Part IV. Items — Internal Revenue Bulletin 2014-2

Notice of Proposed Rulemaking and Notice of Public Hearing

Credit for Increasing Research Activities: Intra- Group Gross Receipts

REG–159420–04

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations under section 41 of the Internal Revenue Code (Code) relating to the treatment of qualified research expenditures (QREs) and gross receipts resulting from transactions between members of a controlled group of corporations or a group of trades or businesses under common control (intra-group transactions) for purposes of determining the credit under section 41 for increasing research activities (research credit). These proposed regulations will affect controlled groups of corporations or groups of trades or businesses under common control (controlled groups) that are engaged in research activities. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by March 13, 2014. Outlines of topics to be discussed at the public hearing scheduled for April 23, 2014, at 10:00 a.m. must be received by March 13, 2014.

ADDRESSES: Send submissions to: CC: PA:LPD:PR (REG–159420–04), Room 5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions also may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–159420–04), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically via the Federal eRulemaking Portal at

http://www.regulations.gov (IRS REG– 159420–04). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, David Selig, (202) 317-4137; concerning submission of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Oluwafunmilayo (Funmi) Taylor, (202) 3176901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

These proposed regulations address how the interaction of section 41(f)(1) (relating to the treatment of controlled groups as a single taxpayer) and section 41(c)(7) (relating to the exclusion from gross receipts of amounts received by a foreign corporation that are not effectively connected to a United States trade or business) affects the computation of gross receipts resulting from intra-group transactions between domestic controlled group members (domestic members) and foreign corporate members of the controlled group (foreign corporate members). These proposed regulations apply to an intragroup transaction that is followed by a transaction between a foreign corporate member and a party outside of the controlled group involving the same or a modified version of tangible or intangible property or services that was the subject of the intra-group transaction, and the transaction with the party outside of the controlled group does not give rise to gross receipts that are effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States.

Section 41(f)(1) provides that in determining the amount of the research credit, all members of the same controlled group of corporations and all commonly controlled trades or businesses (whether or not incorporated) shall be treated as a single taxpayer. For this purpose, controlled group is defined by reference to section

1563(a), except that “more than 50 percent” is substituted for “at least 80 percent,” and the determination is made without regard to subsections (a)(4) (regarding certain insurance companies) and (e)(3)(C) (regarding stock owned by an employees’ trust). The statute provides no rules, however, regarding how the single taxpayer treatment is to be implemented. Commentators have noted the ambiguity associated with similar provisions of the Code. See, e.g., Prop. Reg. § 1.199–1, 70 FR 67220, 67236 (November 4, 2005) (“the single corporation language in section 199(d)(4)(A) has created confusion among commentators and the proposed regulations clarify the meaning of this language”).

The IRS and the Treasury Department believe that the single taxpayer concept should be interpreted consistently with the purpose the statute is intended to advance. The single taxpayer concept as it relates to the computation of the research credit first appeared in 1981 when Congress initially enacted the research credit. As originally enacted, the research credit was determined solely by reference to a taxpayer’s QREs. Specifically, to ensure that the research credit was available only for actual increases in research expenditures, former section 44F(f)(1) provided that the QREs of a controlled group of corporations and all commonly controlled trades or businesses (whether or not incorporated) were aggregated and treated as those of a single taxpayer. H. Rept. No. 97–201, 1981–2 CB 364–365 (demonstrating that controlled groups are prevented from increasing research expenditures by shifting these expenditures from an entity that has a high baseline of research expenditures to one that does not).

In 1989, Congress modified the computation of the research credit (now section 41 of the Code) by adding the base amount concept embodied in section 41(a)(1)(B), which included gross receipts in the calculation of the research credit for the first time. See the Omnibus Budget Reconciliation Act of 1989 (Public Law 101–239, §7110) (the “1989 Act”). The legislative history of the 1989 Act explains that gross receipts were included in the computation of the research credit to address concerns with the existing rules

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and incentivize spending on research activities. In particular, Congress wished to modify the pre-existing incremental credit structure in order to maximize the research credit’s efficiency by not allowing (to the extent possible) credits for research that would have been undertaken in any event. Congress believed that businesses often determine their research budgets as a fixed percentage of gross receipts and determined that it was appropriate to compute the research credit, in part, based on the increase in a taxpayer’s gross receipts. This approach also had the advantage of effectively indexing the research credit for inflation and preventing taxpayers from being rewarded for increases in research spending that are attributable solely to inflation. See H.R. Rep. No. 101–247, 101st Cong., 1st Sess. 1199–1200 (1989).

The 1989 Act also amended section 41 to provide certain parameters for measuring gross receipts. Specifically, section 41(c)(7) provides that gross receipts are reduced by returns and allowances made during the taxable year. Section 41(c)(7) also provides that in the case of a foreign corporation, only gross receipts effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States are taken into account in the computation of the research credit. See section 41(c)(7), as amended. The legislative history of the 1989 Act does not expressly address the purpose of the gross receipts provision relating to foreign corporations. The enactment of the controlled group aggregation rules in section 41(f)(1) (treating all members of a controlled group as a single taxpayer) preceded the enactment of the foreign corporation gross receipts rule in section 41(c)(7). Congress, however, did not make clear how the two provisions should interact and did not provide any additional indication regarding the consequences of being treated as a single taxpayer, including when the deemed single taxpayer is comprised of both domestic and foreign controlled group members.

Current Regulatory Scheme

Section 1.41–3(c) defines gross receipts generally as the total amount, determined under the taxpayer’s method of

accounting, derived from all its activities and from all sources. Section 1.41–6(i) interprets the single taxpayer concept of section 41(f)(1) to provide that transfers between members of a controlled group of corporations are generally disregarded for purposes of determining the research credit under section 41 for both gross receipts and QREs. The IRS and the Treasury Department believe that, in most cases, the general rule that disregards intra-group transactions for both gross receipts and QREs furthers the statutory purpose of ensuring that the computation of the research credit is based upon an economic measure of gross receipts relative to QREs and not artificially increased by multiple intra-group transactions.

The IRS and the Treasury Department believe, however, that an interpretation of section 41(f)(1) that completely excludes gross receipts associated with certain transactions is inconsistent with Congressional intent. For example, assume that a domestic corporation incurs research expenditures and sells a product that it produced to a foreign corporate member, and the foreign corporate member then sells the product to a customer in a transaction that does not give rise to gross receipts effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States. If gross receipts from the sales transactions are excluded because the intra-group transaction is disregarded under §1.41–6 and the foreign corporate member’s gross receipts are excluded under section 41(c)(7) for the second transaction, the aggregate amount of gross receipts for purposes of determining the research credit is distorted. The distortion results because the QREs of the domestic member are included, but its gross receipts from the sale to the foreign corporate member are not. Accordingly, the IRS and the Treasury Department propose to revise the regulations to include gross receipts in this situation, including in cases where the property is modified prior to being transferred by the foreign corporate member, the gross receipts are in the form of royalties, interest, or other cash or non-cash remuneration, or the gross receipts relate to services ultimately provided by the foreign corporate member to a third-party customer.

However, the IRS and the Treasury Department believe that multiple inclusions of gross receipts associated with intra-group transactions involving the same or a modified version of tangible or intangible property or services would be inconsistent with Congressional intent. Thus, for example, it would not be appropriate to overstate gross receipts, and thereby reduce the research credit available to a controlled group, by taking into account the transfer of a single piece of property (including a modified form of the same property) more than one time (that is, first as a transfer between controlled group members and then as a transfer with a third party).

Explanation of Provisions

The proposed regulations retain the current rule that generally disregards transactions among members of a controlled group for purposes of computing the research credit, but provide a narrow exception to this rule. Under the exception, gross receipts (within the meaning of §1.41–3(c)) from an intra-group transaction are taken into account if (1) a foreign corporate member engages in a transaction with a party outside of the group (external transaction) involving the same or a modified version of tangible or intangible property or a service that was previously the subject of one or more intra-group transactions (an internal transaction); and (2) the external transaction does not give rise to gross receipts that are effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States. The exception harmonizes the application of sections 41(f)(1) and 41(c)(7) and is consistent with the purposes of these provisions as well as the broader statutory changes that made gross receipts a central feature of the research credit computation.

For example, if a domestic member transfers property to a foreign corporate member, and the foreign corporate member then transfers the property outside of the controlled group in a transaction that does not give rise to gross receipts that are effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any posses

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sion of the United States, the proposed regulations provide that the domestic member includes in its gross receipts amounts received from the foreign corporate member for that transaction. The amounts are taken into account in computing gross receipts in the taxable year in which the foreign corporate member engages in the external transaction. The fact that the foreign corporate member that ultimately engages in a transaction involving the property outside of the controlled group is not the same foreign corporate member to which the domestic member directly transferred the property (for example, one foreign corporate member retransfers the property to another foreign corporate member) is not material to the determination of the domestic member’s gross receipts.

To prevent multiple inclusions of gross receipts in cases in which transactions involving the same or a modified version of tangible or intangible property or services occur successively between domestic and foreign corporate members, the proposed regulations provide that only the last internal transaction giving rise to gross receipts (within the meaning of section 1.41–3(c)) is taken into account in the research credit computation.

These proposed regulations embody the statutory requirement of consistency in determining a taxpayer’s base amount (generally, the product of the fixed-base percentage and 4-year average annual gross receipts preceding the credit year). See section 41(c)(6). Accordingly, in computing the research credit for taxable years beginning on or after the date of publication of these proposed regulations as final regulations, QREs and gross receipts taken into account in computing a taxpayer’s fixed-base percentage and a taxpayer’s base amount must be determined on a basis consistent with the definition of QREs and gross receipts for the credit year, without regard to the law in effect for the earlier taxable years that are taken into account in computing the fixedbase percentage or the base amount. However, the proposed regulations do not specify the manner in which a taxpayer must make the base amount adjustments. The IRS and the Treasury Department recognize that accounting for intra-group transactions in prior years presents a

unique burden because taxpayers may not have records for the base years with sufficient information to satisfy the proposed regulations’ requirement of consistency. These proposed regulations are intended to capture some measure of intra-group gross receipts for purposes of satisfying the requirement of consistency, but are not intended to preclude research credit claims for taxpayers that do not have adequate information in their books and records for the base years. Accordingly, the IRS and Treasury Department request comments regarding the need for a rule or safe harbor in applying the consistency rule for purposes of determining the base amount in accordance with these proposed regulations.

QREs

These proposed regulations remove the rules in §1.41–6(i)(4) (relating to the treatment of lease payments as QREs) to reflect changes to section 41 by the Tax Reform Act of 1986, Public Law 99–514.

These proposed regulations generally would not change the rules concerning whether payments between members of a controlled group constitute QREs. The IRS and the Treasury Department request comments concerning whether any revisions are necessary.

Proposed Effective Date

The amendments to §1.41–6(i) are proposed to apply to taxable years beginning on or after the date that these regulations are published as final regulations in the Federal Register .

Special Analysis

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. It also has been determined that section 553(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to these regulations, and 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. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section

7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any electronic or written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. The IRS and the Treasury Department request comments on all aspects of the proposed rules.

All comments will be available for public inspection and copying.

A public hearing has been scheduled for April 23, 2014, beginning at 10:00 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, N.W., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments by March 13, 2014, and submit an outline of the topics to be discussed and the amount of time to be devoted to each topic (a signed original and eight (8) copies) by March 13, 2014. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these proposed regulations is David Selig, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the Treasury

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Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be 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. - - Par. 2. In §1.41–0, the table of contents is amended by:

Revising the section heading for §1.

41–6 and the entries for §1. 41–6 (i), (i)(1), (i)(2), (i)(3), (i)(4), and (i)(5).

Adding a new entry for §1.41– 6(i)(6).
Adding a new entry for §1.41– 6(j)(4). The addition reads as follows:

§1.41–0 Table of contents.

§1.41–6 Controlled groups.

(i) Transactions between controlled group members. (1) In general. (2) Exception for certain amounts received from foreign corporate controlled group members. (3) In-house research expenses. (4) Contract research expenses. (5) Payment for supplies. (6) Consistency requirement.

(j) - -

- - - (4) Intra-group transactions.

Par. 3. Section 1.41–6 is amended by:

Revising the section heading.
Revising paragraph (i)(1).
Removing paragraph (i)(4).
Redesignating paragraphs (i)(2) and (3) as paragraphs (i)(3) and (4), respectively.
Adding new paragraph (i)(2).
Adding new paragraph (i)(6).
Revising the first sentence of paragraph (j)(1).
Adding new paragraph (j)(4). The revisions and additions read as follows:

§1.41–6 Controlled groups.

(i) Transactions between controlled group members —(1) In general - Treat- ment of transactions . Except as otherwise provided in this paragraph, all activities giving rise to amounts included in gross receipts under §1.41–3(c) (transactions) between members of a controlled group as defined in paragraph (a)(3) of this section (intra-group transactions) are generally disregarded in determining the QREs and gross receipts of a member for purposes of the research credit.

(2) Exception for certain amounts re- ceived from foreign corporate controlled group members –(i) In general . Notwithstanding paragraph (i)(1) of this section, gross receipts (within the meaning of §1.41–3(c)) from an intra-group transaction are taken into account if–

(A) A foreign corporate controlled group member engages in a transaction with a party outside of the group (an external transaction) involving the same or a modified version of tangible or intangible property or a service that was previously the subject of one or more intra-group transactions (an internal transaction); and

(B) The external transaction does not give rise to gross receipts that are effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States.

(ii) Timing of inclusion . The amount described as taken into account in computing gross receipts in paragraph (i)(2)(i) of this section is taken into account in the year a foreign corporate controlled group member engages in the external transaction described in paragraph (i)(2)(i)(B) of this section.

(iii) Multiple intra-group transactions . If there is more than one internal transaction, then only the last internal transaction giving rise to gross receipts (within the meaning of section 1.41–3(c)) is taken into account in the research credit compu

tation pursuant to paragraph (i)(2)(i) of this section.

(iv) Examples . The following examples illustrate the principles of paragraph (i)(2) of this section.

Example 1 . Domestic Controlled Group Member Includes in Gross Receipts Proceeds From Intra- group Sale . D and F are members of the same controlled group. D is a domestic corporation. F is a foreign corporation that is organized under the laws of Country. F does not conduct a trade or business within the United States, Puerto Rico, or any U.S. possession. In Year 1, D sells Product to F for $8x. In Year 2, F sells Product to F’s unrelated customer for $10x. Because the Product that F sells outside the group is the same Product that was the subject of an internal transaction (i.e., the sale from D to F), and the $10x that F receives upon sale of Product outside the group is not effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States, the $8x that D receives from F is included in D’s gross receipts for purposes of computing the amount of the group credit. The $8x of gross receipts is taken into account in Year 2, the year of the external transaction. See paragraph (i)(2) of this section. The $10x that F receives from F’s customer is excluded from gross receipts under section 41(c)(7) because it is not effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States.

Example 2 . Domestic Controlled Group Member Includes in Gross Receipts Amounts Received For Intra-group Transfer of License . Assume the same facts as in Example 1, except in Year 1, D licenses intellectual property (license) to F for $8x. F owns similar intellectual property that it plans to license to a customer together with the license it received from D. In Year 2, F licenses its intellectual property and sublicenses D’s intellectual property to F’s unrelated customer for $20x. Because the intellectual property that F sublicenses outside the group is the same intellectual property that was the subject of an internal transaction (i.e., the license from D to F), and the $20x that F receives for the license and sublicense of intellectual property outside the group is not effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States, the $8x that D receives from F is included in D’s gross receipts for purposes of computing the amount of the group credit. The $8x of gross receipts is taken into account in Year 2, the year of the external transaction. See paragraph (i)(2) of this section. The $20x that F receives from F’s customer is excluded from gross receipts under section 41(c)(7) because it is not effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States.

Example 3 . Domestic Controlled Group Member Includes in Gross Receipts Proceeds From Intra- group Sale Following Multiple Internal Transac- tions . D, F1, and F2 are members of the same controlled group. D is a domestic corporation. F1 and F2 are foreign corporations that are organized under the

Bulletin No. 2014–2 377 January 6, 2014

Notice of Proposed Rulemaking

Section 752 and Related Party Rules

REG–136984–12

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations under section 752 of the Internal Revenue Code (Code) relating to recourse liabilities of a partnership and the special rules for related persons. The proposed regulations affect partnerships and their partners.

DATES: Written or electronic comments and request for a public hearing must be received by March 17, 2014.

ADDRESSES: Send submissions to: CC: PA:LPD:PR (REG–136984–12), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be handdelivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–136984–12), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the Federal eRulemaking Portal at www. regulations.gov (IRS REG–136984–12).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Caroline E. Hay or Deane M. Burke, at (202) 317-5279; concerning the submissions of comments and requests for a public hearing, Oluwafunmilayo (Funmi) Taylor at (202) 317-5179 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 752 regarding a partner’s share of recourse partnership liabilities.

Section 752(a) provides, in general, that any increase in a partner’s share of

laws of Country. F1 and F2 do not conduct a trade or business within the United States, Puerto Rico, or any U.S. possession. In Year 1, D sells Product to F1 for $8x. In Year 2, F1 sells Product to F2 for $9x, and F2 sells Product to F2’s unrelated customer for $10x. Both D’s sale to F1 and F1’s sale to F2 are internal transactions involving Product that precede F2’s external transaction involving Product. The $10x that F2 receives upon sale of Product outside the group is not effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States. Accordingly, the group will include gross receipts from an internal transaction in its research credit computation pursuant to paragraph (i)(2)(i) of this section. Because F1’s sale of Product to F2 does not produce gross receipts that are effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States, those gross receipts are not taken into account even though that sale is the most recent internal transaction preceding the external transaction. See section 41(c)(7) and paragraph (i)(2)(i) of this section. Therefore, D will include $8x of gross receipts in its research credit computation in Year 2, the year of the external transaction, because the transfer from D to F1 is the last internal transaction giving rise to includible gross receipts. See paragraph (i)(2)(iii) of this section.

Example 4 . Foreign Partnership Controlled Group Member Includes in Gross Receipts Proceeds From Intra-group Sale . Assume the same facts as in Example 3, except that F1 is a foreign partnership for federal income tax purposes and is part of the controlled group (within the meaning of §1.41– 6(a)(3)(ii)) that includes D and F2. Both D’s sale to F1 and F1’s sale to F2 are internal transactions involving Product that precede F2’s external transaction involving Product. The $10x that F2 receives upon sale of Product outside the group is not effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States. Accordingly, the group will include gross receipts from an internal transaction in its research credit computation pursuant to paragraph (i)(2)(i) of this section. F1’s sale to F2 is the most recent internal transaction preceding the external transaction giving rise to gross receipts (see paragraph (i)(2)(iii)). The gross receipts from F1’s sale to F2 are not excluded under section 41(c)(7) and paragraph (i)(2)(i) of this section because F1 is a partnership. Therefore, F1 will include $9x of gross receipts in its research credit computation in Year 2 because the transfer from F1 to F2 is the last internal transaction giving rise to gross receipts. See paragraph (i)(2)(iii) of this section.

Example 5 . Domestic Controlled Group Member Includes in Gross Receipts Proceeds From Intra- group Sale Following Multiple Internal Transac- tions that Include a Section 721 Exchange . Assume the same facts as Example 3, except that in an exchange meeting the requirements of section 721(a), F2 transfers Product to PRS, a partnership that is not part of the controlled group within the meaning of §1.41–6(a)(3)(ii). Both D’s sale to F1 and F1’s sale to F2 are internal transactions involving Product that precede F2’s transfer of Product to

PRS. The exchange engaged in by F2 does not give rise to gross receipts that are effectively connected with a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States. Because F1’s sale of Product to F2 does not produce gross receipts that are effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States, those gross receipts are not taken into account even though that sale is the most recent internal transaction preceding the external transaction. See section 41(c)(7) and paragraph (i)(2)(i) of this section. Therefore, D will include $8x of gross receipts in its research credit computation in Year 2, the year of the external transaction, because the transfer from D to F1 is the last internal transaction giving rise to includible gross receipts. See paragraphs (i)(2)(i) and (i)(2)(iii) of this section.

- - - (6) Consistency requirement . In computing the research credit for taxable years beginning on or after the date of publication of these regulations as final regulations in the Federal Register, QREs and gross receipts taken into account in computing a taxpayer’s fixed-base percentage and a taxpayer’s base amount must be determined on a basis consistent with the definition of QREs and gross receipts for the credit year, without regard to the law in effect for the taxable years taken into account in computing the fixed-base percentage or the base amount. This consistency requirement applies even if the period for filing a claim for credit or refund has expired for any taxable year taken into account in computing the fixed-base percentage or the base amount.

(j) Effective/applicability dates –(1) In general . Except as otherwise provided in this paragraph (j), these regulations apply to taxable years ending on or after May 24, 2005.

- - - (4) Intra-group transactions . Paragraphs (i)(1) and (2) of this section apply to taxable years beginning on or after the date of publication of these regulations as final regulations in the Federal Register .

Beth Tucker, Deputy Commissioner for

Operations Support.

(Filed by the Office of the Federal Register on December 12, 2013, 8:45 a.m., and published in the issue of the Federal Register for December 13, 2013, 78 F.R. 75905)

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partnership liabilities (or an increase in a partner’s individual liabilities by reason of the assumption by the partner of partnership liabilities) will be considered a contribution of money by such partner to the partnership. Conversely, section 752(b) provides that any decrease in a partner’s share of partnership liabilities (or a decrease in a partner’s individual liabilities by reason of the assumption by the partnership of such individual liabilities) will be considered a distribution of money to the partner by the partnership.

When determining a partner’s share of partnership liabilities, the regulations under section 752 distinguish between two categories of liabilities—recourse and nonrecourse. In general, a partnership liability is recourse to the extent that a partner or related person bears the economic risk of loss as provided in §1.752–2 and nonrecourse to the extent that no partner or related person bears the economic risk of loss. See §1.752–1(a)(1) and (2).

These proposed regulations provide guidance as to when and to what extent a partner is treated as bearing the economic risk of loss for a partnership liability when multiple partners bear the economic risk of loss for the same partnership liability (overlapping economic risk of loss). In addition, these proposed regulations provide guidance when a partner has a payment obligation with respect to a liability or makes a nonrecourse loan to the partnership (and no other partner bears the economic risk of loss for that liability) and such partner is related to another partner in the partnership.

Explanation of Provisions

Overlapping Risk of Loss

Under §1.752–2(a), a partner’s share of a recourse partnership liability equals the portion of that liability, if any, for which the partner or related person bears the economic risk of loss. Section 1.752– 2(b)(1) provides that a partner bears the economic risk of loss for a partnership liability to the extent that, if the partnership constructively liquidated, the partner or related person would be obligated to make a payment on the partnership obligation to any person or a contribution to the partnership (payment obligation) because the liability becomes due and pay

able and the partner or related person would not be entitled to reimbursement from another partner or a person that is related to another partner. Moreover, under §1.752–2(c)(1), a partner bears the economic risk of loss for a partnership liability to the extent that the partner or a related person makes (or acquires an interest in) a nonrecourse loan to the partnership and the economic risk of loss for the liability is not borne by another partner. Section 1.752–4(c) provides that the amount of an indebtedness is taken into account only once.

The IRS and the Treasury Department are aware that there is uncertainty as to how partners should share a partnership liability if multiple partners bear the economic risk of loss with respect to the same liability. The temporary regulations under §1.752–1T(d)(3)(i) that preceded the existing final regulations under section 752 addressed the issue of overlapping economic risk of loss by providing that “if the aggregate amount of the economic risk of loss that all partners are determined to bear with respect to a partnership liability (or portion thereof) . . . exceeds the amount of such liability (or portion thereof), then the economic risk of loss borne by each partner with respect to such liability shall equal the amount determined by multiplying the amount of such liability (or portion thereof) by the fraction obtained by dividing the amount of the economic risk of loss that such partner is determined to bear with respect to that liability (or portion thereof) by the sum of such amounts for all partners.” The rule in the temporary regulations, however, was not included in the final regulations in part in response to comments that the proposed regulations addressed too many topics generally and should be simplified to focus on more basic concepts. See 56 FR 36704–02 (1991–2 C.B. 1125). The IRS and the Treasury Department have received comments requesting guidance in this area. The IRS and the Treasury Department continue to balance the importance of simplicity in regulations under section 752 against the utility of providing additional guidance on identified issues. In light of comments received, the IRS and the Treasury Department believe that a rule is needed to address overlapping economic risk of loss due to un

certainty under the current regulations and believe that the concepts from the temporary regulations regarding the overlapping risk of loss rule provide a reasonable approach in addressing how a partnership liability should be shared among partners bearing the economic risk of loss for the same liability. Accordingly, these proposed regulations adopt the rule from the temporary regulations.

Tiered Partnerships

The rules under section 752 regarding the allocation of liabilities in a tiered partnership structure also may result in overlapping economic risk of loss. Section 1.752–2(i) provides that if a partnership (the “upper-tier partnership”) owns (directly or indirectly through one or more partnerships) an interest in another partnership (the “lower-tier partnership”), the liabilities of the lower-tier partnership are allocated to the upper-tier partnership in an amount equal to the sum of the following: (1) the amount of the economic risk of loss that the upper-tier partnership bears with respect to the liabilities; and (2) the amount of any other liabilities with respect to which partners of the upper-tier partnership bear the economic risk of loss. Section 1.752–4(a) further provides that an upper-tier partnership’s share of the liabilities of a lower-tier partnership (other than any liability of the lower-tier partnership that is owed to the upper-tier partnership) is treated as a liability of the upper-tier partnership for purposes of applying section 752 and the regulations thereunder to the partners of the upper-tier partnership.

The regulations therefore allocate a recourse liability of a lower-tier partnership to an upper-tier partnership if either that upper-tier partnership, or one of its partners, bears the economic risk of loss for the liability. When a partner of the uppertier partnership is also a partner in the lower-tier partnership, and that partner bears the economic risk of loss with respect to a liability of the lower-tier partnership, the current regulations do not provide guidance as to how the lower-tier partnership should allocate the liability between the upper-tier partnership and the partner. The IRS and the Treasury Department believe that the lower-tier partner

Bulletin No. 2014–2 379 January 6, 2014

ship should allocate the liability directly to the partner. The IRS and the Treasury Department believe that this approach is more administrable and ensures that the additional basis resulting from the liability is only for the benefit of the partner that bears the economic risk of loss for the liability. Thus, the proposed regulations modify the tiered-partnership rule in §1.752–2(i)(2) to prevent a liability of a lower-tier partnership from being allocated to an upper-tier partnership when a partner of the lower-tier partnership and the upper-tier partnership bears the economic risk of loss for such liability.

Related Party Rules

A. Constructive Owner of Stock

Under §1.752–4(b)(1), a person is related to a partner if the partner and the person bear a relationship to each other that is specified in sections 267(b) or 707(b)(1), except that 80 percent or more is substituted for 50 percent or more in each of those sections, a person’s family is determined by excluding siblings, and sections 267(e)(1) and 267(f)(1)(A) are disregarded.

In determining whether a partner and a person bear a relationship to each other that is specified in section 267(b), the constructive stock ownership rules in section 267(c) are applicable. Specific to partnerships, section 267(c)(1) provides, in part, that stock owned directly or indirectly by or for a partnership is considered as being owned proportionately by or for its partners. Therefore, if a partnership owns all of the stock in a corporation, a partner that owns 80 percent or more of the interests in the partnership is considered to be related to the corporation under §1.752– 4(b)(1). If the corporation has a payment obligation with respect to a liability of its partnership owner, or the corporation lends to the partnership and the economic risk of loss for the liability is not borne by another partner, any partner that is treated as related to the corporation bears the economic risk of loss for the partnership liability under §1.752–2. The IRS and the Treasury Department believe that partners in a partnership, where that partnership owns stock in a corporation that is a

lender to the partnership or has a payment obligation with respect to a liability of its partnership owner, should not be treated as related, through ownership of the partnership, to the corporation. A partner’s economic risk of loss that is limited to the partner’s equity investment in the partnership should be treated differently than the risk of loss beyond that investment. Thus, for purposes of §1.752–4(b)(1), the proposed regulations disregard section 267(c)(1) in determining whether a partner in a partnership is considered as owning stock in a corporation to the extent the corporation is a lender or has a payment obligation with respect to a liability of its partnership owner.

B. Person Related to Multiple Partners

Section 1.752–4(b)(2)(i) provides that if a person is related to more than one partner in a partnership under §1.752–4(b)(1), the related party rules in §1.752–4(b)(1) are applied by treating the person as related only to the partner with whom there is the highest percentage of related ownership (greatest percentage rule). If, however, two or more partners have the same percentage of related ownership and no other partner has a greater percentage, the liability is allocated equally among the partners having the equal percentages of related ownership.

The IRS and the Treasury Department have recently received comments requesting that the greatest percentage rule be removed. The commenter explains that if a person is related to more than one partner under §1.752–4(b)(1), the ultimate determination of a person’s relatedness to a partner should not be based on which partner has the highest percentage of related ownership because differences in ownership percentages within a 20-percent range do not justify treating a person as related to one partner over another. After considering the comments, the IRS and the Treasury Department agree with the comments, especially given the administrative burden associated with determining precise ownership percentages above the 80-percent threshold in §1.752– 4(b)(1)(i). Therefore, the proposed regulations remove the greatest percentage

rule and provide that if a person is a lender or has a payment obligation for a partnership liability and is related to more than one partner, those partners share the liability equally.

C. Related Partner Exception to Related Party Rules

Section 1.752–4(b)(2)(iii) provides that persons owning interests directly or indirectly in the same partnership are not treated as related persons for purposes of determining the economic risk of loss borne by each of them for the liabilities of the partnership (the related partner exception). The IRS and the Treasury Department are aware that taxpayers are uncertain of the application of the related partner exception following the decision in IPO II v. Commissioner, 122 T.C. 295 (2004). IPO II involved an individual, Mr. Forsythe, who owned 100 percent of an S corporation, Indeck Overseas, and 70 percent of a second S corporation, Indeck Energy. Mr. Forsythe’s children owned the remaining 30 percent of Indeck Energy. Mr. Forsythe and Indeck Overseas formed a partnership, IPO II, which received a loan from a bank. To secure that loan, Mr. Forsythe, Indeck Energy, and Indeck Power (a C corporation of which Mr. Forsythe owned 63 percent) entered into guarantees with the bank. IPO II allocated 99 percent of the increase in basis attributable to this liability to Indeck Overseas. Id . at 296–97. The Tax Court held that this allocation was incorrect because Indeck Overseas was not directly or indirectly liable for the debt. The court, while stressing that it interprets “the policy behind the related partner exception as preventing the shifting of basis from a party who bears actual economic risk of loss to one who does not,” did not end its analysis by stating that Mr. Forsythe guaranteed the debt, and thus his economic risk of loss could not be shifted to Indeck Overseas which did not guarantee the debt. Id . at 303. The court instead examined whether Indeck Overseas indirectly bore the economic risk of loss due to its relationship with a related party, Indeck Energy. The Tax Court held that the relationship between Indeck Overseas and Indeck Energy arose through Mr. Forsythe. Because the related partner exception

January 6, 2014 380 Bulletin No. 2014–2

shuts off the relationship between Mr. Forsythe and Indeck Overseas, it should be turned off for all purposes; therefore, Indeck Energy was not related to Indeck Overseas. Id . at 304.

The IRS and Treasury Department believe the related partner exception should only apply where a partner has a payment obligation or is the lender with respect to a partnership liability. IPO II may be read to expand the related partner exception to turn off relationships between related partners in a partnership without limitation. Under this broad interpretation, the related partner exception could be improperly applied to turn off attribution of economic risk of loss between related partners even when none of the related partners directly bears the economic risk of loss for a partnership liability. The IRS and the Treasury Department believe that such an interpretation could have unintended results, including causing intercompany debts to be treated as nonrecourse because no partner alone owns 80 percent or more of the lending company and the partners are not treated as related to each other. The proposed regulations provide that the related partner exception only applies when a partner bears the economic risk of loss for a liability of the partnership because the partner is a lender under §1.752–2(c)(1) or has a payment obligation for the partnership liability. The proposed regulations also clarify that an indirect interest in a partnership is an indirect interest through one or more partnerships.

D. Special Rule Where Entity Structured To Avoid Related Person Status

Section 1.752–4(b)(2)(iv) provides special rules for when an entity is structured to avoid related person status. The proposed regulations do not propose any changes to these rules. However, as a result of other changes made to simplify the organization of §1.752–4, the rules in §1.752–4(b)(2)(iv) are now in §1.752– 4(b)(4) of the proposed regulations. In addition, the example in §1.752– 4(b)(2)(iv)(C) is now Example 5 under §1.752–4(b)(5) of the proposed regulations.

Request for Comments: Liquidating Distributions of Tiered Partnership Interests

The IRS and the Treasury Department are considering the proper treatment of liabilities when an upper-tier partnership (transferor) bears the economic risk of loss for a lower-tier partnership liability and distributes, in a liquidating distribution, its interest in the lower-tier partnership to one of its partners (transferee) but the partner does not bear the economic risk of loss for the lower-tier partnership’s liability. The IRS and the Treasury Department request comments on the timing of the liability reallocation relative to the transaction that causes the liability to change from recourse to nonrecourse.

Proposed Applicability Date

The regulations are proposed to apply to liabilities incurred or assumed by a partnership on or after the date these regulations are published as final regulations in the Federal Register, other than liabilities incurred or assumed by a partnership pursuant to a written binding contract in effect prior to that date.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. 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 proposed regulations. Because these proposed 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, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are

submitted timely to the IRS as prescribed in this preamble under the “Addresses” heading. The IRS and the Treasury Department request comments on all aspects of the proposed rules. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal authors of these proposed regulations are Caroline E. Hay and Deane M. Burke, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be 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 - - Par. 2. Section 1.752–0 is amended by:

Revising the entry for §1. 752–2(a) and adding new entries for §1.

752–2(a)(1) and (a)(2). 2. Revising the entry for §1.752– 4(b)(2);removing the entries for §1.752– 4(b)(2)(i), (b)(2)(ii), and (b)(2)(iii); redesignating the entries for §1.752– 4(b)(2)(iv), (b)(2)(iv)(A) and (b)(2)(iv)(B) as §1.752–4(b)(4), (b)(4)(i), and (b)(4)(ii), respectively; and removing the entry for §1.752–4(b)(2)(iv)(C).

Adding new entries for §1.752– 4(b)(3) and (b)(5). The revisions and additions read as follows:

§1.752–2 Partner’s share of recourse liabilities

(a) Partner’s share of recourse liabilities.

(1) In general.

Bulletin No. 2014–2 381 January 6, 2014

§1.752–4 Special rules.

(b) - - (1) - - (iv) Disregard section 267(c)(1) in determining whether stock of a corporation owned, directly or indirectly, by or for a partnership is considered as being owned proportionately by or for its partners if the corporation is a lender as provided in §1.752–2(c) or has a payment obligation with respect to a liability of the partnership.

(2) Related partner exception . Notwithstanding paragraph (b)(1) of this section (which defines related person), if a person who owns (directly or indirectly through one or more partnerships) an interest in a partnership is a lender as provided in §1.752–2(c) or has a payment obligation with respect to a partnership liability, or portion thereof, then other persons owning interests directly or indirectly (through one or more partnerships) in that partnership are not treated as related to that person for purposes of determining the economic risk of loss borne by each of them for such partnership liability, or portion thereof. This paragraph (b)(2) does not apply when determining a partner’s interest under the de minimis rules in §1.752–2(d) and (e).

(3) Person related to more than one partner . If a person that is a lender as provided in §1.752–2(c) or that has a payment obligation with respect to a partnership liability, or portion thereof, is related to more than one partner under paragraph (b)(1) of this section, the partnership liability, or a portion thereof, is shared equally among such partners.

(4) Special rule where entity structured to avoid related person status —(i) In gen- eral . If—

(A) A partnership liability is owed to or guaranteed by another entity that is a partnership, an S corporation, a C corporation, or a trust;

(B) A partner or related person owns (directly or indirectly) a 20 percent or more ownership interest in the other entity; and

(C) A principal purpose of having the other entity act as a lender or guarantor of the liability was to avoid the determination that the partner that owns the interest

(2) Overlapping economic risk of loss.

§1.752–4 Special rules

(b) - - (2) Related partner exception. (3) Person related to more than one partner.

(4) Special rule where entity structured to avoid related person status.

(i) In general. (ii) Ownership interest. (5) Examples.

- - - Par. 3. Section 1.752–2 is amended by:

Redesignating paragraph (a) as paragraph (a)(1) and adding a heading to paragraph (a).
Adding paragraph (a)(2).
Adding Example 9 to paragraph (f).
Revising paragraphs (i)(1) and (2).
Adding a sentence to the end of paragraph (l).

The additions and revisions read as follows:

§1.752–2 Partner’s share of recourse liabilities.

(a) Partner’s share of recourse liabili- ties - - - (2) Overlapping economic risk of loss . For purposes of determining a partner’s share of a recourse partnership liability, the amount of the partnership liability is taken into account only once. If the aggregate amount of the economic risk of loss that all partners are determined to bear with respect to a partnership liability (or portion thereof) under paragraph (a)(1) of this section (without regard to this paragraph (a)(2)) exceeds the amount of such liability (or portion thereof), then the economic risk of loss borne by each partner with respect to such liability shall equal the amount determined by multiplying:

(i) The amount of such liability (or portion thereof) by

(ii) The fraction obtained by dividing the amount of the economic risk of loss that such partner is determined to bear with respect to that liability (or portion thereof) under paragraph (a)(1) of this

section, by the sum of such amounts for all partners.

(f) - - Example 9 . Overlapping economic risk of loss . (i) A and B are unrelated equal members of limited liability company, AB. AB is treated as a partnership for federal tax purposes. AB borrows $1,000 from Bank. A guarantees payment for the entire amount of AB’s $1,000 liability and B guarantees payment for $500 of the liability. Both A and B waive their rights of contribution against each other.

(ii) Because the aggregate amount of A’s and B’s economic risk of loss under paragraph (a)(1) of this section ($1,500) exceeds the amount of AB’s liability ($1,000), the economic risk of loss borne by A and B each is determined under paragraph (a)(2) of this section. Under paragraph (a)(2) of this section, A’s economic risk of loss equals $1,000 multiplied by $1,000/$1,500 or $667, and B’s economic risk of loss equals $1,000 multiplied by $500/$1,500 or $333.

- - - (i) - - (1) The amount of liabilities with respect to which the upper-tier partnership has the payment obligation or is the lender as provided in paragraph (c) of this section; and

(2) The amount of any other liabilities with respect to which partners of the upper-tier partnership bear the economic risk of loss, provided the partner is not a partner in the lower-tier partnership.

- - - (l) * * * Paragraphs (a)(2), (f) Example 9, and (i) of this section apply to liabilities incurred or assumed by a partnership on or after the date these proposed regulations are published as final regulations in the Federal Register, other than liabilities incurred or assumed by a partnership pursuant to a written binding contract in effect prior to that date.

Par. 4. Section 1.752–4 is amended by:

Removing the word “and” at the end of paragraph (b)(1)(ii).
Removing “267(f)(1)(A).” at the end of (b)(1)(iii) and adding in its place “267(f)(1)(A); and”.
Adding paragraph (b)(1)(iv).
Revising paragraph (b)(2).
Adding paragraph (b)(3).
Adding paragraph (b)(4).
Adding paragraph (b)(5). The additions and revisions read as follows:

January 6, 2014 382 Bulletin No. 2014–2

bears the economic risk of loss for federal income tax purposes for all or part of the liability; then the partner is treated as holding the other entity’s interest as a creditor or guarantor to the extent of the partner’s or related person’s ownership interest in the entity.

(ii) Ownership interest . For purposes of paragraph (b)(4)(i) of this section, a person’s ownership interest in:

(A) A partnership equals the partner’s highest percentage interest in any item of partnership loss or deduction for any taxable year;

(B) An S corporation equals the percentage of the outstanding stock in the S corporation owned by the shareholder;

(C) A C corporation equals the percentage of the fair market value of the issued and outstanding stock owned by the shareholder; and

(D) A trust equals the percentage of the actuarial interests owned by the beneficial owner of the trust.

(5) Examples . The following examples illustrate the principles of paragraph (b) of this section.

Example 1 . Person related to more than one partner . A owns 100 percent of X, a corporation. X owns 100 percent of Y, a corporation. A and X are equal members of P, a limited liability company treated as a partnership for federal tax purposes. Y guarantees payment of a liability of P of $1,000. A and X are not lenders as provided in §1.752–2(c) and do not otherwise have a payment obligation with respect to the liability. Therefore, paragraph (b)(2) of this section does not apply for purposes of determining the economic risk of loss borne by A and X. Under paragraph (b)(1) of this section, Y is related to A and X. Therefore, under paragraph (b)(3) of this section, A and X each have a $500 share of the $1,000 liability.

Example 2 . Related partner exception . A owns 100 percent of two corporations, X and Y. A and Y are members of P, a limited liability company treated as a partnership for federal tax purposes. P borrows $1,000 from Bank. A and X each guarantee payment of the $1,000 debt owed to Bank. A and Y are not treated as related to each other pursuant to paragraph (b)(2) of this section because A has the payment obligation with respect to the $1,000 debt pursuant to §1.752–2(b). Y is therefore not treated as related to X. Because A is the only partner that bears the economic risk of loss for P’s $1,000 liability, A’s share of the liability is $1,000 under §1.752–2(a)(1).

Example 3 . Related partner exception . A owns 100 percent of two corporations, X and Y. X owns 79 percent of a corporation, Z, and Y owns the remaining 21 percent of Z. X and Y are members of P, a limited liability company treated as a partnership for federal tax purposes. P borrows $2,000 from Bank. Both X and Z guarantee payment of the $2,000 debt owed to Bank. X has a payment obliga

tion with respect to P’s $2,000 liability; therefore, paragraph (b)(2) of this section applies and X and Y are not treated as related for purposes of determining the economic risk of loss borne by each of them for P’s $2,000 liability. Because X and Y are not treated as related, and neither owns an 80 percent or more interest in Z, neither X nor Y is treated as related to Z under paragraph (b)(1) of this section. Because X bears the economic risk of loss for P’s $2,000 liability, X’s share of the liability is $2,000 under §1.752–2(a)(1).

Example 4. Related partner exception and per- son related to more than one partner . Same facts as in Example 3, but X guarantees payment of only $1,200 of the debt owed to Bank and Z guarantees payment of $2,000. Pursuant to paragraph (b)(2) of this section, X and Y are not treated as related to the extent of X’s $1,200 guarantee. Because X bears the economic risk of loss for $1,200 of P’s $2,000 liability, X’s share of the liability is $1,200 under §1.752–2(a)(1). In addition, because paragraph (b)(2) of this section does not apply with respect to the remaining portion of the liability that X did not guarantee, X and Y are treated as related for purposes of the remaining $800 of the liability pursuant to paragraph (b)(1) of this section. Therefore, Z is treated as related to X and Y under paragraph (b)(1) of this section. Pursuant to paragraph (b)(3) of this section, X and Y share the $800 equally. In sum, X’s share of P’s $2,000 liability is $1,600 ($1,200 under §1.752–2(a)(1) and $400 under paragraph (b)(3) of this section) and Y’s share of P’s $2,000 liability is $400 under paragraph (b)(3) of this section.

Example 5 . Entity structured to avoid related person status . A, B, and C form a general partnership, ABC. A, B, and C are equal partners, each contributing $1,000 to the partnership. A and B want to loan money to ABC and have the loan treated as nonrecourse for purposes of section 752. A and B form partnership AB to which each contributes $50,000. A and B share losses equally in partnership AB. Partnership AB loans partnership ABC $100,000 on a nonrecourse basis secured by the property ABC buys with the loan. Under these facts and circumstances, A and B bear the economic risk of loss with respect to the partnership liability equally based on their percentage interest in losses of partnership AB.

- - - Par. 5. Section 1.752–5 is amended by adding a second sentence in paragraph (a) and removing the word “However” at the beginning of the third sentence and adding in its place “In addition”.

The addition reads as follows:

§1.752–5 Effective dates and transition rules.

(a) - - - However, §1.752–4(b)(1)(iv), (b)(2), (b)(3), and (b)(5) Examples 1, 2, 3, and 4 apply to any liability incurred or assumed by a partnership on or after the date that these regulations are published as final

regulations in the Federal Register, other than a liability incurred or assumed by a partnership pursuant to a written binding contract in effect prior to that date. * * *

Beth Tucker, Deputy Commissioner for

Operations Support.

(Filed by the Office of the Federal Register on December 13, 2013, 8:45 a.m., and published in the issue of the Federal Register for December 16, 2013, 78 F.R. 76092)

Proposed Rules

Amendments to Excepted Benefits

REG–143172–13

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: Proposed rules.

SUMMARY: This document contains proposed rules that would amend the regulations regarding excepted benefits under the Employee Retirement Income Security Act of 1974, the Internal Revenue Code, and the Public Health Service Act. Excepted benefits are generally exempt from the health reform requirements that were added to those laws by the Health Insurance Portability and Accountability Act and the Patient Protection and Affordable Care Act.

DATES: Comments are due on or before February 24, 2014.

ADDRESSES: Written comments may be submitted to the Department of Labor as specified below. Any comment that is submitted will be shared with the other Departments and will also be made available to the public. Warning: Do not include any personally identifiable information (such as name, address, or other contact information) or confidential business information that you do not want publicly disclosed. All comments may be posted on the Internet and can be retrieved

Bulletin No. 2014–2 383 January 6, 2014

by most Internet search engines. No deletions, modifications, or redactions will be made to the comments received, as they are public records. Comments may be submitted anonymously.

Comments, identified by “Excepted Benefits,” may be submitted by one of the following methods:

Federal eRulemaking Portal: http:// www.regulations.gov . Follow the instructions for submitting comments.

Mail or Hand Delivery: Office of Health Plan Standards and Compliance Assistance, Employee Benefits Security Administration, Room N-5653, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210, Attention: Excepted Benefits.

Comments received will be posted without change to www.regulations.gov and available for public inspection at the Public Disclosure Room, N-1513, Employee Benefits Security Administration, 200 Constitution Avenue NW., Washington, DC 20210, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Amy Turner or Beth Baum, Employee Benefits Security Administration, Department of Labor, at (202) 6938335; Karen Levin, Internal Revenue Service, Department of the Treasury, at (202) 317-5500; Jacob Ackerman, Centers for Medicare & Medicaid Services, Department of Health and Human Services, at (410) 786-1565.

Customer Service Information : Individuals interested in obtaining information from the Department of Labor concerning employment-based health coverage laws, may call the EBSA Toll-Free Hotline at 1-866-444-EBSA (3272) or visit the Department of Labor’s website ( http://www.dol.

7Pub. L. 104–204, 110 Stat. 2944 (September 26, 1996).

8Pub. L. 110–343, 122 Stat. 3881 (October 3, 2008).

9Pub. L. 104–204, 110 Stat. 2935 (September 26, 1996).

10Pub. L. 105–277, 112 Stat. 2681–436 (October 21, 1998).

11Pub. L. 110–233, 122 Stat. 881 (May 21, 2008).

12Pub. L. 111–3, 123 Stat. 65 (February 4, 2009).

13Pub. L. 110–381, 122 Stat. 4081 (October 9, 2008).

gov/ebsa ). In addition, information from HHS on private health insurance for consumers can be found on the Centers for Medicare & Medicaid Services (CMS) website ( www.cms.gov/cciio ) and information on health reform can be found at www.HealthCare.gov .

SUPPLEMENTARY INFORMATION:

I. Background

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), Public Law 104–191, 110 Stat. 1936 added title XXVII of the Public Health Service Act (PHS Act), part 7 of the Employee Retirement Income Security Act of 1974 (ERISA), and chapter 100 of the Internal Revenue Code (the Code), providing portability and nondiscrimination provisions with respect to health coverage. These provisions of the PHS Act, ERISA, and the Code were later augmented by other consumer protection laws, including the Mental Health Parity Act of 1996, ⁷ the Mental Health Parity and Addiction Equity Act of 2008, ⁸ the Newborns’ and Mothers’ Health Protection Act, ⁹ the Women’s Health and Cancer Rights Act, ¹⁰ the Genetic Information Nondiscrimination Act of 2008, ¹¹ the Children’s Health Insurance Program Reauthorization Act of 2009, ¹² Michelle’s Law, ¹³ and the Affordable Care Act. ¹⁴

The Affordable Care Act reorganizes, amends, and adds to the provisions of part A of title XXVII of the PHS Act relating to group health plans and health insurance issuers in the group and individual markets. The term “group health plan” includes both insured and self-insured group health plans. ¹⁵ Section 715(a)(1) of ERISA and section 9815(a)(1) of the Code, as added by the Affordable Care

Act, incorporate the provisions of part A of title XXVII of the PHS Act into ERISA and the Code to make them applicable to group health plans and health insurance issuers providing health insurance coverage in connection with group health plans. The PHS Act sections incorporated by these references are sections 2701 through 2728.

II. Overview of the Proposed Regulations

Sections 2722 and 2763 of the PHS Act, section 732 of ERISA, and section 9831 of the Code provide that the requirements of title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, respectively, generally do not apply to excepted benefits. Excepted benefits are described in section 2791 of the PHS Act, section 733 of ERISA, and section 9832 of the Code.

The parallel statutory provisions establish four categories of excepted benefits. The first category includes benefits that are generally not health coverage ¹⁶ (such as automobile insurance, liability insurance, workers compensation, and accidental death and dismemberment coverage). The benefits in this category are excepted in all circumstances. In contrast, the benefits in the second, third, and fourth categories are types of health coverage but are excepted only if certain conditions are met.

The second category of excepted benefits is limited excepted benefits, which may include limited scope vision or dental benefits, and benefits for long-term care, nursing home care, home health care, or community based care. Section 2791(c)(2)(C) of the PHS Act, section 733(c)(2)(C) of ERISA, and section 9832(c)(2)(C) of the Code au

14The Patient Protection and Affordable Care Act, Public Law 111–148, was enacted on March 23, 2010, and the Health Care and Education Reconciliation Act, Public Law 111–152, was enacted on March 30, 2010. (They are collectively known as the “Affordable Care Act”.)

15The term “group health plan” is used in title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, and is distinct from the term “health plan,” as used in other provisions of title I of the Affordable Care Act. The term “health plan” does not include self-insured group health plans.

16See 62 FR 16894, 16903 (Apr. 8, 1997), which states that these benefits are generally not health insurance coverage).

January 6, 2014 384 Bulletin No. 2014–2

thorize the Secretaries of HHS, Labor, and the Treasury (collectively, the Secretaries) to issue regulations establishing other, similar limited benefits as excepted benefits. The Secretaries exercised this authority previously with respect to certain health flexible spending arrangements (health FSAs). ¹⁷

To be excepted under this second category, the statute provides that limited benefits must either: (1) be provided under a separate policy, certificate, or contract of insurance; or (2) otherwise not be an integral part of a group health plan, whether insured or selfinsured.

The third category of excepted benefits, referred to as “noncoordinated excepted benefits,” includes both coverage for only a specified disease or illness (such as cancer-only policies), and hospital indemnity or other fixed indemnity insurance. These benefits are excepted only if all of the following conditions are met: (1) the benefits are provided under a separate policy, certificate, or contract of insurance; (2) there is no coordination between the provision of such benefits and any exclusion of benefits under any group health plan maintained by the same plan sponsor; and (3) the benefits are paid with respect to any event without regard to whether benefits are provided under any group health plan maintained by the same plan sponsor. ¹⁸

The fourth category of excepted benefits is supplemental excepted benefits. Such benefits must be: (1) coverage supplemental to Medicare, coverage supplemental to the Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA) or to Tricare, or similar coverage that is supplemental to coverage provided under a group health plan; and (2) provided under a separate

policy, certificate, or contract of insurance. ¹⁹

These proposed regulations would amend the second category of excepted benefits, limited excepted benefits.

A. Dental and Vision Benefits

In 2004, the Departments of the Treasury, Labor, and HHS published final regulations with respect to excepted benefits (the HIPAA regulations). ²⁰ (Subsequent references to the “Departments” include all three Departments, unless the headings or context indicate otherwise.) Under the HIPAA regulations, vision and dental benefits are excepted if they are limited in scope (described as benefits, substantially all of which are for treatment of the eyes or mouth, respectively) and are either: (1) provided under a separate policy, certificate, or contract of insurance; or (2) are otherwise not an integral part of a group health plan. While only insured coverage may qualify under the first test, both insured and self-insured coverage may qualify under the second test. The HIPAA regulations provided that benefits are not an integral part of a plan if participants have the right to elect not to receive coverage for the benefits, and if participants elect to receive coverage for such benefits, they pay an additional premium or contribution for it. By contrast, health FSA benefits could qualify as excepted benefits without any participant contribution under the HIPAA regulations. ²¹

Following enactment of the Affordable Care Act, various stakeholders asked the Departments to amend the regulations in order to remove conditions for limitedscope vision and dental benefits to be treated as excepted benefits. Specifically, some employers represented that, al

though their vision and dental benefits complied with the pre-Affordable Care Act requirements in title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code (such as the nondiscrimination and preexisting condition exclusion provisions), compliance with the Affordable Care Act provisions (including the 90-day waiting period limitation ²² and the prohibition on annual limits ²³ ) presented additional challenges. These employers argued that, where employers are providing such benefits on a self-insured basis and without a contribution from employees, employers should not be required to charge a nominal contribution from participants simply for the benefits to qualify as excepted benefits. In some cases, the cost of collecting the nominal contribution would be greater than the contribution itself. Moreover, they pointed out that employers providing dental and vision benefits through a separate insurance policy are not required to charge a participant any premium in order for the dental or vision benefits to be considered excepted benefits. Similarly, consumer groups argued that, if an employer offers primary group health coverage that is unaffordable to individuals, but limited-scope vision or dental coverage that is affordable, such limited-scope vision or dental coverage should qualify as excepted benefits so as not to make such individuals ineligible for the premium tax credit under section 36B of the Code for enrolling in coverage through an Affordable Insurance Exchange, or “Exchange” (also called a Health Insurance Marketplace or Marketplace).

In response to these concerns, and to level the playing field between insured and self-insured coverage, these proposed regulations would eliminate the require

1726 CFR 54.9831–1(c)(3)(v); 29 CFR 2590.732(c)(3)(v); 45 CFR 146.145(c)(3)(v).

1826 CFR 54.9831–1(c)(4); 29 CFR 2590.732(c)(4); 45 CFR 146.145(c)(4). See also Q7 in FAQs about Affordable Care Act Implementation Part XI, available at http://www.dol.gov/ ebsa/faqs/faq-aca11.html .

1926 CFR 54.9831–1(c)(5); 29 CFR 2590.732(c)(5); 45 CFR 146.145(c)(5). The Departments issued additional guidance regarding supplemental health insurance coverage as excepted benefits. See EBSA Field Assistance Bulletin No. 2007–04 (available at http://www.dol.gov/ebsa/pdf/fab2007-4.pdf ); CMS Insurance Standards Bulletin 08–01 (available at http:// www.cms.gov/CCIIO/Resources/Files/Downloads/hipaa_08_01_508.pdf ); and IRS Notice 2008–23 (available at http://www.irs.gov/irb/2008-07_IRB/ar09.html ).

2069 FR 78720 (Dec. 30, 2004).

21Under paragraph (c)(3)(v) of the HIPAA regulations, benefits provided under a health FSA are only excepted for a class of participants if other group health coverage, not limited to excepted benefits, is made available for the year to the class of participants; and the arrangement is structured so that the maximum benefit payable to any participant in the class for a year does not exceed an amount specified in the regulations.

22 See PHS Act section 2708. See also proposed regulations, published on March 21, 2013, at 78 FR 17313, stating that “the Departments will consider compliance with these proposed regulations as compliance with PHS Act section 2708 at least through the end of 2014.” (78 FR at 17317).

23 See PHS Act section 2711 and its implementing regulations at 26 CFR 54.9815–2711T, 29 CFR 2590.715–2711, and 45 CFR 147.126.

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ment under the HIPAA regulations that participants pay an additional premium or contribution for limited-scope vision or dental benefits to qualify as benefits that are not an integral part of a plan (and therefore as excepted benefits). The Departments invite comments on this approach.

B. Limited Wraparound Coverage

The Affordable Care Act requires that non-grandfathered health plans in the individual and small group markets cover essential health benefits (EHB), which include items and services in ten statutorily specified categories that are equal in scope to a typical employer plan. ²⁴ Because employer group coverage varies from State to State, HHS regulations at 45 CFR 156.100 provide for States to adopt individual benchmarks from among a range of primarily small group plan offerings in each State to serve as a reference plan, reflecting both the scope of services and limits offered by a typical employer plan in that State. ²⁵

Prior to the Affordable Care Act, there was no Federal requirement that health coverage in the individual and small group market include a standardized set of benefits such as those included in EHB. Self-insured group health plans and health insurance coverage in the large group market often cover items and services in addition to the types of services included in EHB. For example, items and services that either cannot be or are unlikely to be included in EHB include routine adult vision and dental care, long-term/custodial nursing home care, non-medically necessary pediatric orthodontia, and coverage that extends beyond the benchmark plan’s coverage of wellness programs, manipu

lative treatment, infertility, home health care, private duty nursing, hospice, or certain non-traditional treatments. In addition, some of these group health plans may provide broader provider networks, in terms of the number and types of of contracted providers, than those often included in the individual and small group market. Federal law is designed to encourage employers to provide group coverage for their employees. ²⁶

Experts suggest that most workers who are offered minimum value employersponsored coverage will not meet the criteria for the premiums to be considered to be “unaffordable” and thus not qualify for the premium tax credit for enrolling in coverage through an Exchange. ²⁷ Nevertheless, in some cases, employer plans may be unaffordable for some employees. These individuals might purchase coverage through an Exchange with a premium tax credit. While such individuals might pay lower premiums for coverage through an Exchange, they might also have less generous coverage in terms of benefits or a different provider network than they would have had in their group health plan. Some group health plan sponsors have asked whether wraparound coverage could be provided for employees for whom the employer premium is unaffordable and who obtain coverage through an Exchange. This approach would allow employers to provide such employees with overall coverage that is comparable to the group health plan coverage, taking into account both the wraparound coverage and the Exchange coverage.

Accordingly, the Departments have developed these proposed regulations to treat certain wraparound coverage provided under a group health plan as excepted benefits when it is offered to indi

viduals who could receive such benefits through their group health plan if they could afford the premiums, but who do not enroll in the employer-sponsored plan because the premium is unaffordable under the law. As excepted benefits, the coverage would generally be exempt from the HIPAA and Affordable Care Act market reform requirements of ERISA, the PHS Act, and the Code. Wraparound coverage would only qualify as excepted benefits under limited circumstances in order to alleviate two concerns. First, the wraparound coverage could not replace group coverage for employers who drop coverage or who otherwise do not offer minimum value coverage. Instead, the wraparound coverage would only be considered to be an excepted benefit if it is used to provide additional coverage to individuals and families enrolled in nongrandfathered individual health insurance coverage and for whom minimum value coverage under the employer’s group health plan is offered but is unaffordable. Second, the proposed rules aim to prevent plan sponsors from structuring wraparound coverage so that low-income workers receive fewer primary benefits than high-income workers. These proposed regulations are intended to allow a plan sponsor to maintain a comparable level of benefits for all potential enrollees, including not only high-income workers in their group health plan but also lowincome workers that enroll in nongrandfathered individual market coverage, promoting equity in coverage.

The proposed regulations, which the Departments are proposing would be effective for plan years starting in 2015, describe the circumstances under which employer-provided wraparound coverage would constitute excepted benefits (lim

24For more information on grandfathered health plans, see section 1251 of the Affordable Care Act and its implementing regulations at 26 CFR 54.9815–1251T, 29 CFR 2590.715–1251, and 45 CFR 147.140. For more information on essential health benefits, see 45 CFR 156.110, incorporated into the regulations through 78 FR 12834, Patient Protection and Affordable Care Act; Standards Related to Essential Health Benefits, Actuarial Value, and Accreditation; Final Rule, Feb. 25, 2013.

2545 CFR 156.100, 78 FR 12840.

26Section 4980H of the Code generally provides that an applicable large employer is subject to an assessable payment if one or more full-time employees is certified to the employer as having received an applicable premium tax credit or cost-sharing reduction and either (1) the employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer sponsored plan, or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan but the coverage fails to meet requirements for affordability and minimum value. Section 5000A of the Code provides that MEC includes group health plans that are self-insured or are offered in the large or small group market within a State. Under section 5000A, nonexempt individuals must either maintain MEC for themselves and any nonexempt family members or include an additional payment with their Federal income tax return. Section 36B of the Code allows a premium tax credit to certain taxpayers who enroll (or whose family members enroll) in a qualified health plan (QHP) through an Exchange. The credit subsidizes a portion of the premiums for the QHP. In general, the premium tax credit may not subsidize coverage for an individual who is eligible for other MEC. If the MEC is eligible employer-sponsored coverage, however, an individual is treated as eligible for that coverage only if the coverage is affordable and provides minimum value or if the individual enrolls in the coverage.

27 See Congressional Budget Office, CBO and JCT Estimates of the Effects of the Affordable Care Act on the Number of People Obtaining Employer-Based Insurance, March 2012, at Table 2, available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-15-ACA_and_Insurance_2.pdf . See also Carter C. Price & Evan Saltzman, Delaying the Employer Mandate, July 2013, available at http://www.rand.org/pubs/research_reports/RR411.html .

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ited wraparound coverage) and therefore would not disqualify an employee from eligibility for the premium tax credit and cost-sharing reductions. The Departments note that provision of excepted benefits will not satisfy an applicable large employer’s responsibilities under section 4980H of the Code. Under these proposed regulations, limited wraparound coverage is an excepted benefit if five conditions are met.

First, the coverage can wrap around only certain coverage provided through the individual market. Specifically, the individual health insurance coverage must be non-grandfathered and cannot consist solely of excepted benefits. In States that elect to establish a Basic Health Program (BHP), certain low-income individuals ( for example, those with household income between 133% and 200% of the Federal poverty level) who would otherwise qualify for a tax credit to obtain a qualified health plan through an Exchange will instead be enrolled in coverage through the BHP. Therefore, the Departments invite comments on how an employer might make wraparound coverage available to BHP enrollees.

Second, the limited wraparound coverage must be specifically designed to provide benefits beyond those offered by the individual health insurance coverage. Specifically, the limited wraparound coverage must provide either benefits that are in addition to EHBs, or reimburse the cost of health care providers considered outof-network under the individual health insurance coverage, or both. The Departments invite comments on the types of benefits and provider arrangements that could be included in this coverage as well as their similarities to, or differences from, other types of excepted benefits described in the HIPAA regulations. The Departments also invite comments on whether the proposed standard should be modified to require that these wraparound coverage benefits be “substantial” or “ma

terial” and, if so, how those terms should be defined.

The limited wraparound coverage may, but is not required to, also provide benefits to reimburse for participants’ otherwise applicable cost sharing under the individual health insurance policy, but that cannot be its primary purpose. For the benefits to be considered specifically designed to wrap around the individual health insurance coverage, it must provide additional wraparound benefits as discussed in the immediately preceding paragraph; the coverage cannot provide benefits solely pursuant to a coordination-of-benefits provision that simply pays benefits whenever the individual health insurance policy does not cover all or part of a medical expense.

The third condition requires the limited wraparound coverage to be otherwise not an integral part of a group health plan. That is, under the proposed regulations, the plan sponsor offering the limited wraparound coverage must sponsor another group health plan meeting minimum value (as defined under section 36B(c)(2)(C)(ii) of the Code) for the plan year, referred to as the “primary plan.” This primary plan must be affordable for a majority of the employees eligible for the primary plan. Only individuals eligible for this primary plan may be eligible for the limited wraparound coverage. The Departments seek input on this proposed standard, including whether the majority level is an appropriate level (or whether the primary plan should provide coverage that is affordable for a higher or lower percentage of employees), recognizing the goal of preventing plan sponsors from shifting participants from the employersponsored primary plan to the individual market with limited wraparound coverage. Assuming use of the 9.5% of income test set forth in section 36B(c)(2)(C)(i) of the Code as the basic definition of “affordable,” the Departments also request comments on how to implement that definition here - for example, whether the Depart

ments should use a Form W-2 safe harbor based on employee wages like the one set forth in the proposed regulations under Code section 4980H.

Under the fourth condition set forth in the proposed regulations, the limited wraparound coverage must be limited in amount. Specifically, the total cost of coverage under the limited wraparound coverage must not exceed 15 percent of the cost of coverage under the primary plan offered to employees eligible for the wraparound coverage. ²⁸ For this purpose, the cost of coverage includes both employer and employee contributions towards coverage and is determined in the same manner as that in which the applicable premium is calculated under a COBRA continuation provision. ²⁹ This is similar to the standard in the 2007 enforcement safe harbor for treating supplemental health insurance coverage as excepted benefits. Under the safe harbor, the cost of coverage under the supplemental policy, certificate, or contract of insurance must not exceed 15 percent of the cost of primary coverage. ³⁰ The Departments solicit comment on the level of this threshold, as well as other possible thresholds that could be used to ensure that the benefit is limited in amount, such as whether other thresholds used in the context of health FSAs or health savings accounts (HSAs) would be easier to administer or more appropriate.

The fifth and final condition for the limited wraparound coverage to qualify as excepted benefits relates to nondiscrimination. The limited wraparound coverage must not differentiate among individuals in eligibility, benefits, or premiums based on any health factor of an individual (or any dependent of the individual), consistent with the requirements of section 2705 of the PHS Act (as incorporated into ERISA section 715 and Code section 9815) and its implementing regulations. This condition is similar to the standard in the 2007 enforcement safe harbor treating supplemental health insurance coverage

28If an employer provides more than one primary plan option (for example, a health maintenance organization option and a preferred provider organization option), and one primary plan does not satisfy the 15% standard but another plan does, the Departments would consider the 15% standard to be met if the average value of the primary plan options meets the 15% standard.

29Under the COBRA rules, plans are generally permitted to charge up to 102 percent of the applicable premium. The cost of coverage for purposes of these proposed regulations is 100 percent of the applicable premium, not 102 percent of the applicable premium that the plan is generally permitted to charge under the COBRA rules.

30The Departments issued parallel guidance regarding supplemental health insurance coverage as excepted benefits under HIPAA and related legislation. See EBSA Field Assistance Bulletin No. 2007-04 (available at http://www.dol.gov/ebsa/pdf/fab2007-4.pdf ); CMS Insurance Standards Bulletin 08-01 (available at http://www.cms.gov/CCIIO/Resources/Files/Downloads/ hipaa_08_01_508.pdf ); and IRS Notice 2008–23 (available at http://www.irs.gov/irb/2008-07_IRB/ar09.html ).

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as excepted benefits. In addition to the cost standard mentioned above, the safe harbor requires that such coverage be similar to Medicare Supplemental Coverage in that it must not differentiate among individuals in eligibility, benefits, or premiums based on any health factor of an individual (or any dependent of the individual).

In addition, to satisfy the fifth condition, the limited wraparound coverage must not impose any preexisting condition exclusion, consistent with the requirements of section 2704 of the PHS Act (as incorporated into ERISA section 715 and Code section 9815) and its implementing regulations. Finally, both the primary coverage and the limited wraparound coverage must not discriminate in favor of highly compensated individuals, consistent with the provisions of section 2716 of the PHS Act (also incorporated by reference into ERISA section 715 and Code section 9815) and section 105(h) of the Code, and its implementing regulations at 26 CFR 1.105–11 as applicable. ³¹ These limitations are intended to ensure the coverage is available regardless of health status and to prevent employers from shifting employees with high medical costs to an Exchange. Conditioning excepted benefit status on meeting standards consistent with the compensationbased nondiscrimination rules, in combination with the requirement that the primary plan be affordable for a majority of the employees eligible for it, helps ensure that employers will not be able to use wraparound coverage to send excessive numbers of low wage workers to the Exchanges. Comments are invited as to whether additional nondiscrimination standards are needed to prevent such cost-shifting and abuse.

C. Employee Assistance Programs

Employee assistance programs (EAPs) are typically programs offered by employers that can provide a wide-ranging set of benefits to address circumstances that might otherwise adversely affect employees’ work and health. Benefits may include short-term substance use disorder or mental health counseling or referral services, as well as financial counseling and legal services. They are typically available free of charge to employees and are often provided through third-party vendors. To the extent an EAP provides benefits for medical care, it would generally be considered group health plan coverage, which would generally be subject to the HIPAA and Affordable Care Act market reform requirements, unless the EAP meets the criteria for being excepted benefits.

Since enactment of the Affordable Care Act, various stakeholders have asked the Departments to treat EAPs as excepted benefits for reasons analogous to the arguments described above with respect to vision and dental benefits. Specifically, some employers represented that compliance with the prohibition on annual limits could be problematic as such benefits are typically very limited, and that EAPs generally are intended to provide benefits in addition to those provided under other group health plans sponsored by employers. Moreover, consumer groups have represented that EAPs with very limited benefits, which may be the only coverage offered to employees, may prohibit the employee from obtaining a premium tax credit under section 36B of the Code if the EAP is treated as minimum essential coverage under section 5000A of the Code. At the same time, the Departments recognize that no universal definition exists for EAPs, and are concerned that employers not act to shift primary coverage to a

separate “EAP plan,” exempt from the consumer protection provisions of title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, including the mental health parity provisions. ³²

The Departments issued guidance on September 13, 2013, which stated the Departments’ intent to amend the excepted benefits regulations with respect to EAPs. ³³ The guidance also provided transition relief, stating, “[u]ntil rulemaking is finalized, through at least 2014, the Departments will consider an employee assistance program or EAP to constitute excepted benefits only if the employee assistance program or EAP does not provide significant benefits in the nature of medical care or treatment. For this purpose, employers may use a reasonable, good faith interpretation of whether an employee assistance program or EAP provides significant benefits in the nature of medical care or treatment.”

These proposed regulations set forth criteria for an EAP to qualify as excepted benefits beginning in 2015. Under these proposed regulations, benefits provided under EAPs are excepted if four criteria are met. First, the program cannot provide significant benefits in the nature of medical care. The Departments invite comments on how to define “significant.” For example, the Departments request comments as to whether a program that provides no more than 10 outpatient visits for mental health or substance use disorder counseling, an annual wellness checkup, immunizations, and diabetes counseling, with no inpatient care benefits, should be considered to provide significant benefits in the nature of medical care. ³⁴

The second criterion for an EAP to constitute excepted benefits is that its benefits cannot be coordinated with benefits under another group health plan. The Departments propose three conditions to

31Section 2716 of the PHS Act (as incorporated into ERISA and the Code) generally applies to insured coverage and section 105(h) of the Code and its implementing regulations generally apply to self-insured coverage.

32The mental health parity provisions are included in PHS Act section 2726, ERISA section 712, and Code section 9812.

33 See IRS Notice 2013-54 (available at http://www.irs.gov/pub/irs-drop/n-13-54.pdf ) and DOL Technical Release 2013-03 (available at http://www.dol.gov/ebsa/newsroom/tr13-03.html ), Q&A 9. See also CMS Insurance Standards Bulletin–Application of Affordable Care Act Provisions to Certain Healthcare Arrangements (available at http://www.cms.gov/CCIIO/Resources/ Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf ).

34Other examples of EAPs that do not provide significant benefits in the nature of medical care, discussed in IRS Notice 2004–50 Q&A–10 include (1) an EAP with benefits that consist primarily of free or low-cost confidential short-term counseling (which could address substance abuse, alcoholism, mental health or emotional disorders, financial or legal difficulties, and dependent care needs ) to identify an employee’s problem that may affect job performance and, when appropriate, referrals to an outside organization, facility or program to assist the employee in resolving the problem; and (2) a wellness program that provides a wide-range of education and fitness services (also including sports and recreation activities, stress management, and health screenings) designed to improve the overall health of the employees and prevent illness, where any costs charged to the individual for participating in the services are separate from the individual’s coverage under the health plan.

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meet this standard. Participants in the separate group health plan must not be required to exhaust benefits under the EAP (making the EAP a “gatekeeper”) before an individual is eligible for benefits under the other group health plan. Moreover, participant eligibility for benefits under the EAP must not be dependent on participation in another group health plan. Lastly, benefits under the EAP must not be financed by another group health plan.

The third criterion for an EAP to constitute excepted benefits is that no employee premiums or contributions be required to participate in the EAP. The fourth criterion is that there is no cost sharing under the EAP.

These criteria are intended to ensure that employers are able to continue offering EAPs as supplemental benefits to other coverage, and to ensure that in circumstances in which an EAP with limited benefits is the only coverage, or the only affordable coverage provided to an employee, that the coverage does not unreasonably disqualify an employee from otherwise being eligible for the premium tax credit for enrolling in coverage through an Exchange. The Departments request comments on whether the criteria proposed are sufficient to prevent the potential for abuse, including the evasion of compliance with the mental health parity provisions, and whether different or additional standards should be included.

D. Comment Solicitation, Applicability Date and Reliance

The Departments invite comments on these proposed regulations generally, and on the specific issues identified in this preamble. Until rulemaking is finalized, through at least 2014, for purposes of enforcing the provisions of title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, the Departments will consider dental and vision benefits, and EAP benefits, meeting the conditions of these proposed regulations to qualify as excepted benefits. To the extent final regulations or other guidance with respect to vision or dental benefits or EAPs is more restrictive on plans and issuers than these proposed regulations, the final regulations or other guidance will not be effective prior to January 1, 2015.

III. Economic Impact and Paperwork Burden

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

As stated above, these proposed regulations would amend the definition of limited excepted benefits to: (1) eliminate the requirement that participants in selfinsured plans pay an additional contribution for limited-scope vision or dental benefits to qualify as benefits that are not an integral part of a plan (and therefore as excepted benefits); (2) allow plan sponsors in limited circumstances to offer wraparound coverage to individuals who, but for the unaffordability of the premium, would receive such benefits through their group health plan; and (3) set forth the criteria under which EAPs that do not provide significant benefits in the nature of medical care constitute excepted benefits.

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

OMB has determined that this regulatory action is significant within the meaning of section 3(f)(4) of the Executive Order, and the Departments accordingly provide the following assessment of its potential benefits and costs. The Departments expect the impact of these proposed regulations to be limited because they do not require any action or impose any requirements on employers and plan sponsors. The proposed modifications to vision, dental, and EAP benefits are primarily clarifications. Additionally, the Departments expect that the take-up with respect to limited wraparound coverage will be limited for several reasons. The proposed rules are designed so that the wraparound coverage could not replace group coverage for employers who drop coverage or who otherwise do not offer minimum value coverage. Instead, the wraparound coverage would only be considered to be an excepted benefit if it is used to provide additional coverage to individuals and families enrolled in nongrandfathered individual health insurance coverage and for whom minimum value coverage under the employer’s group health plan is offered but is unaffordable.

Moreover, the proposed rules aim to prevent plan sponsors from structuring wraparound coverage so that low-income workers receive fewer primary benefits than high-income workers. Lastly, the Departments note that provision of excepted benefits will not satisfy an applicable large employer’s responsibilities under section 4980H of the Code.

One objective of the Affordable Care Act is to allow individuals with comprehensive health insurance plans to maintain their current level of benefits. The Departments recognize that many plan sponsors provide generous health benefits to their workers. Some employers offer EAPs or other additional benefits to their employees as part of a comprehensive set of benefits. Others are interested in newly offering wraparound coverage to employees who qualify for tax credits in an Exchange to provide them with coverage comparable to employees who enroll in a group health plan. These proposed regulations would clarify the circumstances under which plan sponsors can provide such limited wraparound coverage to make their employees’ coverage “whole.”

Specifically, these proposed regulations would allow plan sponsors to provide coverage for limited vision, dental, wraparound, and EAP benefits consistent with the qualifications for excepted benefits. These proposed improvements would help employees by continuing to maintain their access to health coverage that new requirements could constrain. The Departments expect these proposed regulations to have some costs, but these costs could be limited because they would not require any action or impose any requirements on employers and plan sponsors; take-up may be low; and the proposed modifications to vision, dental, and EAP benefits are primarily clarifications. With respect to vision and dental benefits, the proposed regulations would allow self-insured plans to offer dental and vision benefits to employees without charging a nominal contribution. With respect to EAPs, the proposed regulations would clarify the extent to which such benefits constitute excepted benefits rather than primary coverage.

With respect to wraparound coverage, the proposed regulations would allow plan sponsors to offer limited wraparound coverage to employees in certain limited cir

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cumstances. This proposal is not intended to replace group coverage for employers who drop coverage or who do not otherwise offer it, and offering the wraparound coverage will not satisfy an applicable large employer’s responsibilities under section 4980H of the Code. Instead, the proposal is intended for plan sponsors whose goal is to provide health benefits to employees eligible for coverage through an Exchange that is, in total, comparable to the benefits offered through the sponsor’s minimum value group health plan. As such, the targets of the proposed regulation are plan sponsors who otherwise would provide the full range of health benefits to qualifying enrollees. The wraparound coverage may only be offered to individuals eligible for the primary plan coverage the plan sponsor offers; and that primary coverage must provide minimum value and must be affordable for a majority of employees who are eligible for the primary plan coverage. Plan designs will be limited by nondiscrimination rules aimed at preventing plan sponsors from discriminating in favor of highly compensated employees or offering different benefits for workers along other dimensions such as health status ( i.e., discriminating against those with high medical costs).

The proposal provides additional flexibility for sponsors and does not impose additional costs on sponsors. The Federal budget impact of the proposal also depends on assumptions about the choices made by employers and workers. As with other group health coverage, employer contributions to the limited wraparound coverage would be excluded from employee income for tax purposes. The budget implications of adding limited wraparound coverage as a form of excepted benefits depend on the number of employers that elect this option and the number of employees that in turn receive it. As previously described, this proposal targets a narrow group of plan sponsors: those that offer minimum value coverage that is affordable for a majority of employees. The Departments seek input on this standard, including whether the majority level is an appropriate level (or whether the primary plan should provide coverage that is affordable for a larger or smaller fraction of employees), recognizing the goal of preventing plan sponsors from shifting em

ployees from the primary plan to the individual market with limited wraparound coverage, and on the cost implications of different definitions. The cost of this proposal is difficult to quantify, as it is unclear how many plan sponsors will be eligible to offer and how many employees will elect the wraparound coverage. It is important to note that the cost of the proposed limited wraparound coverage can be reduced by limiting its availability. This could be accomplished by modifying the “majority” standard so that a greater proportion of employees would have to be offered a primary plan that is affordable. The majority level was proposed to help minimize the implications for the primary plan’s risk pool by preventing a large number of low-wage workers from leaving the primary plan for Exchange coverage. The Departments invite input on this level, and on other standards that would achieve these goals.

Another factor in assessing the proposal’s cost is that the decision to offer the wraparound coverage is optional. There is greater administrative complexity associated with the wraparound coverage than primary coverage and, given a choice, some plan sponsors may choose to increase the affordability of their primary coverage rather than offer limited wraparound coverage. Some plan sponsors may not have that choice: the employers may not be in a financial position to make their primary health plans affordable, let alone contribute to wraparound coverage. Employers may also continue to allow employees to simply obtain Exchange coverage with no additional wraparound benefit, and these employers would continue to pay any shared responsibility payments as applicable, resulting in no additional Federal costs.

The Departments seek comment on the effects of the proposal. Specifically, the Departments request detailed data that would inform the following questions: How many employers offer coverage that provides minimum value and is affordable for a majority of the employees who are eligible for coverage? What is the total number of individuals who are eligible for primary plan coverage that provides minimum value and is affordable for a majority of eligible employees, but would not find it affordable? To what extent would

this proposed rule cause employers to drop health insurance coverage or avoid newly offering it, and what is the dollar value associated with such dropped coverage? To what extent would wrap-around coverage be offered more widely as a result of this rule, and what is the average dollar value associated with such coverage? To what extent would premiums for relatively generous health coverage change in the presence and in the absence of this rule?

C. 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 that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency certifies that a proposed rule is not likely to have a significant economic impact on a substantial number of small entities, section 603 of RFA requires that the agency present an initial regulatory flexibility analysis at the time of the publication of the notice of proposed rulemaking describing the impact of the rule on small entities and seeking public comment on such impact. Small entities include small businesses, organizations and governmental jurisdictions.

For purposes of the RFA, the Departments continue to consider a small entity to be an employee benefit plan with fewer than 100 participants. The basis for this definition is found in section 104(a)(2) of the act, which permits the Secretary of Labor to prescribe simplified annual reports for pension plans that cover fewer than 100 participants. Pursuant to the authority of section 104(a)(3), the Department of Labor has previously issued at 29 CFR 2520.104–20, 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 satisfying certain other requirements.

January 6, 2014 390 Bulletin No. 2014–2

Further, while some large employers may have small plans, in general small employers maintain most small plans. Thus, the Departments believe that assessing the impact of these proposed rules 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 that is based on size standards promulgated by the Small Business Administration (13 CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et seq.). The Departments therefore request comments on the appropriateness of the size standard used in evaluating the impact of this proposed rule on small entities.

Because the proposed rules would impose no additional costs on employers or plans, the Departments believe that it would not have a significant economic impact on a substantial number of small entities. Accordingly, pursuant to section 605(b) of the RFA, the Departments hereby certify that the proposed rules, if promulgated, would not have a significant economic impact on a substantial number of small entities.

D. Special Analyses—Department of the Treasury

For purposes of the Department of the Treasury it has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. 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 proposed regulations, and, because these proposed 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, this notice of proposed rulemaking has been submitted to the Small Business Administration for comment on its impact on small business.

E. Unfunded Mandates Reform Act

For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1501 et seq. ), as well as Executive Order 12875, these proposed rules do not include any Federal mandate that may result in expenditures by State, local, or tribal governments, or the private sector, which may impose an annual burden of $100 million adjusted for inflation since 1995.

F. Federalism—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 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 final regulation.

In the Departments’ view, the proposed regulations, by clarifying policy regarding certain excepted benefits options that can be designed by employers to support their employees, would provide more certainty to employers and others in the regulated community as well as States and political subdivisions regarding the treatment of such arrangements under ERISA. Accordingly, the Departments will affirmatively engage in outreach with officials of State and political subdivisions regarding the proposed rules and seek their input on the proposed rules and any federalism implications that they believe may be presented by it.

G. Congressional Review Act

These proposed 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, if finalized, will

be transmitted to the Congress and to the Comptroller General for review in accordance with such provisions.

IV. Statutory Authority

The Department of the Treasury regulations are proposed to be adopted pursuant to the authority contained in sections 7805 and 9833 of the Code. The Department of Labor regulations are proposed to be 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); sec. 512(d), Public Law 110–343, 122 Stat. 3765; Public Law 110–460, 122 Stat. 5123; Secretary of Labor’s Order 1–2011, 77 FR 1088 (January 9, 2012). The Department of Health and Human Services regulations are proposed to be 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.

John Dalrymple, Deputy Commissioner for Services and Enforcement.

Internal Revenue Service.

Signed this 11th day of December, 2013.

Phyllis C. Borzi, Assistant Secretary Employee Benefits Security

Administration Department of Labor

CMS-9946-P Dated: November 22, 2013

Marilyn Tavenner,

Administrator, Centers for Medicare &

Medicaid Services.

Dated: December 3, 2013

Bulletin No. 2014–2 391 January 6, 2014

Kathleen Sebelius,

Secretary, Department of Health and

Human Services.

DEPARTMENT OF THE TREASURY

Internal Revenue Service

Accordingly, 26 CFR Part 54 is proposed to be amended as follows:

PART 54 - PENSION EXCISE TAXES

Paragraph 1. The authority citation for part 54 continues to read, in part, as follows:

Authority : 26 U.S.C. 7805. - - Section 54.9831–1 also issued under 26 U.S.C. 9833; - - Paragraph 2. Section 54.9831–1 is amended by revising paragraphs (c)(3)(i) and (c)(3)(ii), and adding paragraphs (c)(3)(vi) and (c)(3)(vii), to read as follows:

§ 54.9831–1 Special rules relating to group health plans.

- - - (c) - - (3) - - (i) In general . Limited-scope dental benefits, limited-scope vision benefits, or long-term care benefits are excepted if they are provided under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a group health plan as described in paragraph (c)(3)(ii) of this section. In addition, benefits provided under a health flexible spending arrangement are excepted benefits if they satisfy the requirements of paragraph (c)(3)(v) of this section. Furthermore, benefits that wraparound individual health insurance coverage are excepted benefits if they satisfy the requirements of paragraph (c)(3)(vi) of this section, and benefits provided under an employee assistance program are excepted benefits if they satisfy the requirements of paragraph (c)(3)(vii) of this section.

(ii) Not an integral part of a group health plan. For purposes of this paragraph (c)(3), benefits are not an integral part of a group health plan (whether the benefits are provided through the same plan or a separate plan) only if partici

pants have the right to elect not to receive coverage for the benefits.

- - - (vi) Limited wraparound coverage . Limited benefits that wraparound benefits provided through individual health insurance coverage are excepted benefits if all of the following requirements are satisfied

(A) Wraps around certain individual health insurance coverage . The individual health insurance coverage is not a grandfathered health plan (as described in section 1251 of the Affordable Care Act) and does not consist solely of excepted benefits (as defined in paragraph (c) of this section).

(B) Covers benefits or providers not covered by individual health insurance coverage . The wraparound coverage is specifically designed to wrap around the individual health insurance coverage described in paragraph (c)(3)(vi)(A) of this section, as follows:

( 1 ) The wraparound coverage must provide coverage of benefits that are not essential health benefits, or reimburse the cost of health care providers that are considered out-of-network under the individual health insurance coverage, or both. The wraparound coverage may also provide benefits for participants’ otherwise applicable cost sharing under the individual health insurance policy.

( 2 ) The wraparound coverage must not provide benefits only under a coordinationof-benefits provision.

(C) Otherwise not an integral part of the plan . The plan sponsor with respect to the wraparound coverage must sponsor another group health plan meeting minimum value (as defined under section 36B(c)(2)(C)(ii)) and that is affordable for a majority of the employees eligible for that group health plan (“primary plan”). Only individuals eligible for this primary plan may be eligible for the wraparound coverage.

(D) Limited in amount . The total cost of coverage under the wraparound coverage must not exceed 15 percent of the cost of coverage under the primary plan (as described in paragraph (c)(3)(vi)(C) of this section). For this purpose, the cost of coverage includes both employer and employee contributions towards coverage and is determined in the same manner as

the applicable premium is calculated under a COBRA continuation provision.

(E) Nondiscrimination . The following conditions must be satisfied:

( 1 ) The wraparound coverage must not differentiate among individuals in eligibility, benefits, or premiums based on any health factor of an individual (or any dependent of the individual), consistent with the requirements of section 2705 of the PHS Act (as incorporated into section 9815) and § 54.9802–1. ( 2 ) The wraparound coverage must not impose any preexisting condition exclusion, consistent with the requirements of section 2704 of the PHS Act (as incorporated into section 9815).

( 3 ) To the extent the primary coverage is insured, the primary coverage must not be discriminatory under section 2716 the PHS Act (as incorporated into section 9815). To the extent the primary coverage is self-insured, the primary coverage must not be discriminatory under section 105(h) and § 1.105–11. ( 4 ) To the extent the wraparound coverage is insured, the wraparound coverage must not be discriminatory under section 2716 the PHS Act (as incorporated into section 9815) and. To the extent the wraparound coverage is self-insured, the wraparound coverage must not be discriminatory under section 105(h) and § 1.105–11.

(vii) Employee assistance programs . Benefits provided under employee assistance programs are excepted if they satisfy all of the following requirements (A) The program does not provide significant benefits in the nature of medical care.

(B) The benefits under the employee assistance program cannot be coordinated with benefits under another group health plan, as follows:

( 1 ) Participants in the other group health plan must not be required to exhaust benefits under the employee assistance program (making the employee assistance program a gatekeeper) before an individual is eligible for benefits under the other group health plan;

( 2 ) Participant eligibility for benefits under the employee assistance program must not be dependent on participation in another group health plan; and

January 6, 2014 392 Bulletin No. 2014–2

( 3 ) Benefits under the employee assistance program must not be financed by another group health plan.

(C) No employee premiums or contributions may be required as a condition of participation in the employee assistance program.

(D) There is no cost sharing under the employee assistance program.

(Filed by the Office of the Federal Register on December 20, 2013, 11:15 a.m., and published in the issue of the Federal Register for December 24, 2013, 78 F.R. 77632)

Update on FATCA Financial Institution Registration

Announcement 2014–1

As anticipated in Notice 2013–43, 2013–31 I.R.B. 113, the IRS FATCA registration website was made accessible to financial institutions (FIs) on August 19, 2013, in order for FIs to begin the process of creating accounts and entering registration information. All information entered since August 19, 2013, has been automatically saved in the registration system and associated with the FI’s FATCA account. With the exception of December 21 and December 31, 2013 (GMT –5), when the registration website will undergo end-ofyear processing, FIs will continue to have access to the registration website to create accounts or access existing accounts to modify or add registration information.

Notice 2013–43 notified FIs that any information they entered in the registration system before the formal opening of the IRS FATCA registration website at the beginning of January 2014, even if submitted as final, would not be regarded as a final submission. Consistent with the Notice, all registrations prior to January 2014, including registrations submitted as final before December 31, 2013 (GMT –5), will be treated as initiated but unsubmitted. Thus, on or after January 1, 2014 (GMT–5), every registering FI must revisit its account, make edits to its information if necessary, sign its FFI agreement if registering as a participating FFI, and submit its registration information as final.

Any FI submitting its registration information on or after January 1, 2014 (GMT–5) may subsequently choose to revoke its status by revisiting its account and deleting its registration (if its GIIN has not yet been issued) or cancelling its registration (if its GIIN has already been issued).

The IRS and Treasury anticipate that the final FFI agreement will be published prior to January 1, 2014. Final qualified intermediary (QI), withholding foreign partnership (WP), and withholding foreign trust (WT) agreements will be published in early 2014. Any FI seeking to renew its status as a QI, WP, or WT should do so during the registration process (i.e., by answering Questions 6, 9c, 13, 14, and 15). Any QI, WP, or WT that does so prior to the finalization of the QI,

WP, and WT agreements will be treated as having accepted the revised terms of the applicable agreement, effective on June 30, 2014, for QIs, WPs, and WTs that receive a GIIN prior to July 1, 2014 (GMT –5). A QI, WP, or WT may terminate its status at any time by delivery of a notice of termination in accordance with the terms of the applicable agreement.

All other dates relevant to registration and publication of the IRS FFI List as described in Notice 2013–43 remain unchanged. Notably, the IRS will electronically post the first IRS FFI List by June 2, 2014 (GMT–5), and any FI seeking to be included on the June 2014 IRS FFI List should finalize its registration by April 25, 2014 (GMT–5). Additionally, as previously announced, verification of a GIIN is not required for payments made prior to January 1, 2015, with respect to any payee that is a reporting Model 1 FI. Thus, while reporting Model 1 FIs will be able to register and obtain GIINs on or after January 1, 2014, they will not need to register or obtain GIINs until on or about December 22, 2014, to ensure inclusion on the IRS FFI list by January 1, 2015.

DRAFTING INFORMATION

The principal author of this announcement is Kamela Nelan of the Office of Associate Chief Counsel (International). For further information regarding this announcement, contact Ms. Nelan at 202317-6942 (not a toll-free call).

Bulletin No. 2014–2 393 January 6, 2014