de minimis exception for corporation-shareholder loans in §1.7872–9 of the proposed regulations. However, the Treasury Department and the IRS do not believe it is necessary that the threshold amount for open account debt be modeled after the rules under §1.7872–9 regarding corporate-shareholder loans. Nevertheless, despite the $25,000 threshold amount for open account debt in these final regulations, the provisions under section 7872 and related regulations for corporate-shareholder loans in excess of $10,000 separately apply to open account debt in excess of $10,000 for each advance if the corporation is not obligated to pay a market rate of interest on the advances.

Monitoring the Aggregate Principal Threshold Amount

The proposed regulations effectively required day-to-day monitoring of open account debt. For purposes of determining compliance with the aggregate principal threshold amount for open account debt, the shareholder was required to maintain a daily running balance of shareholder advances and repayments on such advances, and the outstanding principal amount of the open account debt. Some of the commentators suggested that the daily monitoring requirement would impose an unreasonable burden on shareholders and recommended that the running balance requirement be tested quarterly, annually or when the corporation maintains and updates its other books and records. One commentator described the practice by many closely held corporations of reconciling and accounting only once a year and noted that only then would such an S corporation and its shareholder(s) know what payments are legitimately charged to the corporation as opposed to those appropriately charged to the shareholder(s).

Another commentator suggested that with daily monitoring, a maximum threshold rule for open account debt is too harsh for shareholders insofar as it immediately changes the treatment of such debt the principal balance of which exceeds the threshold by a single cent on any day, resulting in a “cliff” effect. The commentator suggested that in order to mitigate

November 24, 2008 1176 2008–47 I.R.B.

debt would not be subject to these final regulations and, thus, would not be subject to any aggregate principal threshold dollar amount and would be repaid under the rules of the prior final regulations. If, on or after the effective date of these final regulations, A were to both make an advance of $5,000 to his S corporation and receive a $1,000 repayment on that advance, the advance and repayment would constitute separate new open account debt subject to the rules under these final regulations.

Shareholders also have the option to apply these rules to shareholder advances to the S corporation and repayments on those advances by the S corporation made before the effective date of these regulations. Using the example above, A would have the option to net the $5,000 advance and $1,000 repayment.

Effective/Applicability Date

The regulations apply to any and all shareholder advances to the S corporation made on or after October 20, 2008, and repayments on those advances by the S corporation.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking that preceded these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal authors of these final regulations are Stacy L. Short and Deane M. Burke of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the

be made immediately before the disposition of the debt during that taxable year. Moreover, if a shareholder with open account debt is no longer a shareholder at the end of the S corporation’s taxable year, the determination must be made immediately before the shareholder’s interest in the S corporation is terminated.

Character of Income/Gain Recognition

One of the commentators suggested that the final regulations address the issue of how to characterize any income or gain that is recognized upon repayment of both open account debt and indebtedness evidenced by a written instrument. While recognizing the commentators’ concerns, the Treasury Department and the IRS believe that the characterization issue is beyond the scope of these final regulations. However, the Treasury Department and the IRS intend to continue considering the characterization issue.

Effective Date Operation

The effective date in the proposed regulations provided that the proposed rules for open account debt applied to any shareholder advances to the S corporation made on or after the date the regulations were published as final regulations and repayments on those advances by the S corporation. Thus, all open account debt (net of repayments) prior to the publication of the final regulation was outside the scope of the proposed regulations, irrespective of the outstanding principal amount.

One of the commentators believed that the effective date language in the proposed regulations was subject to two interpretations. Under the first interpretation, the rules under these final regulations (New Rules) would apply only to open account debt created on or after the effective date, that is, shareholder advances made on or after the effective date and repayments on those same advances. The rules under the prior final regulations (as contained in the 26 CFR edition revised April 1, 2007) (Old Rules) would apply to open account debt created before the effective date, that is, shareholder advances with respect to pre-effective date open account debt and repayments on those prior advances. Accordingly, a shareholder could have open account debt, subject to the Old Rules, and open account debt, subject to the New

Rules, to which new shareholder advances and repayments on those advances could be made after the effective date.

Under the second interpretation, a shareholder could not make additional advances with respect to open account debt created before the effective date but could receive repayments on that debt under the Old Rules. Accordingly, the New Rules would apply to all shareholder advances on and after the effective date, as well as repayments on those advances, and the Old Rules would apply only to repayments on pre-effective date open account debt.

The Treasury Department and the IRS intend that the rules under these final regulations (New Rules) apply to any and all shareholder advances made on and after the effective date. The rules under these final regulations (New Rules) also apply to repayments on such advances. However, if a shareholder has open account debt (net of prior repayments in the taxable year) outstanding prior to the effective date of these final regulations, the rules under the prior final regulations (Old Rules) apply to any repayments on such pre-effective date open account debt. Accordingly, that pre-effective date open account debt will not be subject to any aggregate principal threshold dollar amount. The shareholder may not make additional advances with respect to the pre-effective date open account debt (because all shareholder advances made on or after the effective date of these final regulations constitute new open account debt subject to these final regulations).

For instance, assume that the effective date of these final regulations falls within the taxable year of shareholder A’s S corporation. Also assume that, at the beginning of the S corporation’s taxable year, A will have existing open account debt with an outstanding principal balance of $12,000. Assume further that A will make an additional advance of $3,000 to and will receive a $2,000 repayment from his S corporation prior to the effective date. Thus, as of the effective date, A will have existing open account debt with an outstanding principal balance of $13,000 (A would net the pre-effective date advance and repayment for the taxable year and combine that net advance of $1,000 with the $12,000 outstanding aggregate principal balance of the then existing open account debt). This $13,000 pre-effective date open account

2008–47 I.R.B. 1177 November 24, 2008

in whole or in part before the close of the taxable year, the basis of that indebtedness is restored under paragraph (c) of this section, effective immediately before the disposition or the first repayment on the debt during the taxable year. To the extent any indebtedness of the S corporation to the shareholder is disposed of or repaid (in whole or in part) during the taxable year and the shareholder’s basis in that indebtedness has been reduced under paragraph (b) of this section and is not restored completely under paragraph (c) of this section, the disposition or repayment is a recognition event effective immediately before the indebtedness is disposed of or repaid (in whole or in part).

(2) Open account debt —(i) In gen- eral . All advances and repayments on open account debt (as described in paragraph (a)(2)(i) of this section) during the S corporation’s taxable year are netted at the close of the S corporation’s taxable year to determine the amount of any net advance or net repayment. The net advance or net repayment is combined with the outstanding aggregate principal balance of the existing open account debt and that amount is carried forward to the beginning of the subsequent taxable year as the outstanding aggregate principal amount of the open account debt (unless the aggregate principal amount meets the exception defined in paragraph (a)(2)(ii) of this section at the close of the taxable year). However, if the shareholder in the S corporation is not a shareholder of the S corporation at the close of the S corporation’s taxable year, such advances and repayments on open account debt are netted, and the basis of that indebtedness is restored under paragraph (c) of this section, effective immediately before the shareholder terminates his or her interest in the S corporation. If any open account debt is disposed of before or upon the close of the taxable year, the disposition is effective at the close of the S corporation’s taxable year, and all advances and repayments are netted immediately prior to the disposition and the basis of that indebtedness is restored under paragraph (c) of this section, effective at the close of the S corporation’s taxable year.

(ii) Exception . Shareholder indebtedness that is open account debt at the beginning of the taxable year but meets the exception defined in paragraph (a)(2)(ii) of

Treasury Department participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.1367–2 also issued under 26 U.S.C. 1367(b)(2).* * * Par. 2. Section 1.1367–2 is amended as follows:

Paragraph (a) is revised.
Paragraphs (c)(2) and (d)(1) are revised.
Paragraph (d)(2) is redesignated as paragraph (d)(3) and new paragraph (d)(2) is added.
Paragraph (e) is amended by adding Examples 6, 7 and 8 .

The revisions and additions read as follows:

§1.1367–2 Adjustments to basis of indebtedness to shareholder .

(a) In general —(1) Adjustments un- der section 1367 . This section provides rules relating to adjustments required by subchapter S to the basis of indebtedness (including open account debt as described in paragraph (a)(2) of this section) of an S corporation to a shareholder. The basis of indebtedness of the S corporation to a shareholder is reduced as provided in paragraph (b) of this section and restored as provided in paragraph (c) of this section in accordance with the timing rules in paragraph (d) of this section.

(2) Open Account Debt —(i) Gen- eral rule . The term open account debt means shareholder advances not evidenced by separate written instruments and repayments on the advances, the aggregate outstanding principal of which does not exceed $25,000 of indebtedness of the S corporation to the shareholder at the close of the S corporation’s taxable year. Advances and repayments on open account debt are treated as a single indebtedness.

(ii) Exception . If the shareholder advances not evidenced by a separate written instrument, net of repayments, exceeds an aggregate outstanding principal amount of $25,000 at the close of the S corporation’s taxable year, for any subsequent taxable year the aggregate principal amount of that indebtedness is treated in the same manner as indebtedness evidenced by a separate written instrument for purposes of this section. For any subsequent taxable year, that indebtedness is not open account debt and is subject to all basis adjustment rules applicable to basis of indebtedness of an S corporation to a shareholder in this section.

- - - (c) - - (2) Multiple indebtedness . If a shareholder holds more than one indebtedness (including any open account debt and any debt treated as a single indebtedness under paragraph (a)(2)(ii) of this section) as of the beginning of an S corporation’s taxable year, any net increase is applied first to restore the reduction of basis in any indebtedness repaid (in whole or in part) in that taxable year to the extent necessary to offset any gain that would otherwise be realized on the repayment. Any remaining net increase is applied to restore each outstanding indebtedness (including any open account debt and any debt treated as a single indebtedness under paragraph (a)(2)(ii) of this section) in proportion to the amount that the basis of each outstanding indebtedness has been reduced under section 1367(b)(2)(A) and paragraph (b) of this section and not restored under section 1367(b)(2)(B) and this paragraph (c). (d) Time at which adjustments to ba- sis of indebtedness are effective —(1) In general . The amounts of the adjustments to basis of indebtedness (including open account debt) provided in section 1367(b)(2) and this section are determined as of the close of the S corporation’s taxable year, and the adjustments are generally effective as of the close of the S corporation’s taxable year. However, if the shareholder is not a shareholder in the S corporation at that time, these adjustments are effective immediately before the shareholder terminates his or her interest in the S corporation. Except as provided in paragraph (d)(2) of this section, if a debt is disposed of or repaid

November 24, 2008 1178 2008–47 I.R.B.

this section at the close of the taxable year, adjustments to the basis of the indebtedness for that taxable year follow the provisions for open account debt. The resulting aggregate principal amount of indebtedness is treated as the principal amount of a debt evidenced by a separate written instrument for any subsequent taxable year, and is no longer subject to the open account debt provisions of this section.

- - - (e) - - Example 6 . The $25,000 aggregate principal amount applies to each shareholder . (i) A and B have been the two shareholders in Corporation S since 2000. As of the end of the 2008 taxable year, the bases of A’s and B’s stock are both zero. On June 1, 2009, A advances S $16,000, which is not evidenced by a written instrument. On August 1, 2009, B advances S $22,000, which is not evidenced by a written instrument. Both the $16,000 advance and the $22,000 advance are open account debt and remain outstanding at those amounts during 2009. There is no net increase under paragraph (c) of this section in year 2009.

(ii) At the close of the 2009 taxable year, A’s open account debt does not exceed $25,000. A therefore carries forward to the beginning of the 2010 taxable year the $16,000 as open account debt.

(iii) At the close of the 2009 taxable year, B’s open account debt does not exceed $25,000. B therefore carries forward to the beginning of the 2010 taxable year the $22,000 as open account debt.

Example 7 . Treatment of open account debt . (i) The facts are the same as in Example 6, in addition to which, on December 31, 2009, A’s basis in the open account debt is reduced under paragraph (b) of this section to $8,000. On April 1, 2010, S repays A $4,000 of the open account indebtedness. On September 1, 2010, A advances S an additional $1,000, which is not evidenced by a written instrument. There is no net increase under paragraph (c) of this section in year 2010.

(ii) The $4,000 April repayment S makes to A and A’s $1,000 September advance are netted to result in a net repayment of $3,000 for the taxable year on A’s $16,000 open account debt carried forward from 2009. Because there is no net increase in 2010, no basis of indebtedness is restored for the 2010 taxable year, and A realizes $1,500 of income on the $3,000 net repayment at the close of the 2010 taxable year.

(iii) At close of the 2010 taxable year, A’s open account debt does not exceed $25,000. The net repayment of $3,000 for the taxable year on A’s $16,000 open account debt carried forward from 2009, leaves A with an open account debt of $13,000 to carry forward as open account debt to the beginning of the 2011 taxable year. Example 8 . Treatment of shareholder indebted- ness not evidenced by a written instrument which ex- ceeds $25,000 . (i) The facts are the same as in Exam- ple 7, in addition to which, on February 1, 2011, S repays $5,000 of the open account debt and on March 1, 2011, A advances S $20,000, which is not evidenced by a written instrument.

(ii) At the close of the 2010 taxable year, A has an open account debt of $13,000 to carry forward as open account debt to the beginning of the 2011 taxable year.

(iii) The 2011 advances and repayments are netted to result in a net advance of $15,000 on A’s $13,000 open account debt carried forward from 2010, increasing A’s open account debt to $28,000 as of the close of the 2011 taxable year. Because A’s open account debt exceeds $25,000, for any subsequent taxable year the $28,000 indebtedness will be treated in the same manner as indebtedness evidenced by a separate written instrument for the purposes of this section. Because there is no net increase in 2011, no basis of indebtedness is restored for the 2011 taxable year.

Par. 3. Section 1.1367–3 is revised to read as follows:

§1.1367–3 Effective/Applicability date .

Section 1.1367–2(a), (c)(2), (d)(2), and (e) Example 6, Example 7, and Example 8 apply to any shareholder advances to the S corporation made on or after October 20, 2008, and repayments on those advances by the S corporation. The rules that apply with respect to shareholder advances to the S corporation made before October 20, 2008, are contained in §1.1367–3 in effect prior to October 20, 2008. (See 26 CFR part 1 revised as of April 1, 2007.) Shareholders have the option to apply these rules to shareholder advances to the S corporation made before October 20, 2008, and repayments on those advances by the S corporation.

Linda E. Stiff, Deputy Commissioner for Services and Enforcement.

Approved September 25, 2008.

Eric Solomon, Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on October 17, 2008, 8:45 a.m., and published in the issue of the Federal Register for October 20, 2008, 73 F.R. 62199)

Section 6011.—General Requirement of Return, Statement, or List

trust), results in the grantor or other noncharitable recipient receiving the value of that person’s trust interest while claiming to recognize little or no taxable gain. See Notice 2008-99, page 1194.

Section 6111.—Disclosure of Reportable Transactions

The Internal Revenue Service and the Treasury Department are aware of a type of transaction, identified in this notice as a transaction of interest, in which a sale or other disposition of all interests in a charitable remainder trust (subsequent to the contribution of appreciated assets to and their reinvestment by the trust), results in the grantor or other noncharitable recipient receiving the value of that person’s trust interest while claiming to recognize little or no taxable gain. See Notice 2008-99, page 1194.

Section 6112.—Material Advisors of Reportable Transactions Must Keep Lists of Advisees, etc.

Section 9811.—Standards Relating to Benefits for Mothers and Newborns

26 CFR 54.9811–1: Standards relating to benefits for mothers and newborns.

T.D. 9427

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 54

DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2590

DEPARTMENT OF HEALTH AND HUMAN SERVICES 45 CFR Parts 146 and 148

2008–47 I.R.B. 1179 November 24, 2008

Final Rules for Group Health Plans and Health Insurance Issuers Under the Newborns’ and Mothers’ Health Protection Act

AGENCIES: Internal Revenue Service, Department of the Treasury; Employee Benefits Security Administration, Department of Labor; Centers for Medicare & Medicaid Services, Department of Health and Human Services.

ACTION: Final rules.

SUMMARY: This document contains final rules for group health plans and health insurance issuers concerning hospital lengths of stay for mothers and newborns following childbirth pursuant to the Newborns’ and Mothers’ Health Protection Act of 1996 and the Taxpayer Relief Act of 1997.

DATES: Effective Date: These final regulations are effective December 19, 2008.

Applicability Dates: Group market rules. These final regulations for the group market apply to group health plans and group health insurance issuers for plan years beginning on or after January 1, 2009. Individual market rules. These final regulations for the individual market apply with respect to health insurance coverage offered, sold, issued, renewed, in effect, or operated in the individual market on or after January 1, 2009.

FOR FURTHER INFORMATION CONTACT: Amy Turner or Beth Baum, Employee Benefits Security Administration, Department of Labor, at (202) 693–8335; Russ Weinheimer, Internal Revenue Service, Department of the Treasury, at (202) 622–6080; or Adam Shaw, Centers for Medicare & Medicaid Services, Department of Health and Human Services, at (877) 267–2323 extension 61091.

CUSTOMER SERVICE INFORMA- TION: Individuals interested in obtaining copies of Department of Labor publications concerning health care laws may request copies by

1 26 CFR §54.9811–1, 29 CFR §2590.711, 45 CFR §146.130.

2 45 CFR §148.170.

calling the EBSA Toll-Free Hotline at 1–866–444–EBSA (3272) or may request a copy of CMS’s publication entitled “Protecting Your Health Insurance Coverage” by calling 1–800–633–4227. These regulations as well as other information on the Newborns’ and Mothers’ Health Protection Act and other health care laws are also available on the Department of Labor’s website ( http://www.dol.gov/ebsa ), including the interactive web pages, Health E laws.

SUPPLEMENTARY INFORMATION:

I. Background

The Newborns’ and Mothers’ Health Protection Act of 1996 (Newborns’ Act), Public Law 104–204, was enacted on September 26, 1996. The rules contained in this document implement changes made to the Employee Retirement Income Security Act of 1974 (ERISA) and the Public Health Service Act (PHS Act) made by the Newborns’ Act, and parallel changes to the Internal Revenue Code of 1986 (Code) enacted as part of the Taxpayer Relief Act of 1997 (TRA ’97). The Newborns’ Act was enacted to provide protections for mothers and their newborn children with regard to hospital lengths of stay following childbirth. Interim final rules implementing the group and individual market provisions of the Newborns’ Act were published in the Federal Register on October 27, 1998 (63 FR 57546) (the interim final rules).

These regulations being published today in the Federal Register finalize the interim final rules. The final regulations implementing the group market provisions of the Newborns’ Act are issued jointly by the Secretaries of the Treasury, Labor, and HHS. ¹ The individual market final regulations are issued solely by HHS. ²

II. Overview of the Regulations

Section 9811 of the Code, section 711 of ERISA, and sections 2704 and 2751 of the PHS Act (the Newborns’ Act provisions) provide a general rule under which a group health plan and a health insurance issuer may not restrict mothers’ and newborns’ benefits for a hospital length of stay

in connection with childbirth to less than 48 hours following a vaginal delivery or 96 hours following a delivery by cesarean section. The interim final rule—

Provided that the attending provider makes the determination that an admission is in connection with childbirth;
Determined when the hospital stay begins for purposes of application of the general rule;
Provided an exception to the 48-hour (or 96-hour) general rule if the attending provider decides, in consultation with the mother, to discharge the mother or her newborn earlier;
Clarified the application of authorization and precertification requirements with respect to the 48-hour (or 96-hour) stay;
Explained the application of benefit restrictions and cost-sharing rules with respect to the 48-hour (or 96-hour) stay;
Clarified the prohibitions with respect to a plan or issuer offering mothers incentives or disincentives to encourage less than the 48-hour (or 96-hour) stay;
Clarified the prohibitions against incentives and penalties with respect to attending providers; and
Included the statutory notice provisions under ERISA and the PHS Act.

In general, these final regulations do not change the interim final rules. However, the text of these final regulations incorporates a clarifying statement from the preamble of the interim final rules that the definition of attending provider does not include a plan, hospital, managed care organization, or other issuer. The text also makes a small clarification with respect to state law applicability.

In addition, these final regulations make minor clarifications to the notice requirements for nonfederal governmental plans. The interim final rules specified that the notice of post-childbirth hospitalization benefits must be included in the plan

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cordance with the regulations, and prohibit plans and issuers from inducing attending providers to provide care in a manner that is inconsistent with the regulations. At the same time, the statute specifies that plans and issuers are still free to negotiate with attending providers the level and type of compensation for care furnished in accordance with the regulations.

The comments requested greater specificity in the final regulations for distinguishing between the types of compensation arrangements that are permissible under the negotiation provision and those that are impermissible under the prohibitions against penalties and inducements. One comment suggested that it is clear that a bonus arrangement for obstetricians and gynecologists contingent on the percentage of discharges within 24 hours would not be permitted. The comment requested confirmation that arrangements with a more general focus would be permitted, such as a global payment for prenatal care and childbirth, or a bonus for a multi-specialty group including obstetricians and gynecologists based on the utilization for all patients served by the group. Another comment expressed a concern about whether capitated arrangements are consistent with the hospital length-of-stay requirements.

The Departments devoted considerable resources over a sustained period of time to develop rules that provide greater specificity for distinguishing between negotiated compensation arrangements that would give attending providers an incentive to deliver health care services efficiently and arrangements that could give providers an incentive to discharge patients in contravention of the statute and regulations. The great variety, complexity, and mutability of such arrangements ³ would have required extensive rules that at best were likely to impose heavy administrative costs and yet were still of only marginal value in clarifying what arrangements would be permissible. For this reason, the rules on compensation arrangements for attending providers are adopted unchanged from the interim final rules.

document that described plan benefits to participants and beneficiaries. These final regulations specify that any notice a nonfederal governmental plan must provide under these regulations can be included either in the plan document that describes benefits, or in the type of document the plan generally uses to inform participants and beneficiaries of plan benefit changes. These final regulations also specify that any time a plan distributes one or both of these documents after providing the initial notice, the applicable statement must appear in one or both of these documents.

Hospital Length of Stay

The interim final rules and these final regulations provide that when a delivery occurs in the hospital, the stay begins at the time of delivery (or, in the case of multiple births, at the time of the last delivery) rather than at the time of admission or onset of labor. Also, the interim final rules and these final regulations provide that when a delivery occurs outside of the hospital, the stay begins at the time the mother or newborn is admitted (rather than at the time of delivery).

Some comments expressed concern that this rule somehow required birthing centers or other non-hospital facilities to extend the right to stay to more than 24 hours. These comments noted that such extended stays may violate local regulations or otherwise conflict with the operations of such facilities. The statute and these final regulations do not require hospitals or other facilities to provide particular lengths of stay, but instead require group health plans and health insurance issuers to provide benefits for particular hospital lengths of stay.

A comment recommended that if a delivery was planned for outside of a hospital, any following admission in response to complications resulting from that delivery should be excluded from the provisions providing for particular lengths of stay. These final regulations do not distinguish between a delivery that was planned for outside of the hospital and other deliveries occurring outside of a hospital.

Definition of Attending Provider

The mandatory coverage period provisions are not violated if the attending provider, in consultation with the mother, decides to discharge the mother or newborn earlier. Under the interim final rules and these final regulations, the attending provider is defined by a functional analysis of state licensure rules and the actual performance of care. Under this definition, the attending provider is restricted to an individual who is licensed under applicable state law to provide maternal or pediatric care and who is directly responsible for providing such care to a mother or newborn child. While the preamble to the interim final rules noted that this definition could include a nurse midwife or physician assistant, the regulation itself does not provide a list of titles or positions that qualify as attending providers.

Some comments requested that additional titles, such as pediatric nurse practitioners, or nurse practitioners, be specifically mentioned in the definition. While positions with these titles may meet the definition in many cases, as noted above, the language of the regulation takes a functional approach and does not provide a list of titles or positions that qualify as attending providers. This functional approach is more useful in addressing who the attending provider is on an ongoing basis, as specific position titles and responsibilities may vary from location to location as well as over time.

It was also suggested that the text of the final regulations incorporate a clarifying statement from the preamble of the interim final rules that the definition of attending provider does not include a plan, hospital, managed care organization, or other issuer. These final regulations adopt this suggestion.

Compensation of Attending Provider

Several comments addressed the provisions in the interim final rules that relate to the compensation of physicians and other attending providers. These provisions prohibit plans and issuers from penalizing attending providers who provide care in ac

3 Broad classes of examples include fee-for-service, capitation, productivity-based salary, incentive contracting, blended systems, prospective versus post-service payment, etc. See e.g., Theory and Practice in the Design of Physician Payment Incentives, James C. Robinson (University of California, Berkley), The Milbank Quarterly, Vol. 79, No. 2, 2001; Regulation of Managed Care Incentive Payments to Physicians, Stephen Latham (Boston University School of Law), 22 Am. J.L. & Med. 399; Blended Payment Methods in Physician Organizations Under Managed Care, James C. Robinson, JAMA 1999;282:1258–1263; The Alignment and Blending of Payment Incentives Within Physician Organizations, JC Robinson, SM Shortell, R Li, LP Casalino, T Rundall, Health Services Research Vol. 39, Issue 5, pages 1589–1606, Oct. 2004.

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The final regulations do not attempt to provide guidance on this issue through examples. Certainly the bonus arrangement described in one comment, based on the percentage of discharges within 24 hours, violates the prohibition against providing inducements for early discharge. Such an example is not included in the final regulations to avoid the inference that anything less blatant would be permissible. Examples of less blatant arrangements could be similarly misleading, whether the conclusion was that the arrangement was permissible or impermissible, since there are bound to be differences between arrangements that would have been described in the regulations and any actual arrangement for an attending provider, and in some cases even minor differences could change the result.

Authorization and Precertification

The interim final rules and these final regulations provide, under paragraph (a), that a group health plan or a health insurance issuer may not require a physician or other health care provider to obtain authorization from the plan or issuer to prescribe a hospital length of stay that is subject to the general rule.

Under paragraph (b) of the interim final rules and these final regulations, a plan or issuer may not restrict benefits for part of a stay that is subject to the general rule in a way that is less favorable than a prior portion of the stay. An example in the interim final rules and these final regulations illustrates that a plan or issuer is precluded from requiring a covered individual to obtain precertification for any portion of a hospital stay that is subject to the general rule if precertification is not required for any preceding portion of the stay. However, the interim final rules do not prevent a plan or issuer from requiring precertification for any portion of a stay after 48 hours (or 96 hours), or from requiring precertification for an entire stay.

Under paragraph (c) of the interim final rules and these final regulations, a plan or issuer may not increase an individual’s coinsurance for any later portion of a 48-hour (or 96-hour) hospital stay. An example in the interim final rules and these

final regulations illustrates that plans and issuers may vary cost-sharing in certain circumstances, provided the cost-sharing rate is consistent throughout the 48-hour (or 96-hour) hospital length of stay.

One comment asked whether less favorable cost sharing for the 48-hour (or 96-hour) stay can be applied to covered individuals who fail to give advance notice or notice upon admission for the services or providers related to the stay, if such a penalty applies in other hospitalization situations. This issue was addressed in Example 2 of paragraph (c)(3) of the interim final rules. This example is repeated in the final regulations and illustrates that a plan may require advance notice for services or providers related to hospital length of stay in connection with childbirth, in order for a covered individual to obtain more favorable cost sharing under the plan or coverage. Such requirements may not be used to deny an individual benefits for any portion of the 48-hour (or 96-hour) stay based on a determination of medical necessity or appropriateness. Any variance in cost-sharing related to compliance with a plan’s or an issuer’s advance notice requirements must be applied consistently throughout the 48-hour (or 96-hour) stay. Under the principles set forth in the rule and illustrated in this example, a plan or issuer could generally apply less favorable cost sharing towards the hospital length of stay in connection with childbirth of an individual who failed to satisfy the plan’s advance notice requirements, to the extent permissible under the preexisting condition rules in 26 CFR 54.9801–3, 29 CFR 2590.701–3, and 45 CFR 146.111 and 148.120. ⁴

Notice Requirements under ERISA and the PHS Act

This section of the final regulations addresses the Newborns’ Act notice requirements under ERISA and the PHS Act. The interim final rules, and these final regulations, contain different notice provisions for ERISA-covered group health plans, nonfederal governmental plans, and health insurance issuers in the individual market. ERISA-covered group health plans are required to comply with the ERISA notice

regulations, whether insured or self-insured. Nonfederal governmental plans and health insurance issuers in the individual market are required to comply with the PHS Act notice regulations. Because there are fundamental differences between the types of entities regulated under ERISA as compared to the PHS Act, and in the structure of the two acts, the notice requirements in the ERISA regulations and PHS Act regulations differ.

Notice Requirements under ERISA. The interim final rules and these final regulations require group health plans that are subject to ERISA to comply with summary plan description (SPD) disclosure requirements at 29 CFR 2520.102–3(u). The SPD rules generally require that participants and beneficiaries in a group health plan be furnished an SPD to apprise them of their rights and obligations. The rules also prescribe the content of the SPD and the manner and timing in which participants and beneficiaries are to be notified of any material modification to the terms of the plan or any change in the information required to be included in the SPD.

In November 2000, the Department of Labor finalized the SPD content regulation (65 FR 70241) requiring that all group health plans (including insured plans not subject to the federal Newborns’ Act) provide language in the SPD that describes the federal or state law requirements applicable to the plan or any health insurance coverage offered under the plan relating to hospital lengths of stay in connection with childbirth for the mother or newborn child. If federal law applies in some areas in which the plan operates and state law applies in other areas, the SPD should describe the different areas and the federal or state law requirements applicable in each. Model language for plans subject to the federal Newborns’ Act’s requirements is included in the SPD content regulation. This change became applicable as of the first day of the second plan year beginning on or after January 22, 2001.

Some comments asked for clarification about whether the notice can be provided through electronic media, as an alternative to traditional paper disclosure. Under ERISA, the notice can be provided through electronic media if the plan com

4 In order to avoid imposing an impermissible preexisting condition exclusion, plans and group health insurance issuers that require individuals to notify the plan or issuer of pregnancy within a certain amount of time (for example, within the first trimester) must waive or modify the notice requirement for individuals who enroll in the plan after the time notice was required. This also applies to individual market issuers with respect to federally eligible individuals they are required to enroll.

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These final regulations retain the notice exception in the interim final rules for issuers that are subject only to state insurance law requirements regarding hospital lengths of stay following childbirth.

Applicability in States

The statute and the interim final rules include an exception to the Newborns’ Act requirements for health insurance coverage in certain states. Specifically, the Newborns’ Act and the interim final rules do not apply with respect to health insurance coverage if there is a state law that meets any of the criteria ⁵ that follow:

The state law requires health insurance coverage to provide at least a 48-hour (or 96-hour) hospital length of stay in connection with childbirth;
The state law requires health insurance coverage to provide for maternity and pediatric care in accordance with guidelines established by the American College of Obstetricians and Gynecologists, the American Academy of Pediatrics, or any other established professional medical association; or
The state law requires that decisions regarding the appropriate hospital length of stay in connection with childbirth be left to the attending provider in consultation with the mother. The interim final rules and these final regulations clarify that state laws that require the decision to be made by the attending provider with the consent of the mother satisfy this criterion.

Although this exception applies with respect to insured group health plans, it does not apply with respect to a group health plan to the extent the plan provides benefits for hospital lengths of stay in connection with childbirth other than through health insurance coverage. Accordingly, self-insured plans in all states generally are required to comply with the federal requirements (except those nonfederal governmental plans that have opted out of the PHS Act requirements).

These final regulations repeat the statute and the interim final rules with one

plies with ERISA’s electronic disclosure rules in 29 CFR 2520.104b–1.

Some comments requested that the rules require plans to provide information to patients and providers regarding who has legal oversight with respect to the Newborns’ Act and who to contact in the event of a violation. However, this concern is already addressed by current regulation. Under 29 CFR 2520.102–3(t)(1) of the SPD content rules, ERISA plans are required to provide a statement of ERISA rights in the SPD. Among other things, this provision requires ERISA-covered plans to provide information on the enforcement of a participant or beneficiary’s rights and who to contact if there are any questions about the plan.

Notice Requirements under the PHS Act . Nonfederal governmental plans . The Newborns’ Act requires nonfederal governmental plans to comply with the Newborns’ Act notice requirements under section 711(d) of ERISA as if section 711(d) applied to such plans. The interim final rules and these final regulations require plans that are subject to the federal Newborns’ Act requirements to provide a notice with specific language describing the federal requirements. Under the interim final rules and these final regulations, if federal law applies in some areas in which the plan operates and state law applies in others, the plan must provide the appropriate notice to each participant and beneficiary who is covered by federal law.

Several comments on the interim final rules objected that specific language was required for the disclosure statement, and suggested that the regulation instead should have provided guidelines for plans to base their own language on (such as language that comports with the Department of Labor’s sample language). However, requiring specific language ensures the substantive adequacy of the notices. Additionally, because many plans presumably have already incorporated that mandatory language into their documents since the effective date of the interim final rules, continuing to require that language is the simplest approach.

As in the interim final rules, these final regulations require nonfederal governmental plans to provide notice not later

than 60 days after the first day of the plan year following the effective date, regardless of whether the plan had already provided notice under the Department of Labor standards. This takes into account the fundamental differences between the nonfederal governmental plans regulated under the PHS Act and the types of entities regulated under ERISA. However, with respect to the requirement that notice be provided within that 60-day period, the final regulations include an exception for plans with regard to participants and beneficiaries for whom the plan has already provided notices in accordance with the interim final regulations that are consistent with these final regulations (such as self-insured nonfederal governmental plans that are subject to the federal Newborns’ Act requirements and that have already provided such notices).

Health insurance issuers in the indi- vidual market. The Newborns’ Act requires health insurance issuers in the individual market to comply with the Newborns’ Act notice requirements under section 711(d) of ERISA as if section 711(d) applied to such issuers. Thus, the interim final rules and these final regulations require individual market health insurance issuers that provide benefits for hospital lengths of stay in connection with childbirth to include, in the insurance contract, a rider, or equivalent amendment to the contract, specific language that notifies policyholders of their rights under the Newborns’ Act. The interim final rules and these final regulations also require such issuers to provide this notice not later than a specific time frame that is within a few months after the effective date of the regulations.

Several comments on the interim final rules objected that specific language was required for the disclosure statement and suggested instead there should be guidelines for issuers to base their own language on. However, requiring specific language ensures the substantive adequacy of the notices. Additionally, because issuers presumably have already incorporated that language into their documents since the effective date of the interim final rules, continuing to require that same language is the simplest approach.

5 HHS has the responsibility to enforce the federal Newborns’ Act with regard to issuers in states that do not have one of the three types of state laws described in the Newborns’ Act. As of the publication of these final regulations, the only state in which HHS is enforcing the Newborns’ Act with respect to issuers is Wisconsin.

2008–47 I.R.B. 1183 November 24, 2008

clarification. With respect to the second criterion above (professional guidelines), the statute only addresses the period following a vaginal delivery or a caesarean section. Accordingly, although guidelines issued by professional medical associations such as the American College of Obstetricians and Gynecologists (ACOG) cover a spectrum of care both before and after childbirth, the only relevant guidelines for this purpose are those pertaining to care following childbirth. Therefore, the final rules include an express clarification that State law need only require coverage in accordance with professional guidelines that deal with care following childbirth. Guidelines relating to other issues are not relevant for this purpose.

One comment to the interim final rules supported the criteria used in those rules for determining whether the federal Newborns’ Act applies in a given state. However, another comment objected to the fact that issuers in states that have enacted one of the three types of state laws described in the federal Newborns’ Act would arguably be exempt from several of the federal Act’s requirements, such as the prohibitions on offering incentives to providers to induce them to provide care in a manner inconsistent with the Act. This comment asked us to reconsider whether the regulations should provide such a broad exception from the federal Act’s requirements in such states. The statutory language does not require state law to include all the federal provisions, such as the anti-incentive provisions, in order for health insurance coverage in that state to be excepted from the federal requirements. In light of this flexibility, these final regulations retain the exception from the interim final rules.

Applicability Date

These final rules apply to group health plans, and health insurance issuers offering group health insurance coverage, for plan years beginning on or after January 1, 2009. The final rules for the individual market apply with respect to health insurance coverage offered, sold, issued, renewed, in effect, or operated in the individ

ual market on or after January 1, 2009. Until the applicability date for this regulation, plans and issuers are required to continue to comply with the corresponding sections of the regulations previously published in the Federal Register (63 FR 57546) and other applicable regulations.

III. Economic Impact and Paperwork Burden

Summary — Department of Labor and Department of Health and Human Services

The Newborns’ Act provisions generally prohibit group health plans and group health insurance issuers from limiting hospital lengths of stay in connection with childbirth to less than 48 hours for vaginal deliveries and 96 hours for cesarean sections and from requiring a health care practitioner to obtain preauthorization for such stays. For insured coverage, the Newborns’ Act allows any state law, meeting one of three criteria, to take its place. The Departments have crafted these regulations to secure the Act’s protections in as economically efficient a manner as possible, and believe that the economic benefits of the regulations justify their costs. ⁶

The primary economic benefits associated with securing these minimum lengths of stay derive from the reduction in complications linked to premature discharge of mothers and newborns. Complications that are easily treated and readily identifiable, like excessive bleeding and infection in new mothers and dehydration and hyperbilirubinemia in their newborns, are common causes for readmission following a premature discharge. These complications and the subsequent readmissions are expensive and cause avoidable suffering for mothers and their newborns.

By eliminating the need to obtain preauthorization for affected stays, the Act provides affected individuals with increased access to the health care system. Increased access fosters timelier and fuller medical care, better health outcomes, and improved quality of life. This is especially true for certain individuals affected by the

Newborns’ Act provisions. For example, lower-income individuals, when denied coverage for the full length of stay, are more likely to forego care for financial reasons. When adverse health outcomes result, costs for the individual and the plan are high. For these individuals especially, this requirement is more likely to mean receiving timely, quality postnatal care, and living healthier lives.

Any mandate to increase the richness of health benefits, however, adds to the cost of health coverage. Plans can mitigate costs by increasing cost-sharing or by reducing non-mandated benefits. This in turn shifts the economic burden of the regulation to plan participants, and may induce some employers and employees, as well as those in the individual insurance market, to drop coverage. The cost of enacting federal minimum stay regulation is estimated to fall between $139 and $279 million annually. ⁷ However, as this constitutes a small fraction of one percent of total health care expenditures, it would most likely be a small, possibly negligible, factor in most employers’ decisions to offer health coverage and individuals’ decisions to enroll.

While the interim final regulations clarified several provisions within the statute, this action serves primarily to provide the certainty associated with a final rule for the regulated community, as well as update the cost of the regulation, adjusting for changes in the landscape of the community. Because these regulations are being published several years after the Newborns’ Act’s passage and minimal interpretation of the statutory language was required, the regulatory implementation costs should be negligible. Costs of the final regulation are detailed below in the section entitled “Unified Analysis of Costs and Benefits.” Benefits of the regulation are also discussed in that section at length, although because the benefits primarily involve quality of life improvements, the Departments have not attempted to quantify them. They do, however, believe them to be sufficiently large so as to justify the cost of the regulation.

6 The Newborns’ Act still requires that insured plans disclose a notice outlining participants’ rights regarding hospital lengths of stay related to childbirth. Nonetheless, final regulations related to that notice were published separately (see 65 FR 70266, Nov. 21, 2000) and so those costs are not included herein.

7 The vast majority of this cost is attributable to the impact of the statute. ($14 million is the upper bound cost attributable to the exercise of regulatory discretion.) Moreover, there are no increased costs attributable to any new exercise of regulatory discretion in the final rule. Instead, the final rule repeats the interpretations of the interim final rule. Any increased costs over the 1998 estimate in the interim final rules are attributable to economic factors, such as increased cost of care (from 1996 to 2007 dollars), increased number of births, and increased number of participants and beneficiaries covered by self-insured plans to which the regulations apply.

November 24, 2008 1184 2008–47 I.R.B.

2520.104–21, 2520.104–41. 2520.104–46 and 2520.104b–10, certain simplified reporting provisions and limited exemptions from reporting and disclosure requirements for small plans, including unfunded or insured welfare plans covering fewer than 100 participants and which satisfy certain other requirements.

Further, while some small plans are maintained by large employers, most are maintained by small employers. Both small and large plans may enlist small third party service providers to perform administrative functions, but it is generally understood that third party service providers shift their costs to their plan clients in the form of fees. Thus, the Departments believe that assessing the impact of this final rule on small plans is an appropriate substitute for evaluating the effect on small entities. The definition of small entity considered appropriate for this purpose differs, however, from a definition of small business based on size standards promulgated by the Small Business Administration (SBA) (13 CFR 121.201) pursuant to the Small Business Act (5 U.S.C. 631 et seq .). The Department of Labor solicited comments on the use of this standard for evaluating the impact of the proposed regulations on small entities. No comments were received with respect to this standard.

The Departments believe that the final regulation will not have a significant economic impact on a substantial number of small entities. The direct costs of restricting short stay policies is estimated to fall between $15 million and $31 million for small plans which amount to a per-participant cost of between nine and nineteen dollars for those plans affected, or a small fraction of one percent of total small plan expenditures. ⁸

The Departments estimate that prior to the Act, 115,000 small plans with 1.6 million participants would have restricted lengths of stay in connection with childbirth or required preauthorization for such stays. ⁹ While this represents just 5 percent of all small plans, the Departments believe

Executive Order 12866 — Department of Labor and Department of Health and Human Services

Under Executive Order 12866, the Departments must determine whether a regulatory action is “significant” and therefore subject to the requirements of the Executive Order and subject to review by the Office of Management and Budget (OMB). Under section 3(f), the order defines a “significant regulatory action” as an action that is likely to result in a rule (1) having an annual effect on the economy of $100 million or more, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities (also referred to as “economically significant”); (2) creating serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order.

Pursuant to the terms of the Executive Order, it has been determined that this action is “economically significant” and is subject to OMB review under Section 3(f) of the Executive Order. Consistent with the Executive Order, the Departments have assessed the costs and benefits of this action. The Departments’ assessment, and the analysis underlying the assessment, is detailed below. The Departments performed a comprehensive, unified analysis to estimate the costs and benefits attributable to the regulations for purposes of compliance with Executive Order 12866, the Regulatory Flexibility Act, and the Paperwork Reduction Act.

These final regulations are needed to provide certainty for the affected community, as well as clarify the economic burden that the Newborns’ Act will place on health plans and their participants. The

Departments believe that this regulation’s benefits will justify its costs. This belief is grounded in the assessment of costs and benefits that is summarized earlier and detailed below.

Regulatory Flexibility Act — Department of Labor and Department of Health and Human Services

The Regulatory Flexibility Act (5 U.S.C. 601 et seq .) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq .) and likely to have a significant economic impact on a substantial number of small entities. Unless an agency certifies that a final rule will not have a significant economic impact on a substantial number of small entities, section 604 of the RFA requires that the agency present a final regulatory flexibility analysis (FRFA) at the time of the publication of the notice of final rulemaking describing the impact of the rule on small entities. Small entities include small businesses, organizations, and governmental jurisdictions.

Because the 1998 rules were issued as interim final rules and not as a notice of proposed rulemaking, the RFA did not apply and the Departments were not required to either certify that the rule would not have a significant impact on a substantial number of small entities or conduct a regulatory flexibility analysis. The Departments nonetheless crafted those regulations in careful consideration of effects on small entities, and conducted an analysis of the likely impact of the rules on small entities. This analysis was detailed in the preamble to the interim final rule.

For purposes of this discussion, the Departments consider a small entity to be an employee benefit plan with fewer than 100 participants. Pursuant to the authority of section 104(a)(3) of ERISA, the Department of Labor has previously issued at 29 CFR 2520.104–20,

8 Departments’ estimates using the 2005 Medical Expenditures Panel Survey Household Component (MEPS-HC), the 2006 Medical Expenditures Panel Survey Insurance Component (MEPS-IC) and the National Centers for Disease Control and Prevention (CDC) National Hospital Discharge Survey: 2005 Annual Summary with Detailed Diagnosis and Procedure Data determined that of participants affected by the regulation, 11 percent were enrolled in small plans. Costs born by small plans were 11 percent of all costs.

9 Estimates are based on the 2006 MEPS-IC. It should be noted, however, that the Pregnancy Discrimination Act of 1978 allows firms with less than 15 employees that offer health insurance to exclude maternity care. The 2000 Mercer/Foster Higgins National Survey of Employer Sponsored Health Plans found that 7 percent of firms with 10–24 employees did not offer such benefits, but the survey did not examine smaller firms. Rough estimates by the Departments suggest that the share of firms with 9 or fewer employees that offer health benefits but exclude maternity benefits is 21 percent. As the cost of these benefits rises, this share is likely to increase which, while having a small effect on the number of participants affected by the regulation, might significantly decrease the number of small plans affected by the regulation.

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agencies in formulating and implementing policies that have “substantial direct effects” on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have these federalism implications must consult with State and local officials, and describe the extent of their consultation and the nature of the concerns of State and local officials in the preamble to the regulation.

In the Departments’ view, these final regulations have federalism implications because they may have substantial direct effects on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among the various levels of government. However, in the Departments’ view, the federalism implications of these final regulations are substantially mitigated because, with respect to health insurance issuers, all but one of the States have requirements that prescribe benefits for hospital lengths of stay in connection with childbirth that satisfy the Newborns’ Act hospital length of stay requirements.

In general, through section 514, ERISA supersedes State laws to the extent that they relate to any covered employee benefit plan, but preserves State laws that regulate insurance. At the same time, however, ERISA prohibits States from regulating a plan as an insurance company. HIPAA added a new section to ERISA (as well as to the PHS Act and the Code) narrowly preempting State requirements for issuers of group health insurance coverage. ¹¹ HIPAA’s conference report states that the conferees intended only the narrowest preemption of State laws with regard to health insurance issuers. H.R. Conf. Rep. No. 736, 104 ^th Cong. 2d Session 205 (1996). The Newborns’ Act also added a new section to ERISA (and to the PHS Act and the Code) which provides that the federal requirements applicable to group health plans and health insurance issuers concerning hospital lengths of stay for mothers and newborns following childbirth do not apply if State law meets one

it may represent a substantial number of small entities.

Paperwork Reduction Act — Department of Labor and Department of Health and Human Services

1. Department of Labor

These rules contain no new information collection requirements that are subject to review and approval by OMB under the Paperwork Reduction Act of 1995 (Public Law 104–13, 44 U.S.C. Chapter 35). The Department of Labor reported the information collection burdens associated with the Newborns’ Act in the interim rules (Interim Rules Amending ERISA Disclosure Requirements for Group Health Plans) implementing section 711(d) of ERISA that were published in the Federal Register on April 8, 1997 (62 FR 16979). OMB approved the information collection under OMB Control Number 1210–0039, expiring on March 31, 2010.

2. Department of Health and Human Services

These rules contain no new information collection requirements that are subject to review and approval by OMB under the Paperwork Reduction Act of 1995 (Public Law 104–13, 44 U.S.C. Chapter 35). HHS reported the information collection burdens associated with the Newborns’ Act in the interim rules (Information Collection Requirements Referenced in HIPAA for the Group Market, Supporting Regulations 45 CFR 146), published in the Fed- eral Register on April 8, 1997. These collection requirements were approved under OMB Control Number 0938–0702, expiring on August 31, 2009.

Special Analyses — Department of the Treasury

Notwithstanding the determinations of the Departments of Labor and of Health and Human Services, for purposes of the Department of the Treasury it has been determined that this Treasury decision is not a significant regulatory action. Therefore,

a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these Treasury regulations, and, because these regulations do not impose a collection of information on small entities, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its impact on small business.

Congressional Review Act

These regulations are subject to the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq .) and have been transmitted to Congress and the Comptroller General for review. These regulations, however, are considered a “major rule,” as that term is defined in 5 U.S.C. 804, because they are likely to result in an annual effect on the economy of $100 million or more.

Unfunded Mandates Reform Act

For purposes of the Unfunded Mandates Reform Act of 1995 (Public Law 104–4), as well as Executive Order 12875, these regulations do not include any federal mandate that may result in expenditures by state, local, or tribal governments, ¹⁰ however, they include mandates which may impose an annual burden of $100 million or more on the private sector, updated annually for inflation. After applying the most current gross domestic product implicit price deflator in 2008, that threshold is approximately $130 million.

Federalism Statement Under Executive Order 13132 — Department of Labor and Department of Health and Human Services

Executive Order 13132 outlines fundamental principles of federalism. It requires adherence to specific criteria by federal

10 Nonfederal governmental plans can opt-out of these requirements and it was assumed that those States that had rules in place that supplanted the Newborns’ Act (that is, all States except one) would.

11 The Newborns’ Act was incorporated into the administrative framework established by HIPAA.

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Consumer Outreach and Advocacy conferences in March 1999 and June 2000, and the Implementation and Enforcement of HIPAA National State-Federal Conferences in August 1999, 2000, 2001, 2002, and 2003. Furthermore, both the Department of Labor and CMS websites offer links to important State websites and other resources, facilitating coordination between the State and federal regulators and the regulated community.

Throughout the process of developing these regulations, to the extent feasible within the specific preemption provisions of HIPAA and the Newborns’ Act, the Departments have attempted to balance the States’ interests in regulating health insurance issuers, and Congress’ intent to provide uniform minimum protections to consumers in every State. By doing so, it is the Departments’ view that they have complied with the requirements of Executive Order 13132.

Pursuant to the requirements set forth in Section 8(a) of Executive Order 13132, and by the signatures affixed to these final regulations, the Departments certify that the Employee Benefits Security Administration and the Centers for Medicare & Medicaid Services have complied with the requirements of Executive Order 13132 for the attached Final Regulations for Group Health Plans and Health Insurance Issuers Under the Newborns’ and Mothers’ Health Protection Act (RIN 1210–AA63 and RIN 0938–AI17), in a meaningful and timely manner.

Unified Analysis of Costs and Benefits

1. Introduction

The Newborns’ Act’s provisions generally prohibit group health plans and health insurance issuers from: 1) limiting hospital lengths of stay in connection with childbirth to less than 48 hours for vaginal deliveries and 96 hours for cesarean sections, and 2) requiring preauthorization for the 48/96 hour stays. The primary effect and intent of the provision is to reduce postpartum complications associated with premature discharge.

or more of three specific criteria in the statute. ¹² The accompanying conference report states that it is the intent of the conferees that States may impose more favorable requirements for the treatment of maternity coverage under health insurance coverage than required by the Newborns’ Act. H.R. Conf. Rep. No. 104–812, 104 ^th

Cong. 2d Session 88 (1996).

Guidance conveying the Newborns’ Act hospital length of stay requirements was published in the Federal Register on October 27, 1998 (63 FR 57546). These final regulations clarify and implement the statute’s minimum standards and do not significantly reduce the discretion given the States by the statute. Moreover, the Departments understand that all but one State have requirements that prescribe benefits for hospital lengths of stay in connection with childbirth that satisfy the Newborns’ Act requirements.

The Newborns’ Act modified HIPAA’s framework to provide that the States have primary responsibility for enforcement of the provisions of the Newborns’ Act as they pertain to issuers, but that the Secretary of Health and Human Services must enforce any provision that a State fails to substantially enforce. To date, CMS enforces the Newborns’ Act hospital length of stay requirements in only one State. When exercising its responsibility to enforce the Newborns’ Act provisions, CMS works cooperatively with the State for the purpose of addressing the State’s concerns and avoiding conflicts with the exercise of State authority. CMS has developed procedures to implement its enforcement responsibilities, and to afford the States the maximum opportunity to enforce the Newborns’ Act requirements in the first instance. CMS procedures address the handling of reports that States may not be enforcing the Newborns’ Act requirements, and the mechanism for allocating responsibility between the States and CMS. In compliance with Executive Order 13132’s requirement that agencies examine closely any policies that may have federalism implications or limit the policymaking discretion of the States, the Department of Labor and CMS have consulted and worked

cooperatively with affected State and local officials.

For example, the Departments sought and received input from State insurance regulators and the National Association of Insurance Commissioners (NAIC). The NAIC is a non-profit corporation established by the insurance commissioners of the 50 States, the District of Columbia, and the four U.S. territories. In most States the insurance commissioner is appointed by the governor; in approximately 14 States, the insurance commissioner is an elected official. Among other activities, it provides a forum for the development of uniform policy when uniformity is appropriate. Its members meet, discuss and offer solutions to mutual problems. The NAIC sponsors quarterly meetings to provide a forum for the exchange of ideas and in-depth consideration of insurance issues by regulators, industry representatives and consumers. CMS and Department of Labor staff have consistently attended these quarterly meetings to listen to the views of the State insurance departments.

In addition, the Departments informally consulted with the NAIC in developing the interim final regulations. Through the NAIC, the Departments sought and received the input of State insurance departments regarding preemption of State laws, applicability of the Newborns’ Act provisions, and certain insurance industry definitions ( e.g., attending provider). In general, these final regulations do not change the interim final rules. Significantly, the Departments received only eleven formal comment letters on the interim final regulation, none of which were from or on behalf of the NAIC or any of the States.

The Departments have also cooperated with the States in several ongoing outreach initiatives, through which information is shared among federal regulators, State regulators and the regulated community. In particular, the Department of Labor has established a Health Benefits Education Campaign with more than 70 partners, including CMS, NAIC and many business and consumer groups. CMS has sponsored conferences with the States - the

12 The federal requirements concerning hospital lengths of stay in connection with childbirth do not apply with respect to health insurance coverage if state law requires (1) such coverage to provide for at least a 48 hour hospital length of stay following a vaginal delivery and at least a 96 hour length of stay following a delivery by cesarean section, (2) such coverage to provide for maternity and pediatric care in accordance with guidelines established by the American College of Obstetricians and Gynecologists, the American Academy of Pediatrics, or other established professional medical associations, or (3) in connection with such coverage for maternity care, that the hospital length of stay for such care is left to the decision of (or is required to be made by) the attending provider in consultation with the mother.

2008–47 I.R.B. 1187 November 24, 2008

try. However, because the statute does not require a 48 or 96-hour stay, but instead gives the decision-making authority to the attending physician in consultation with the mother, it is expected that not all of these births will result in additional hospital time. If only one-half of affected mothers had their stays extended by the full amount, the annual cost of the provision would be $139 million, less than $1 million of which would be attributable to the individual market of Wisconsin. ¹⁸

While the Departments estimate that the cost of the NMHPA is as much as $279 million annually, health plans are estimated to have spent more than $775 billion in 2007 to cover approximately 201.7 million privately insured individuals. ¹⁹ Therefore, the upper estimate of the costs under the Newborns’ Act’s provisions represent a very small fraction of one percent of total health plan expenditures.

Moreover, the cost of this provision is likely to decline in the future, despite increases in overall health care spending. Since the statute was passed, there has been a significant increase in the number of cesarean births, compared to vaginal births. While traditionally cesarean births are associated with higher risk, an increasing number of women are now electing to have the procedure. ²⁰ Women who elect to have a cesarean would presumably have a lower risk than those for whom the procedure is required and therefore may not re

These regulations draw on the Departments’ authority to clarify and interpret the Newborns’ Act’s statutory provisions in order to secure the protections intended by Congress for newborns and mothers. The Departments crafted them to satisfy this mandate in as economically efficient a manner as possible, and believe that the economic benefits of the regulations justify their costs. This conclusion takes into account both the effect of the statute and the impact of the discretion exercised in the regulations.

This regulation is needed to clarify and interpret the Newborns’ Act provisions under section 711 of ERISA, sections 2704 and 2751 of the PHS Act, and section 9811 of the Internal Revenue Code and to ensure that group health plans and health insurance issuers subject to these rules do not impermissibly restrict benefits or require preauthorization for 48-hour or 96-hour hospital lengths of stay in connection with childbirth.

2. Costs and Benefits of the Statute

The Departments provide qualitative assessments of the nature of the costs and benefits that are expected to derive from the statutory provisions of the Newborns’ Act. In addition, the Departments provide summaries of any credible, empirical estimates of these effects that are available.

In order to determine how many plan participants could benefit from the New

borns’ Act provision, the Departments considered the estimated 2.8 million births in 2005 by women with private health insurance. ¹³ Of these, approximately 55.0 percent are assumed to be normal, healthy deliveries, and therefore eligible for early discharge. ¹⁴ Because legislation has been passed in every state but Wisconsin, the Departments limited their analysis to participants in self-insured group health plans throughout the country and all health plans within Wisconsin. Finally, because Health Maintenance Organizations (HMOs) have traditionally had more aggressive short-stay policies, the share of workers enrolled in HMOs versus commercial plans was taken into account as were the share of those plans with short-stay policies. ¹⁵

Based on these assumptions, approximately 328,000 births or roughly 22 percent of healthy births by privately insured women would be affected by the provision. ¹⁶ If each woman then stayed the maximum period outlined in the statute, approximately 348,000 additional days of hospital care would be required. ¹⁷ Assuming hospitals charge $800 per day for postpartum care, the annual cost of the provision would be $279 million: $1.7 million of which would be attributable to the individual market in Wisconsin; the remaining $276.9 million would be attributable to the group market in Wisconsin and self-funded plans throughout the coun

13 Departments’ estimate based on the 2005 MEPS-HC and the 2005 CDC Survey.

14 The CDC reported that of the 4.0 million births in 2005, 2.2 million, or 55.0 percent of those newborns were categorized as without any illness or risk-related diagnosis ( e.g., jaundice, respiratory distress, disorders relating to short gestation and low birth weight). No data are available on whether health of newborns varies by mothers’ insurance status, although insured mothers are more likely to receive prenatal care and this would be expected to positively affect the share of “healthy” births (see Susan Egerter et al, “Timing of Insurance Coverage and Use of Prenatal Care Among Low-Income Women,” American Journal of Public Health, v. 92(3): 423–427).

15 Julie A. Gazmararian & Jeffrey Koplan found in, “Length-of-Stay After Delivery: Managed Care versus Fee for Service,” Health Affairs, v. 15(4): 74–80, that 35.9 percent of enrollees in commercial plans were discharged within one day after delivery compared to 57.7 percent from commercial HMOs. The shares of individuals enrolled in HMOs at self-insured and fully-insured plans were taken from the 2007 Kaiser Family Foundation’s Survey of Employer Sponsored Insurance.

16 The number of women age 10–54 with private insurance was estimated using the 2005 MEPS-HC. Fertility rates for different age brackets were taken from the 2005 CDC National Hospital Discharge Survey and were interacted with the number of privately insured women to ascertain the number of births by insured women. This was then interacted with the share of infants that were born healthy, as reported in the 2005 CDC report, to determine the number of healthy births to privately-insured women.

To restrict the number of privately-insured woman having healthy births to those with ESI, the share of all privately insured women, age 10–54, that had ESI was taken from the 2007 March CPS and interacted with the above number. To then discern the number of births that would be covered by the regulation, the 2006 MEPS-IC was used to ascertain the share of employees in ESI that were in self-insured plans that had maternal coverage. This number was further interacted by the share of employees in the share of those employees in HMO versus non-HMO health plans as provided by the 2007 Kaiser Family Foundation’s Employer Health Benefits Survey.

Interacting all of these numbers results in the 328,000 number cited in the text.

17 Based on 1995 discharge rates, approximately 94 percent of the 328,000 births required one additional day to meet the maximum period outlined by the statute; 6 percent required two additional days.

18 The Congressional Budget Office (CBO) analyzed Senate proposal S.969, which was an earlier version of the Newborns’ Act. CBO estimated 900,000 insured births had stays shorter than the minimum specified in the bill, which would result in 400,000 additional inpatient days and an additional 200,000 additional out-patient visits at an annual cost of $360 million in 2007 dollars (or $800 for each additional day of inpatient care; $200 for outpatient care). The Departments’ estimate is significantly less, primarily due to: 1) a large number of states either clarifying existing policies for short-stay deliveries or enacting new ones which supersede the federal statute for all but self-insured plans; and 2) the CBO estimates included costs for follow-up visits, a requirement that was dropped from the federal statute.

19 The Departments’ estimate is based on the Office of the Actuary at the Centers for Medicare & Medicaid Services (CMS) projected measure of total personal health expenditures by private health insurance in 2007.

20 The share of all births that are cesarean rose from 20.7 percent in 1996 to an estimated 31.3 percent in 2005 (CDC (2005). “National Hospital Discharge Survey” Vital and Health Statistics, Series 13 (162)). A study by Health Grades Inc. found a 36.6 percent increase in the number of “patient choice” cesarean sections between 2001 and 2003.

November 24, 2008 1188 2008–47 I.R.B.

quire the prescribed 96-hour recovery period detailed in the statute. ²¹ If this trend continues, the burden of this statute should lessen.

The primary statutory economic benefits associated with the Newborns’ Act’s provisions derive from an increase in access to health plan coverage for postpartum care and monitoring of mothers and their newborns. Individuals without coverage for this care and monitoring are less likely to remain in the hospital for fear of incurring expenses that must be paid for ‘out-of-pocket.’ Lower-income individuals are more likely to forego care not covered by their insurance. Foregoing this care and monitoring increases the risk of adverse health outcomes, which in turn generates higher medical costs. Much of these costs may be shifted to public funding sources (and therefore to taxpayers) or to other payers. ²²

Foregoing appropriate care can also negatively affect the quality of life. Improved access to health coverage for mothers and newborns will lead to more appropriate medical care and monitoring, better health outcomes, and improved

quality of life. ²³ Denied coverage, individuals must choose whether to pay for the extra day(s) in the hospital and potentially suffer economic hardship or forego the care and monitoring, creating a risk of an adverse health outcome. Gaining coverage will sometimes mean receiving high quality care and living healthier lives. ²⁴

The provisions of the Newborns’ Act and its regulation generally apply to both group health plans and health insurance issuers. While the costs of the Newborns’ Act are substantial, economic theory predicts that issuers will pass their costs of compliance back to plans, and that plans may shift some or all of issuers’ and their own costs of compliance to participants either through increases in premiums, increased cost-sharing, or reducing the richness of non-mandated health benefits. ²⁵

While 74 million individuals are enrolled in group or private health plans, only 15 million individuals are enrolled in plans that had policies affected by the Newborns’ Act. Of these, only 328,000 individuals are expected to be annually directly impacted and receive additional coverage they were previously denied or

restricted for 48 or 96-hour hospital stays following childbirth. Though these benefits are received by a small number of plan enrollees, the costs are distributed broadly among all plan participants. As a result, the cost of the Newborns’ Act per individual enrollee is expected to be minimal between 9 and 19 dollars per person for those enrolled in affected plans. ²⁶ While it is possible that some enrollees on the margin will decline coverage in response to cost increases, the number of those acting in such a manner is expected to be negligible. As such, the benefits of this statute are believed to justify its costs.

3. Costs and Benefits of the Rules Applicable to the Newborns’ Act

The interim final rule clarified when a stay begins under the Newborns’ Act. Prior to this, private health plans could use the expectant mother’s admittance time to determine the required stay, an assumption that consistently reduced the number of women experiencing stays less than those prescribed by the statute by 5 per

21 Most research comparing complication rates of cesarean to vaginal births focus on those women who previously had a cesarean section, as insufficient data are available to compare initial vaginal versus initial elected cesarean deliveries. As such, it is difficult to discern how the medically advisable stay of an elected cesarean section compares to that of an uncomplicated vaginal birth. However, there is much agreement that emergency cesarean sections, which typically follow a lengthy labor, are far more dangerous to mother and child than the elected variety. Given the Newborns’ Act’s prescribed 96-hour stays for cesarean births when elected cesareans comprised a smaller share of all cesareans, it would be reasonable to expect that the stays for elected cesareans may fall over time.

22 For more information on health choices of lower-income individuals, see: Trude, Sally (2003). “Patient Cost Sharing: How Much is Too Much,” Health System Change Issue Brief, no. 72 (December).

23 For more detailed information, see: O’Brien, Ellen (2003). “Employer Benefits from Workers’ Health Insurance,” Milbank Quarterly, Vol. 1 No. 1. O’Brien provides an extensive analysis of the literature on benefits accruing to employers from offering health benefits and the costs to employers of unhealthy employees, as well as information on studies demonstrating that poor health may be related to lower productivity. In particular, she discusses studies that have examined the effects on workplace productivity of specific health conditions and shows that poor health reduces workers’ productivity at work, and that effective health care treatments can reduce productivity losses and may even pay for themselves in terms of increased productivity.

24 Research on the benefits of longer stays has been somewhat mixed. Some studies show short-stays to be correlated with decreased follow-up care and increased re-hospitalization, particularly for low-income families, which will ultimately increase societal costs (for further discussion, see: Galbraith, Alison A. et al. (2003) “Newborn Early Discharge Revisited: Are California Newborns Receiving Recommended Postnatal Services?” Pediatrics, vol. 111 (2): p. 364–371; Lock, Michael & Joel G. Ray. (1999) “Higher Neonatal Morbidity after Routine Hospital Discharge: Are We Sending Newborns Home Too Early?” Canadian Medical Association Journal, vol. 161 (3): p. 249–253; Malkin, Jesse D. et al. (2003) “Postpartum Length of Stay and Newborn Health: A Cost-Effectiveness Analysis,” Pediatrics, vol. 111 (4): p. 316–322).

Since the statutes have been in place, other studies have argued that higher re-hospitalization rates found in short-stay newborns are due to more frequent post-stay evaluations in the four days following birth, considered the critical window for ascertaining newborn health, as mandated in health plans. Once new regulations were passed extending stays, health plans reduced their follow-up care policies and newborns were less likely to be examined in the days following discharge. This could result in an increase in costs. (For further discussion, see: Hyman, David A. (2001) “What Lessons Should We Learn from Drive-Through Deliveries?” Pediatrics, vol. 107 (2): 406–408; Madden, Jeanne M. et al . (2002) “Effects of a Law Against Early Postpartum Discharges on Newborn Follow-up, Adverse Events, and HMO Expenditures,” New England Journal of Medicine, vol. 347 (25): p. 2031–2038; Madden, Jeanne M. et al. (2004) “Length-of-Stay Policies and Ascertainment of Postdischarge Problems in Newborns,” Pediatrics, vol. 113 (1): p. 42–49.)

The Departments believe, however, that because most of the complications of newborns manifest themselves within the immediate 48 hours following birth, special protection much be given to that period. Moreover, since the decision to discharge the patients will be made by the doctor, in consultation with the mother, many of the concerns posed by those who oppose extended stays will be factored into that decision. As such, the Departments believe that the Newborns’ Act will improve the health and welfare of mothers and newborns.

25 The voluntary nature of the employment-based health benefit system in conjunction with the open and dynamic character of labor markets make explicit as well as implicit negotiations on compensation a key determinant of the prevalence of employee benefits coverage. It is likely that 80% to 100% of the cost of employee benefits is borne by workers through reduced wages (See for example: Jonathan Gruber and Alan B. Krueger, “The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers Compensation Insurance,” Tax Policy and Economy (1991); Jonathan Gruber, “The Incidence of Mandated Maternity Benefits,” American Economic Review, Vol. 84 (June 1994), pp. 622–641; Lawrence H. Summers, “Some Simple Economics of Mandated Benefits,” American Economic Review, Vol. 79, No. 2 (May 1989); Louise Sheiner, “Health Care Costs, Wages, and Aging,” Federal Reserve Board of Governors working paper, April 1999; and Edward Montgomery, Kathryn Shaw, and Mary Ellen Benedict, “Pensions and Wages: An Hedonic Price Theory Approach,” International Economic Review, Vol. 33 No. 1, Feb. 1992). The prevalence of benefits is therefore largely dependent on the efficacy of this exchange. If workers perceive that there is the potential for inappropriate denial of benefits they will discount their value to adjust for this risk. This discount drives a wedge in the compensation negotiation, limiting its efficiency. With workers unwilling to bear the full cost of the benefit, fewer benefits will be provided. The extent to which workers perceive a federal regulation supported by enforcement authority to improve the security and quality of benefits, the differential between the employers’ costs and workers’ willingness to accept wage offsets is minimized.

26 The total cost of the regulation was calculated by estimating the number of additional days in the hospital that short-stay deliveries would require under the statute. This number was then multiplied by $800, to reflect the per day hospitalization cost of a mother (this was a CBO number indexed to 2007 dollars). Having calculated the total cost of the regulation at $279 million (and a lower bound of $139 million), these numbers were then divided by the number of participants in affected health plans (a total of 15 million) to get an upper ($19) and lower bound ($9) of the per-participant cost of the regulation.

2008–47 I.R.B. 1189 November 24, 2008

cent. ²⁷ By clarifying this assumption in the interim final rule, the number of stays that would have been shorter than 48/96 hours increased by approximately 16,000 for all plans, and by approximately 2,000 for small plans. This in turn raised the direct costs to health plans by 5 percent (from $265 to $279 million for the upper bound for all plans and from $29 to $31 million for small plans). However, because it can take several hours for certain conditions to present themselves, such as jaundice and dehydration, the additional hours of hospital supervision — gained by generally not using an expectant mother’s admittance time as the start of a stay — can be critical. Therefore, the benefits of this clarification should justify this additional cost.

The regulation also defines that for births occurring outside of a hospital, stays begin once the mother or newborn is admitted as a hospital inpatient in connection with childbirth, as defined by the

attending provider. The Departments lack any firm basis for quantifying the number of individuals likely to be affected by this provision, and therefore are unable to quantify the increase in costs and benefits. However, given the special and narrow circumstances to which this provision applies, costs and benefits are expected to be small.

Statutory Authority

The Department of the Treasury final rule is adopted pursuant to the authority contained in sections 7805 and 9833 of the Code (26 U.S.C. 7805, 9833).

The Department of Labor final rule is adopted pursuant to the authority contained in 29 U.S.C. 1027, 1059, 1135, 1161–1168, 1169, 1181–1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 1191b, and 1191c, sec. 101(g), Public Law 104–191, 110 Stat. 1936; sec. 401(b), Public Law 105–200, 112 Stat. 645

(42 U.S.C. 651 note); Secretary of Labor’s Order 1–2003, 68 FR 5374 (Feb. 3, 2003).

The Department of Heath and Human Services final rule is adopted pursuant to the authority contained in sections 2701 through 2763, 2791, and 2792 of the PHS Act (42 U.S.C. 300gg through 300gg–63, 300gg–91, and 300gg–92), as amended by Public Law 104–191, 110 Stat. 1936, Public Law 104–204, 110 Stat. 2935 and Public Law 105–277, 112 Stat. 2681–436.

Accounting Statement

In accordance with OMB Circular A–4 (available at http://www.white- house.gov/omb/circulars/a004/a–4.pdf ), in the table below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this final rule. This table provides our best estimate for the annual costs associated with enacting the federal minimum stay final regulation.

of stay in connection with childbirth for a mother or her newborn may not restrict benefits for the stay to less than—

(i) 48 hours following a vaginal delivery; or

(ii) 96 hours following a delivery by cesarean section.

(2) When stay begins —(i) Delivery in a hospital . If delivery occurs in a hospital, the hospital length of stay for the mother or newborn child begins at the time of delivery (or in the case of multiple births, at the time of the last delivery).

(ii) Delivery outside a hospital . If delivery occurs outside a hospital, the hospital length of stay begins at the time the mother or newborn is admitted as a hospital inpatient in connection with childbirth. The determination of whether an admission is in connection with childbirth is a medical decision to be made by the attending provider.

- - - -

Adoption of Amendments to the Regulations

Internal Revenue Service 26 CFR Chapter I

Accordingly, 26 CFR Part 54 is amended as follows:

PART 54—PENSION EXCISE TAXES

Paragraph 1. The authority citation for part 54 is amended by adding an entry for §54.9811–1 in numerical order and by removing the entry for §54.9811–1T to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 54.9811–1 also issued under 26 U.S.C. 9833. - * *

§54.9801–1 [Amended]

Par. 2. Section 54.9801–1(a) is amended by removing the language “54.9811–1T” and adding “54.9811–1” in its place.

§54.9801–2 [Amended]

Par. 3. In §54.9801–2, the introductory paragraph before the definitions is amended by removing the language “54.9811–1T” and adding “54.9811–1” in its place.

Par. 4. Section 54.9811–1 is added to read as follows:

§54.9811–1 Standards relating to benefits for mothers and newborns.

(a) Hospital length of stay —(1) Gen- eral rule . Except as provided in paragraph (a)(5) of this section, a group health plan that provides benefits for a hospital length

27 Departments’ estimate based on the CDC’s 2005 Survey, Tables 37 and 42. The Departments looked at the share of stays that would be labeled “short” for both mothers and newborns in 1995 (before any part of the statute was enforced) and found that the share of newborns with a “short stay” was 5 percent higher. It was therefore assumed that starting the clock at the birth of a child would increase the number of “short stays” by 5 percent.

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(3) Examples . The rules of paragraphs (a)(1) and (2) of this section are illustrated by the following examples. In each example, the group health plan provides benefits for hospital lengths of stay in connection with childbirth and is subject to the requirements of this section, as follows:

Example 1 . (i) Facts . A pregnant woman covered under a group health plan goes into labor and is admitted to the hospital at 10 p.m. on June 11. She gives birth by vaginal delivery at 6 a.m. on June 12.

(ii) Conclusion . In this Example 1, the 48-hour period described in paragraph (a)(1)(i) of this section ends at 6 a.m. on June 14.

Example 2 . (i) Facts . A woman covered under a group health plan gives birth at home by vaginal delivery. After the delivery, the woman begins bleeding excessively in connection with the childbirth and is admitted to the hospital for treatment of the excessive bleeding at 7 p.m. on October 1.

(ii) Conclusion . In this Example 2, the 48-hour period described in paragraph (a)(1)(i) of this section ends at 7 p.m. on October 3.

Example 3 . (i) Facts . A woman covered under a group health plan gives birth by vaginal delivery at home. The child later develops pneumonia and is admitted to the hospital. The attending provider determines that the admission is not in connection with childbirth.

(ii) Conclusion . In this Example 3, the hospital length-of-stay requirements of this section do not apply to the child’s admission to the hospital because the admission is not in connection with childbirth.

(4) Authorization not required —(i) In general . A plan may not require that a physician or other health care provider obtain authorization from the plan, or from a health insurance issuer offering health insurance coverage under the plan, for prescribing the hospital length of stay specified in paragraph (a)(1) of this section. (See also paragraphs (b)(2) and (c)(3) of this section for rules and examples regarding other authorization and certain notice requirements.)

(ii) Example . The rule of this paragraph (a)(4) is illustrated by the following example:

Example . (i) Facts . In the case of a delivery by cesarean section, a group health plan subject to the requirements of this section automatically provides benefits for any hospital length of stay of up to 72 hours. For any longer stay, the plan requires an attending provider to complete a certificate of medical necessity. The plan then makes a determination, based on the certificate of medical necessity, whether a longer stay is medically necessary.

(ii) Conclusion . In this Example, the requirement that an attending provider complete a certificate of medical necessity to obtain authorization for the period between 72 hours and 96 hours following a delivery by cesarean section is prohibited by this paragraph (a)(4).

(5) Exceptions —(i) Discharge of mother . If a decision to discharge a mother earlier than the period specified in paragraph (a)(1) of this section is made by an attending provider, in consultation with the mother, the requirements of paragraph (a)(1) of this section do not apply for any period after the discharge.

(ii) Discharge of newborn . If a decision to discharge a newborn child earlier than the period specified in paragraph (a)(1) of this section is made by an attending provider, in consultation with the mother (or the newborn’s authorized representative), the requirements of paragraph (a)(1) of this section do not apply for any period after the discharge.

(iii) Attending provider defined . For purposes of this section, attending provider means an individual who is licensed under applicable state law to provide maternity or pediatric care and who is directly responsible for providing maternity or pediatric care to a mother or newborn child. Therefore, a plan, hospital, managed care organization, or other issuer is not an attending provider.

(iv) Example . The rules of this paragraph (a)(5) are illustrated by the following example:

Example . (i) Facts . A pregnant woman covered under a group health plan subject to the requirements of this section goes into labor and is admitted to a hospital. She gives birth by cesarean section. On the third day after the delivery, the attending provider for the mother consults with the mother, and the attending provider for the newborn consults with the mother regarding the newborn. The attending providers authorize the early discharge of both the mother and the newborn. Both are discharged approximately 72 hours after the delivery. The plan pays for the 72-hour hospital stays.

(ii) Conclusion . In this Example, the requirements of this paragraph (a) have been satisfied with respect to the mother and the newborn. If either is readmitted, the hospital stay for the readmission is not subject to this section.

(b) Prohibitions —(1) With respect to mothers —(i) In general . A group health plan may not—

(A) Deny a mother or her newborn child eligibility or continued eligibility to enroll or renew coverage under the terms of the plan solely to avoid the requirements of this section; or

(B) Provide payments (including payments-in-kind) or rebates to a mother to encourage her to accept less than the minimum protections available under this section.

(ii) Examples . The rules of this paragraph (b)(1) are illustrated by the following examples. In each example, the group health plan is subject to the requirements of this section, as follows:

Example 1 . (i) Facts . A group health plan provides benefits for at least a 48-hour hospital length of stay following a vaginal delivery. If a mother and newborn covered under the plan are discharged within 24 hours after the delivery, the plan will waive the copayment and deductible.

(ii) Conclusion . In this Example 1, because waiver of the copayment and deductible is in the nature of a rebate that the mother would not receive if she and her newborn remained in the hospital, it is prohibited by this paragraph (b)(1). (In addition, the plan violates paragraph (b)(2) of this section because, in effect, no copayment or deductible is required for the first portion of the stay and a double copayment and a deductible are required for the second portion of the stay.)

Example 2 . (i) Facts . A group health plan provides benefits for at least a 48-hour hospital length of stay following a vaginal delivery. In the event that a mother and her newborn are discharged earlier than 48 hours and the discharges occur after consultation with the mother in accordance with the requirements of paragraph (a)(5) of this section, the plan provides for a follow-up visit by a nurse within 48 hours after the discharges to provide certain services that the mother and her newborn would otherwise receive in the hospital.

(ii) Conclusion . In this Example 2, because the follow-up visit does not provide any services beyond what the mother and her newborn would receive in the hospital, coverage for the follow-up visit is not prohibited by this paragraph (b)(1).

(2) With respect to benefit restric- tions —(i) In general . Subject to paragraph (c)(3) of this section, a group health plan may not restrict the benefits for any portion of a hospital length of stay specified in paragraph (a) of this section in a manner that is less favorable than the benefits provided for any preceding portion of the stay.

(ii) Example . The rules of this paragraph (b)(2) are illustrated by the following example:

Example . (i) Facts . A group health plan subject to the requirements of this section provides benefits for hospital lengths of stay in connection with childbirth. In the case of a delivery by cesarean section, the plan automatically pays for the first 48 hours. With respect to each succeeding 24-hour period, the participant or beneficiary must call the plan to obtain precertification from a utilization reviewer, who determines if an additional 24-hour period is medically necessary. If this approval is not obtained, the plan will not provide benefits for any succeeding 24-hour period.

(ii) Conclusion . In this Example, the requirement to obtain precertification for the two 24-hour periods immediately following the initial 48-hour stay is prohibited by this paragraph (b)(2) because benefits for the latter part of the stay are restricted in a manner that is less favorable than benefits for a preceding portion

2008–47 I.R.B. 1191 November 24, 2008

of the stay. (However, this section does not prohibit a plan from requiring precertification for any period after the first 96 hours.) In addition, the requirement to obtain precertification from the plan based on medical necessity for a hospital length of stay within the 96-hour period would also violate paragraph (a) of this section.

(3) With respect to attending providers . A group health plan may not directly or indirectly—

(i) Penalize (for example, take disciplinary action against or retaliate against), or otherwise reduce or limit the compensation of, an attending provider because the provider furnished care to a participant or beneficiary in accordance with this section; or

(ii) Provide monetary or other incentives to an attending provider to induce the provider to furnish care to a participant or beneficiary in a manner inconsistent with this section, including providing any incentive that could induce an attending provider to discharge a mother or newborn earlier than 48 hours (or 96 hours) after delivery.

(1) Hospital stays not mandatory . This section does not require a mother to—

(i) Give birth in a hospital; or (ii) Stay in the hospital for a fixed period of time following the birth of her child.

(2) Hospital stay benefits not mandated . This section does not apply to any group health plan that does not provide benefits for hospital lengths of stay in connection with childbirth for a mother or her newborn child.

(3) Cost-sharing rules —(i) In general . This section does not prevent a group health plan from imposing deductibles, coinsurance, or other cost-sharing in relation to benefits for hospital lengths of stay in connection with childbirth for a mother or a newborn under the plan or coverage, except that the coinsurance or other cost-sharing for any portion of the hospital length of stay specified in paragraph (a) of this section may not be greater than that for any preceding portion of the stay.

(ii) Examples . The rules of this paragraph (c)(3) are illustrated by the following examples. In each example, the group health plan is subject to the requirements of this section, as follows:

Example 1 . (i) Facts . A group health plan provides benefits for at least a 48-hour hospital length of stay in connection with vaginal deliveries. The plan covers 80 percent of the cost of the stay for the first 24-hour period and 50 percent of the cost of the stay for the second 24-hour period. Thus, the coinsurance paid by the patient increases from 20 percent to 50 percent after 24 hours.

(ii) Conclusion . In this Example 1, the plan violates the rules of this paragraph (c)(3) because coinsurance for the second 24-hour period of the 48-hour stay is greater than that for the preceding portion of the stay. (In addition, the plan also violates the similar rule in paragraph (b)(2) of this section.)

Example 2 . (i) Facts . A group health plan generally covers 70 percent of the cost of a hospital length of stay in connection with childbirth. However, the plan will cover 80 percent of the cost of the stay if the participant or beneficiary notifies the plan of the pregnancy in advance of admission and uses whatever hospital the plan may designate.

(ii) Conclusion . In this Example 2, the plan does not violate the rules of this paragraph (c)(3) because the level of benefits provided (70 percent or 80 percent) is consistent throughout the 48-hour (or 96-hour) hospital length of stay required under paragraph (a) of this section. (In addition, the plan does not violate the rules in paragraph (a)(4) or (b)(2) of this section.)

(4) Compensation of attending provider . This section does not prevent a group health plan from negotiating with an attending provider the level and type of compensation for care furnished in accordance with this section (including paragraph (b) of this section).

(d) Notice requirement . See 29 CFR 2520.102–3(u) for rules relating to a disclosure requirement imposed under section 711(d) of ERISA (29 U.S.C. 1181) on certain group health plans that provide benefits for hospital lengths of stay in connection with childbirth.

(e) Applicability in certain states —(1) Health insurance coverage . The requirements of section 9811 and this section do not apply with respect to health insurance coverage offered in connection with a group health plan if there is a state law regulating the coverage that meets any of the following criteria:

(i) The state law requires the coverage to provide for at least a 48-hour hospital length of stay following a vaginal delivery and at least a 96-hour hospital length of stay following a delivery by cesarean section.

(ii) The state law requires the coverage to provide for maternity and pediatric care in accordance with guidelines that relate to care following childbirth established by

the American College of Obstetricians and Gynecologists, the American Academy of Pediatrics, or any other established professional medical association.

(iii) The state law requires, in connection with the coverage for maternity care, that the hospital length of stay for such care is left to the decision of (or is required to be made by) the attending provider in consultation with the mother. State laws that require the decision to be made by the attending provider with the consent of the mother satisfy the criterion of this paragraph (e)(1)(iii).

(2) Group health plans —(i) Fully-in- sured plans . For a group health plan that provides benefits solely through health insurance coverage, if the state law regulating the health insurance coverage meets any of the criteria in paragraph (e)(1) of this section, then the requirements of section 9811 and this section do not apply.

(ii) Self-insured plans . For a group health plan that provides all benefits for hospital lengths of stay in connection with childbirth other than through health insurance coverage, the requirements of section 9811 and this section apply. (iii) Partially-insured plans . For a group health plan that provides some benefits through health insurance coverage, if the state law regulating the health insurance coverage meets any of the criteria in paragraph (e)(1) of this section, then the requirements of section 9811 and this section apply only to the extent the plan provides benefits for hospital lengths of stay in connection with childbirth other than through health insurance coverage.

(3) Preemption provisions under sec- tion 731(a) of ERISA . See 29 CFR 2590.711(e)(3) for a rule providing that the preemption provisions contained in section 731(a)(1) of ERISA and 29 CFR 2590.731(a) do not supersede a state law if the state law is described in paragraph (e)(1) of 29 CFR 2590.711 (which is substantially similar to paragraph (e)(1) of this section).

(4) Examples . The rules of this paragraph (e) are illustrated by the following examples:

Example 1 . (i) Facts . A group health plan buys group health insurance coverage in a state that requires that the coverage provide for at least a 48-hour hospital length of stay following a vaginal delivery and at least a 96-hour hospital length of stay following a delivery by cesarean section.

November 24, 2008 1192 2008–47 I.R.B.

Approved September 23, 2008.

Eric Solomon, Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on October 17, 2008, 8:45 a.m., and published in the issue of the Federal Register for October 20, 2008, 73 F.R. 62409)

(ii) Conclusion . In this Example 1, the coverage is subject to state law, and the requirements of section 9811 and this section do not apply. Example 2 . (i) Facts . A self-insured group health plan covers hospital lengths of stay in connection with childbirth in a state that requires health insurance coverage to provide for maternity and pediatric care in accordance with guidelines that relate to care following childbirth established by the American College of Obstetricians and Gynecologists and the American Academy of Pediatrics.

(ii) Conclusion . In this Example 2, even though the state law satisfies the criterion of paragraph (e)(1)(ii) of this section, because the plan provides benefits for hospital lengths of stay in connection with childbirth other than through health insurance coverage, the plan is subject to the requirements of section 9811 and this section.

(f) Effective/applicability date . This section applies to group health plans for

plan years beginning on or after January 1, 2009.

§54.9811–1T [Removed]

Par. 5. Section 54.9811–1T is removed.

§54.9831–1 [Amended]

Par. 6. Section 54.9831–1(b) is amended by removing the language “54.9811–1T” and adding “54.9811–1” in its place.

Linda E. Stiff, Deputy Commissioner for Services and Enforcement,

Internal Revenue Service.

2008–47 I.R.B. 1193 November 24, 2008