Part III. — Internal Revenue Bulletin 2014-41

Section 4980H.—Shared Responsibility for Employers Regarding Health Coverage – Approach to Changes in Measurement Periods or Methods Applicable to an Employee

Notice 2014–49

PURPOSE

This notice describes a proposed approach to the application of the look-back measurement method, which may be used to determine if an employee is a full-time employee for purposes of § 4980H of the Internal Revenue Code (Code), in situations in which the measurement period applicable to an employee changes. This change may occur because the employee transfers within the same applicable large employer (or within the same applicable large employer member (ALE member)) from a position to which one measurement period applies to a position to which a different measurement period applies. This situation may also arise when the ALE member modifies the measurement period applicable to a position. This notice is intended to address the topics for which guidance was anticipated in section VII.G of the preamble to the final § 4980H regulations (79 FR 8544, 8563 (Feb. 12, 2014)). The Treasury Department and the IRS invite comments on this proposed approach. However, taxpayers may rely on the approach proposed in this notice until further guidance is issued, and in any case through the end of the 2016 calendar year.

The look-back measurement method generally involves using an employee’s average hours of service per week during a period (referred to in this notice as a measurement period and in the final § 4980H regulations as either an initial measurement period or a standard measurement period, depending on the circumstances) to determine if an employee

is a full-time employee during a subsequent period (referred to both in this notice and the final regulations as a stability period). ¹ The look-back measurement method is one of two alternative methods for identifying full-time employees for purposes of determining whether an ALE member is potentially subject to a payment under § 4980H. Under § 54.4980H– 3(d)(1)(v), each ALE member that uses the look-back measurement method may establish its own measurement and stability periods, subject to rules on maximum and minimum period lengths, and may also establish different measurement and stability periods for different specified categories of employees.

This notice addresses application of the look-back measurement method to the following situations:

(1) An employee in a position to which one measurement period applies transfers within the same applicable large employer (whether or not within the same ALE member) to a position to which a different measurement period applies (for example, an employee moves from an hourly position to which a 12-month measurement period applies to a salaried position to which a 6-month measurement period applies); and

(2) An ALE member changes the measurement method applicable to employees within a permissible category (for example, an ALE member changes the measurement period for all hourly employees for the next calendar year from a 6-month to a 12-month measurement period).

This notice describes how to address these situations, in both the case in which the employee is in a stability period at the time of the transfer and the case in which the employee is not yet in a stability period at that time. In general, for an employee who has been employed for a full measurement period at the time of transfer (and thus has a status as either a full-time employee or non-full-time employee for the stability period associated with that measurement period), the employee retains his or her status through the end of the associated stability period. For an employee who is not in a stability period (or

administrative period) at the time of transfer, the employee’s status is determined using the measurement period applicable to the second position, but including hours of service in the first position in applying that measurement period.

BACKGROUND

A. Section 4980H—In General

The Patient Protection and Affordable Care Act (Pub. L. 111–148) was enacted on March 23, 2010. The Health Care and Education Reconciliation Act of 2010 (Pub. L. 111–152) was enacted on March 30, 2010. These statutes are collectively known as the Affordable Care Act. The Affordable Care Act added Section 4980H to the Code, and that section was amended by the Department of Defense and Full-Year Continuing Appropriations Act, 2011 (enacted April 15, 2011, Pub. L. No. 112–10). Section 4980H applies to applicable large employers (generally, employers who employed at least 50 fulltime employees, including full-time equivalent employees, on business days during the preceding calendar year).

Section 4980H generally provides that an applicable large employer is subject to an assessable payment if either (1) § 4980H(a) applies because the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and any full-time employee is certified to receive a premium tax credit or cost-sharing reduction; or (2) § 4980H(b) applies because the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage and one or more full-time employees is certified to receive a premium tax credit or cost-sharing reduction. Section 4980H is generally applicable for months beginning after December 31, 2013; however, Notice 2013–45 provides transition relief under which § 4980H does not apply for 2014.

1Unless otherwise noted, all terms used in this notice have the same meaning as provided in the final § 4980H regulations.

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B. Section 4980H—Identification of Full-Time Employees

Section 4980H(c)(4) provides that a full-time employee for any month is an employee who is employed on average at least 30 hours of service per week. The final § 4980H regulations (79 FR 8544 (Feb. 12, 2014)) provide two alternative methods for determining if an employee is a full-time employee for purposes of § 4980H: (1) the monthly measurement method; and (2) the look-back measurement method.

Under the monthly measurement method, an employee generally is treated as a full-time employee for any calendar month in which the employee averages 30 or more hours of service per week. See § 54.4980H–3(c)(1). Under the look-back measurement method, an employee generally is treated as a full-time employee for any month within a stability period if the employee averaged 30 or more hours of service per week during the applicable measurement period preceding the stability period. See § 54.4980H–3(d)(1). The look-back measurement method for identifying full-time employees is available only for determining potential liability under § 4980H and not for determining status as an applicable large employer.

An employer that uses the look-back measurement method sets the starting date and length of two separate measurement periods: (1) the standard measurement period, which is used for ongoing employees (generally, all employees who have been employed for at least one full standard measurement period); and (2) the initial measurement period, which is used for new variable hour, seasonal, or part-time employees. ² Each ALE member (that is, each separate entity within a group of entities that constitutes a single applicable large employer) may establish different measurement methods or may use measurement periods that differ in duration or that start on a different date, and each ALE member is also permitted to use different measurement methods or to use measurement periods that differ in duration or that start on a different date for certain specified categories of employees.

These categories are (A) collectively bargained and non-collectively bargained employees, (B) each group of collectively bargained employees covered by a separate collective bargaining agreement, (C) salaried employees and hourly employees, and (D) employees whose primary places of employment are in different States. See § 54.4980H–3(d)(1)(v).

PROPOSED APPROACH

This section III proposes an approach for applying the look-back measurement method if the measurement period applicable to a particular employee changes. Section III.A addresses situations in which an employee transfers from one position to another within the same applicable large employer (or ALE member), in cases in which the employer uses a different measurement period for each position. Section III.B addresses situations in which the employer changes the measurement period applicable to one or more categories of employees, and also addresses situations in which an employer changes the measurement method (in other words, from the look-back measurement method to the monthly measurement method or vice versa) for one or more categories of employees.

Nothing in this notice is intended to prohibit or discourage employers from adopting eligibility provisions that make some employees eligible for coverage before they would be considered a full-time employee under this approach.

A. Employee transferring from a position to which one measurement period applies to a position to which a different measurement period applies.

This section III.A addresses changes in measurement methods under the following circumstances: the employee, who has been employed by an ALE member in a position (referred to as the first position) for which the employer uses the look-back measurement method, transfers to another position (referred to as the second position) for the same applicable large employer (whether or not with the same ALE member) for which the employer also uses the look-back measurement method, but with a measurement period that is differ

ent from the measurement period applicable to the first position. For this purpose, two measurement periods are different if they are of different durations or if they start on different dates (or both).

A transfer that may result in a change of applicable measurement method includes a transfer from one ALE member to another ALE member of the same applicable large employer or a transfer from one category of employees identified in § 54.4980H–3(d)(1)(v) to another.

For purposes of this proposed approach, following a transfer, an employer includes hours of service earned in the first position either by (1) counting the hours of service using the counting method applied to the employee in the first position (for example, using a weekly equivalency method for non-hourly employees), or (2) recalculating the hours of service earned in the first position using the hours of service counting method applied to the employee in the second position (for example, using a monthly equivalency method for non-hourly employees), provided that the employer treats all similarly situated employees consistently.

Proposed Approach to Application of Look-Back Measurement Method

Beginning with the date on which an employee described above transfers from the first position to the second position, the look-back measurement method is applied as follows:

(i) Employees in a stability period or administrative period . If an employee is in a stability period applicable to the first position as of the date of transfer, the employee’s status as a full-time or nonfull-time employee for the first position remains in effect until the end of that stability period. For this purpose, an employee is deemed to be in a stability period if as of the date of transfer the employee has been assigned a status for that stability period as a result of having been employed by the ALE member for a full standard measurement period or, if the employee has been a new variable hour, part-time, or seasonal employee, for a full initial measurement period.

2An initial measurement period does not apply to new employees who are full-time employees (because they are reasonably expected at time of hire to average at least 30 hours of service per week for the months after hire), and so are not variable-hour, seasonal, or part-time employees. See § 54.4980H–3(d)(2).

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Similarly, in the case of a new employee who is in an administrative period immediately following the end of the initial measurement period as of the date of transfer, the employee’s status as a fulltime or non-full-time employee based on hours of service in the initial measurement period under the first position will apply from the start of the associated stability period following the end of that administrative period through the end of that stability period.

At the end of the stability period during which the transfer occurs (or, if the employee was in an administrative period at the date of transfer, the end of the immediately following stability period), the employee assumes the full-time employee or non-full-time employee status that the employee would have under the look-back measurement method applicable to the second position, but including hours of service in the first position when applying that measurement method. For this purpose, if an employee’s status in the second position cannot be determined under the measurement method applicable to the second position because, for example, the employee is a variable hour employee and, even including service performed in the first position, has not yet been employed for a full initial measurement period for the second position (and the administrative period immediately following that measurement period for the second position), then the rule in section III.A.1.ii applies to the employee in the second position.

(ii) Employees not in a stability period . If an employee is not in a stability period or in an administrative period immediately following the end of the initial measurement period under the look-back measurement method applicable to the first position as of the date of transfer as determined in paragraph (i) above, the employee’s status as a full-time or non-fulltime employee is determined solely under the look-back measurement method applicable to the second position as of the date of transfer, including all hours of service in the first position.

In all other respects, the rules generally applicable to the look-back measurement method under § 54.4980H–3(d) continue to apply. For example, whether a new employee is a variable hour, part-time,

seasonal, or full-time employee is determined based on the applicable large employer’s reasonable expectations at the time of hire in accordance with § 54.4980H– 3(d)(2). However, a transfer of a new variable hour, part-time, or seasonal employee from the first position to the second position may be a change in employment status described in § 54.4980H–3(d)(3)(vii), if after the transfer the employee is reasonably expected to average at least 30 hours of service per week in the second position.

As provided in the final § 4980H regulations, a new employee who is not a variable hour or seasonal employee and who is reasonably expected to average at least 30 hours of service per week at the time of hire (and so is expected to be a full-time employee) is not subject to an initial measurement period. Instead, the status of such a new employee as a fulltime employee or non-full-time employee for § 4980H purposes is determined on the basis of hours of service in each month. See § 54.4980H–3(d)(2)(i). Such a new employee by definition will never be in a stability period for purposes of this section A.1.ii (unless the employee has been employed for a full standard measurement period at the date of transfer, in which case the employee would be a continuing rather than a new employee).

Until a new employee described in the preceding paragraph has been employed for a full standard measurement period applicable to the second position (including service in the first position), the status of the employee as a full-time or non-fulltime employee for § 4980H purposes continues to be determined on the basis of hours of service in each calendar month. If such an employee has been employed for a full standard measurement period applicable to the second position but not the first position as of the date of transfer, the employee’s status as a full-time or nonfull-time employee is determined on the basis of the employee’s average hours of service during that standard measurement period for the second position (but counting the hours of service accumulated during that standard measurement period for the first position), applied starting on the first day of the first month following the date of transfer and continuing through the end of the associated stability period.

Examples

The following examples illustrate the approach described in section III.A.1 of this notice. For each example, Position 1 and Position 2 are two positions at the same applicable large employer. Except as otherwise noted, the employer does not apply an optional administrative period described in § 54.4980H–3(d)(1)(vi) or § 54.4980H–3(d)(3)(vi).

Example 1: Ongoing employee . For Position 1, the employer uses 12-month standard measurement and stability periods beginning January 1. For Position 2, the employer uses 12-month standard measurement and stability periods beginning July 1.

Employee A is a long-time employee in Position 1 and so is not in an initial measurement period during the relevant periods. Employee A continues working in Position 1 and averages less than 30 hours of service per week during the period from January 1, 2015 through December 31, 2015. Employee A averages 30 or more hours of service per week during the period from July 1, 2015 through June 30, 2016.

On August 15, 2016, Employee A transfers from Position 1 to Position 2. At the date of the transfer, Employee A is in a stability period under Position 1 under which Employee A is treated as a non-fulltime employee because Employee A averaged less than 30 hours of service per week during the measurement period applicable to Position 1 beginning January 1, 2015 and ending December 31, 2015. For the period from August 15, 2016 through December 31, 2016 (the end of the stability period for Position 1 during which the transfer occurs), Employee A retains his status as a non-full-time employee (although the employer may choose to nonetheless extend an offer of coverage to the employee).

As of January 1, 2017 (the date immediately following the end of the stability period for Position 1), Employee A’s status is determined under the look-back measurement method applicable to Position 2. Employee A is a full-time employee starting January 1, 2017, because Employee A averaged 30 or more hours of service per week in the measurement period for Position 2 beginning July 1, 2015 and ending June 30, 2016 (which has a stability period of July 1, 2016 through June 30, 2017). Employee A remains a full-time employee through the end of that stability period (in other words, through June 30, 2017). After June 30, 2017, Employee A’s status continues to be determined using the applicable measurement period for Position 2.

Example 2: New variable hour employee in ini- tial measurement period transfers to position in which employee has completed initial measurement period . For Position 1, the employer uses 12-month standard measurement and stability periods beginning January 1 and a 12-month initial measurement period beginning on each employee’s start date. For Position 2, the employer uses 6-month standard measurement and stability periods beginning January 1 and July 1 and a 6-month initial measurement period beginning on an employee’s start date.

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tified in § 54.4980H–3(d)(1)(v), provided that for a transition period following the date of any such change, the status of each employee in that category is determined in accordance with this section III.B. A change in measurement method may include a change from the look-back measurement method to the monthly measurement method (or vice versa), or a change in the duration or start date of any applicable measurement period under the lookback measurement method.

The § 4980H final regulations address how to determine the full-time status of employees who transfer from a category to which the monthly measurement method applies to a category to which the look-back measurement method (or vice versa). See § 54.4980H–3(f)(1). The final regulations do not address whether, or under what conditions, an employer that uses a measurement method for a category of employees may subsequently change that measurement method. This section III.B clarifies that an employer may change the measurement method applicable to a category of employees, provided that the transition rules for employees who change between the monthly and look-back measurement methods due to such a change by the employer as provided in § 54.4980H–3(f)(1) apply to all employees impacted by the change for a transition period after the effective date of the change in method. For a change from the look-back measurement method to the monthly measurement method (or vice versa), the status of each affected employee as of the date of the change is determined in accordance with § 54.4980H–3(f)(1) as if on the date of the change each of those employees had transferred from a position to which the original measurement method applied, to a position to which the revised measurement method applied.

The status of any employee whose applicable measurement period under the look-back measurement method is changed by the employer is determined as if the employee had transferred from a position to which the original measurement method applies to a position to which the revised measurement method applies as of the effective date of the change. Accordingly, if an employer changes the duration or start date of the

The employer hires Employee B into Position 1 as a new variable-hour employee on January 1, 2015. Employee B averages 30 or more hours of service per week during the period from January 1 through June 30, 2015. On October 1, 2015, at which time Employee B is in the initial measurement period for Position 1, Employee B transfers from Position 1 to Position 2.

At the date of the transfer, Employee B is not in a stability period for Position 1 because Employee B has not been employed for a full initial measurement period or a full standard measurement period. Accordingly, Employee B’s status is determined under the measurement method applicable to Position 2 as of the date of transfer, taking into account Employee B’s hours of service in Position 1.

Employee B is a full-time employee from the date of transfer (October 1, 2015) through the end of the applicable stability period for Position 2 (December 31, 2015) because Employee B averaged 30 or more hours of service per week during the applicable measurement period for Position 2 ending June 30, 2015 (for Employee B, the initial measurement period and standard measurement period ran simultaneously from January 1, 2015 through June 30, 2015). After December 31, 2015, Employee B’s status continues to be determined using the applicable measurement period for Position 2.

Example 3: New variable hour employee in ini- tial measurement period transfers to position in which employee is also in initial measurement pe- riod . For Position 1, the employer uses a 3-month initial measurement period that begins on the first day of the month following the start date and, if the employee is full-time during the initial measurement period, a 6-month stability period immediately following the initial measurement period. For Position 2, the employer uses a 12-month initial measurement period beginning on each employee’s start date, applies an administrative period that runs from the end of the initial measurement period until the end of the month in which that date falls, and uses a one-year stability period starting the day after the end of the administrative period.

The employer hires Employee C into Position 1 as a new variable-hour employee on February 15, 2015. On May 1, 2015, Employee C transfers from Position 1 to Position 2. Employee C is not reasonably expected to average 30 or more hours of service per week in Position 2 (and thus the transfer from Position 1 to Position 2 does not constitute a change in employment status for purposes of § 54.4980H– 3(d)(3)(vii)). Employee C does not average 30 or more hours of service per week during the period from February 15, 2015 through February 14, 2016.

As of the date of transfer, Employee C had not been employed for the full initial measurement period for Position 1 and so, as of the date of transfer, Employee C is not in a stability period. Accordingly, Employee C’s status is determined using the measurement method applicable to Position 2 (February 15, 2015 through February 14, 2016). Employee C continues to be treated as a new variable hour employee from the date of transfer through February 28, 2016 (the end of the initial measurement period and associated administrative period for Position 2). For the stability period beginning March 1, 2016, Employee C’s status is deter

mined on the basis of Employee C’s average hours of service in the initial measurement period for Position 2, taking into account the hours of service in Position 1. Employee C is not a full-time employee for the stability period from March 1, 2016 through February 28, 2017.

Example 4: New variable hour employee in ini- tial measurement period transfers to new position and has a change in employment status . Same facts as Example 3, except that as of the date of transfer Employee C is reasonably expected to average 30 or more hours of service per week in Position 2.

Because Employee C had not been employed for the full initial measurement period for Position 1, Employee C is not in a stability period as of the date of transfer. Accordingly, Employee C’s status is determined using the measurement method for Position 2.

Because as of the date of transfer to Position 2, Employee C is reasonably expected to average more than 30 hours of service per week in Position 2, the rules set forth in § 54.4980H–3(d)(3)(vii) for changes in employment status during the initial measurement period apply.

Example 5: Transfer of employee during admin- istrative period . For Position 1, the employer uses a 12-month standard measurement period starting January 1 for ongoing employees and an 11-month initial measurement period starting on the first day of the month following the start date combined with a one-month administrative period for new variable hour, part-time, and seasonal employees. With respect to Position 2, the employer uses 6-month standard measurement and stability periods beginning January 1 and July 1.

The employer hires Employee D into Position 1 on March 15, 2016 as a new variable hour employee. For the 11-month initial measurement period from April 1, 2016 through February 28, 2017, Employee D averages 30 or more hours of service per week. On March 10, 2017, during the administrative period for Position 1 from March 1, 2017 through March 31, 2017, Employee D transfers from Position 1 to Position 2.

The date of transfer occurs during the administrative period following the completion of Employee D’s initial measurement period applicable to Position 1. Employee D’s status must be determined using the initial measurement method applicable to Position 1 and applied from the start of the stability period following the end of the administrative period through the end of that stability period.

Accordingly, for the 12-month stability period starting April 1, 2017, Employee D is a full-time employee because Employee D averaged 30 or more hours of service per week in the associated initial measurement period ending February 28, 2017. After the completion of the stability period (March 31, 2018), Employee D’s status as a full-time employee is determined using the measurement method applicable to Position 2.

B. Employer-initiated changes in measurement methods for one or more permissible categories of employees.

Pursuant to this notice, an employer may change the measurement method applicable to a category of employees iden

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measurement period under the look-back measurement method for a category of employees, the status of each employee in that category as a full-time employee after the date of the change is determined in accordance with this notice as if on the date of the change each employee in the category had transferred from a position to which the original measurement method applied, to a position to which the revised measurement method applied.

Example 6: Employer-initiated change in mea- surement periods . Starting January 1, 2015, the employer determines the full-time employee status of employees covered by a particular collective bargaining agreement (CBA) using 6-month measurement and stability periods each starting April 1 and October 1 and determines the status of employees not covered by the CBA using 12-month measurement and stability periods each starting January 1.

On April 1, 2017, the employer changes the look-back measurement method for employees not covered by the CBA to be the same as that used for employees covered by the CBA.

For a transition period following the date of this change, the status of employees not covered by the CBA must be made in a manner consistent with this notice, treating each employee who is subject to the measurement method applicable to employees not covered by the CBA as if on April 1, 2017, that employee had transferred from a position subject to the original measurement method to a position subject to the revised measurement method.

Accordingly, each employee subject to the measurement method applicable to employees not covered by the CBA who is in a stability period as of April 1, 2017 retains his or her status as a full-time employee or non-full-time employee, as determined under the original measurement method for the remainder of the 12-month stability period applicable to that employee. Each such employee who is not in a stability period as of April 1, 2017 has his or her status determined as of April 1, 2017 in accordance with the 6-month measurement method.

RELIANCE

The Treasury Department and the IRS anticipate issuing further guidance after consideration of all comments received pursuant to section V of this notice. However, taxpayers may rely on the approach described in this notice to determine an employee’s status as a full-time employee for purposes of § 4980H until such guidance is issued, and in any case, through the end of calendar year 2016.

REQUEST FOR COMMENTS AND APPLICATION TO CORPORATE TRANSACTIONS

The Treasury Department and the IRS invite public comments on the proposed

approached described in this notice, and on the potential application of the proposed approach described in this notice, or similar rules, in the context of a corporate transaction such as a merger or acquisition involving employers using different measurement methods. In such a corporate transaction, the two (or more) entities may have different measurement methods for their respective employees in a particular category under § 54.4980H–3(d)(1)(v) (for example, salaried employees). As a result of the corporate transaction, these groups of employees may become employed by the same ALE member.

Until further guidance is issued, and in any case through the end of calendar year 2016, taxpayers involved in a corporate transaction in which employers use different measurement methods may rely on the approach described in this notice in determining an employee’s status as a full-time employee for purposes of § 4980H. For example, assume that one corporation (Target) merges into another corporation (Acquirer) and that both corporations use the look-back measurement method but with different measurement periods. The corporations may apply the approach set forth in section III of this notice by treating the Target employees as having transferred at the date of the merger from one position (at Target) to another position (at Acquirer) with a different measurement period.

In addition, if a merger, acquisition or similar corporate transaction occurs and, in connection with the corporate transaction, individuals not employed immediately prior to the transaction by an ALE member become employed by that ALE member (new ALE member employees), the ALE member will not be treated as applying an impermissible categorization of employees under § 54.4980H– 3(d)(1)(v) merely because it applies during the transition period, to some or all of the new ALE member employees, the measurement method applicable to those employees immediately before the corporate transaction. For this purpose, the transition period is the period beginning on the date of the corporate transaction and ending on the last day of the first stability period following a standard measurement period that would have applied to the new ALE member employees absent the cor

porate transaction and that begins after the date of such corporate transaction (or, in the case of an ALE member that uses the monthly measurement method with respect to a category of employees, the last day of the first calendar year that begins after the date of the transaction).

Recognizing that the approach described in the immediately preceding paragraphs to addressing the consequences of corporate transactions is not necessarily the only permissible approach and might in some cases present practical issues, the Treasury Department and the IRS encourage comments on this and other possible approaches. As with the other provisons of this notice, nothing in this section of the notice prohibits employers from adopting eligibility provisions that make some employees eligible for coverage in situations in which the employee could potentially be classified as a non-full-time employee under the approach described in this paragraph.

Comments are also requested on whether additional rules are necessary to address situations where an applicable large employer transfers employees to another employment category or to a different ALE member that uses a different look-back measurement method for the purpose of delaying or avoiding the classification of the employee as a full-time employee for § 4980H purposes.

Public comments should be submitted no later than December 29, 2014. Comments should include a reference to Notice 2014–49. Send submissions to CC: PA:LPD:PR (Notice 2014–49), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2014–49), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, or sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov . Please include “Notice 2014–49” in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.

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over. The regulations provide in part that “any amount paid in a direct rollover is treated as a separate distribution from any amount paid directly to the employee.”

Section 402(f) requires that the plan administrator of a plan qualified under § 401(a) provide any recipient of an eligible rollover distribution with a written explanation describing certain provisions of law. Notice 2009–68, 2009–2 C.B. 423, provides two safe harbor explanations that may be provided to recipients of eligible rollover distributions from an employer plan in order to satisfy § 402(f). The safe harbor explanation with respect to distributions not from a designated Roth account provides in part (under the heading “If your payment includes aftertax contributions”) that “[i]f you do a direct rollover of only a portion of the amount paid from the Plan and a portion is paid to you, each of the payments will include an allocable portion of the aftertax contributions.” Similarly, for distributions from a designated Roth account, the safe harbor explanation provides in part (under the heading “How do I do a rollover?”) that “[i]f you do a direct rollover of only a portion of the amount paid from the Plan and a portion is paid to you, each of the payments will include an allocable portion of the earnings in your designated Roth account.”

Sections 403(b)(8)(B) and 457(e)(16)(B) provide that the rules of § 402(c)(2) through (7), (9), and (11) and the rules of § 402(f) also apply to § 403(b) plans and governmental § 457(b) plans.

In response to Notice 2009–68, comments were received requesting changes to the rules regarding the allocation of basis among simultaneous disbursements to multiple destinations from a retirement plan that contains both after-tax and pretax amounts. Commenters indicated that some plan providers were treating disbursements to separate destinations not as separate distributions but rather as a single distribution of the aggregate disbursement amounts. These plan providers permitted allocation of all the after-tax amounts included in the disbursements to a Roth IRA. The commenters also pointed out that even under the allocation method described in Notice 2009–68 a participant who wishes to disburse after-tax amounts

DRAFTING INFORMATION

The principal author of this notice is Shad C. Fagerland of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice contact Mr. Fagerland at (202) 3175500 (not a toll-free number).

Notice 2014–54

Guidance on Allocation of After-Tax Amounts to Rollovers

PURPOSE

This notice provides rules for allocating pretax and after-tax amounts among disbursements that are made to multiple destinations from a qualified plan described in § 401(a) of the Internal Revenue Code. These rules also apply to disbursements from a § 403(b) plan or a § 457(b) plan maintained by a governmental employer described in § 457(e)(1)(A) (a “governmental § 457(b) plan”). Section VI of this notice provides transition rules.

BACKGROUND

Section 402(a) provides generally that any amount distributed from a trust described in § 401(a) that is exempt from tax under § 501(a) is taxable to the distributee under § 72 in the taxable year of the distributee in which distributed. Under § 403(b)(1), any amount distributed from a § 403(b) plan is also taxable to the distributee under § 72. (Under § 72(d), a different allocation method applies to annuity distributions.)

If a participant’s account balance in a plan qualified under § 401(a) or in a § 403(b) plan includes both after-tax and pretax amounts, then, under § 72(e)(8), each distribution from the account (other than a distribution that is paid as part of an annuity, which is subject to a different rule) will include a pro rata share of both after-tax and pretax amounts.

Under § 402A(d)(4), a designated Roth account in an applicable retirement plan is treated as a separate contract from other amounts in the plan when applying the rules of § 72.

Section 402(c) provides taxability rules for amounts that are rolled over from qualified trusts to eligible retirement plans, including individual retirement accounts or annuities (“IRAs”). Subject to certain exceptions, § 402(c)(1) provides that if any portion of an eligible rollover distribution paid to an employee from a qualified trust is transferred to an eligible retirement plan, the portion of the distribution so transferred is not includible in gross income in the taxable year in which paid.

Under § 402(c)(2), the maximum portion of an eligible rollover distribution that may be rolled over in a transfer to which § 402(c)(1) applies generally cannot exceed the portion of such distribution which is otherwise includible in gross income. However, under § 402(c)(2)(A) and (B), the general rule does not apply to such distribution to the extent that—

(A) such portion is transferred in a direct trustee-to-trustee transfer to a qualified trust or to an annuity contract described in section 403(b) and such trust or contract provides for separate accounting for amounts so transferred (and earnings thereon), including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, or

(B) such portion is transferred to an

[IRA].

In addition, § 402(c)(2) provides the following special rule:

In the case of a transfer described in subparagraph (A) or (B), the amount transferred shall be treated as consisting first of the portion of such distribution that is includible in gross income (determined without regard to

[§ 402(c)(1)]).

Under § 402A, an applicable retirement plan, defined in § 402A(e)(1) to include a plan qualified under § 401(a), a § 403(b) plan, or a governmental § 457(b) plan, may include a designated Roth account. Section 402A(d) provides that a qualified distribution (as defined in § 402A(d)(2)) from a designated Roth account is not includible in gross income.

Section 1.402A–1, Q&A–5(a), of the Income Tax Regulations provides taxability rules for a distribution from a designated Roth account that is rolled

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to one destination and pretax amounts to another could accomplish this result in a series of steps. First, the participant could take an eligible rollover distribution as a single cash distribution. Second, by taking advantage of the rule in § 402(c)(2) that distribution amounts that are rolled over are treated as consisting first of pretax amounts, the participant could roll over the pretax amounts included in the distribution to one destination, such as a traditional IRA. The remaining amount of the distribution would be after-tax, which the participant could either roll over into a Roth IRA or retain without incurring any tax liability. The option to roll over all after-tax amounts into a Roth IRA, however, would only be available to taxpayers with sufficient funds available outside of the plan to be able to roll over the entire amount distributed, including the 20 percent of the taxable portion of the distribution paid to the IRS as withholding pursuant to § 3405(c).

As described in section VI of this notice, this notice is being issued in conjunction with proposed regulations that would modify § 1.402A–1, Q&A–5(a).

GUIDANCE ON THE ALLOCATION OF AFTER-TAX AND PRETAX AMOUNTS

For purposes of determining the portion of a disbursement of benefits from a plan to a participant, beneficiary, or alternate payee that is not includible in gross income under the rules of § 72, all disbursements of benefits from the plan to the recipient that are scheduled to be made at the same time (disregarding differences due to reasonable delays to facilitate plan administration) are treated as a single distribution without regard to whether the recipient has directed that the disbursements be made to a single destination or multiple destinations.

If the pretax amount with respect to the aggregated disbursements that are treated as a single distribution is less than the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the entire pretax amount is assigned to the amount of the distribution that is directly rolled over. In such a case, if the direct rollover is to two or more plans, then the recipient can select how the pretax amount is allocated among

these plans. To make this selection, the recipient must inform the plan administrator of the allocation prior to the time of the direct rollovers.

If the pretax amount with respect to the aggregated disbursements in a distribution equals or exceeds the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the pretax amount is assigned to the portion of the distribution that is directly rolled over up to the amount of the direct rollover (so that each direct rollover consists entirely of pretax amounts). Any remaining pretax amount is next assigned to any 60-day rollovers (that is, rollovers that are not direct rollovers) up to the amount of the 60-day rollovers. If the remaining pretax amount is less than the amount rolled over in 60-day rollovers, the recipient can select how the pretax amount is allocated among the plans that receive 60-day rollovers.

If, after the assignment of the pretax amount to direct rollovers and 60-day rollovers, there is a remaining pretax amount, that amount is includible in the distributee’s gross income. If the amount rolled over to an eligible retirement plan exceeds the portion of the pretax amount assigned or allocated to the plan, the excess is an after-tax amount.

REPORTING REQUIREMENTS

Even though certain multiple disbursements to different destinations are treated as a single aggregated distribution under the first paragraph of section III of this notice, each disbursement may be required to be reported on a separate Form 1099–R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in accordance with the Instructions to Form 1099–R. In preparing the Form 1099–R, the assignment and allocation rules in section III must be taken into account in determining the amount of pretax contributions assigned or allocated among direct rollovers and any amounts paid to the recipient.

EXAMPLES

Example 1. Employee C participates in a qualified plan that does not contain a designated Roth account. Employee C’s $250,000 account balance consists of $200,000 of pretax amounts and $50,000

of after-tax amounts. Employee C separates from service and is entitled to, and requests, a distribution of $100,000. Under § 72(e)(8), the pretax amount with respect to the distribution is $80,000 ($100,000 x $200,000/$250,000). Employee C specifies that $70,000 is to be directly rolled over to the qualified plan maintained by his new employer and that $30,000 is to be paid to Employee C. Because the pretax amount exceeds the amount directly rolled over, the amount directly rolled over to the new plan consists entirely of pretax amounts. The amount paid to Employee C (prior to application of withholding) consists of $10,000 in pretax amounts and $20,000 in after-tax amounts. Prior to the 60 ^th day after the distribution, Employee C chooses to roll over $12,000 to an IRA. Because the amount rolled over in the 60-day rollover exceeds the remaining pretax amounts, the amount rolled over to the IRA consists of $10,000 of pretax amounts and $2,000 of after-tax amounts.

Example 2. The facts are the same as in Example 1, except that Employee C chooses to transfer $82,000 in direct rollovers - $50,000 to the new qualified plan and $32,000 to an IRA. The remaining $18,000 is paid to Employee C. The new qualified plan separately accounts for after-tax contributions. Because the amount rolled over exceeds the pretax amount, the direct rollovers consist of $80,000 in pretax amounts and $2,000 in after-tax amounts. Employee C is permitted to allocate the pretax amounts between the new qualified plan and the IRA prior to the time the direct rollovers are made.

Example 3. The facts are the same as in Example 2, except that the new qualified plan does not separately account for after-tax contributions. In this case, it is impermissible for the $2,000 (which represents the after-tax portion of the distribution) to be rolled over to the new qualified plan. Thus, the entire $50,000 rolled over to the plan must consist of pretax amounts. The $32,000 rolled over to the IRA consists of $30,000 of pretax amounts and $2,000 of after-tax amounts.

Example 4. The facts are the same as in Example 1, except that Employee C chooses to make a direct rollover of $80,000 to a traditional IRA and $20,000 to a Roth IRA. Employee C is permitted to allocate the $80,000 that consists entirely of pretax amounts to the traditional IRA so that the $20,000 rolled over to the Roth IRA consists entirely of after-tax amounts.

PROPOSED REGULATIONS AND TRANSITION RULES

The allocation rules of section III of this notice generally apply to distributions made on or after January 1, 2015.

Concurrent with this notice, the Federal Register has filed for public inspection proposed regulations under § 402A (REG–105739–11, filed for public inspection by the Federal Register on September 18, 2014). The proposed regulations would limit the applicability of the requirement in § 1.402A–1, Q&A–5(a), applicable to distributions from designated Roth accounts that “any amount

Bulletin No. 2014–41 671 October 6, 2014

paid in a direct rollover is treated as a separate distribution from any amount paid directly to the employee.” Under the proposed regulations, that separate distribution requirement would not apply to distributions made on or after the applicability date of the Treasury decision finalizing the proposed regulations. The applicability date of the regulations is proposed to be January 1, 2015. However, in accordance with § 7805(b)(7), taxpayers are permitted to apply the proposed regulations to distributions made before the applicability date, so long as such earlier distributions are made on or after September 18, 2014 . For distributions from designated Roth accounts, the allocation rules of section III of this notice will apply to distributions made on or after the applicability date.

For distributions made on or after September 18, 2014 but before the allocation rules of section III of this notice apply, taxpayers may apply a reasonable interpretation of the last sentence of § 402(c)(2) to allocate after-tax and pretax amounts among disbursements made to multiple destinations. In the case of such disbursements, a reasonable interpretation of the last sentence of § 402(c)(2) includes utilizing the separate distribution allocation rule described in § 1.402A–1, Q&A–5(a). For example, it would be reasonable for a plan administrator to treat each disbursement as a separate distribution that receives a pro rata share of pretax amounts and for the recipient to determine taxability in accordance with that allocation. It would also be reasonable for the plan administrator to allocate pretax amounts in the manner described in section III of this notice as timely selected by the recipient of disbursements made to multiple destinations. In addition, it would be reasonable for a plan administrator to switch from allocating pretax amounts using the separate distribution allocation rule to allocating pretax amounts in the manner described in section III of this notice as timely selected by the recipient.

For distributions made prior to September 18, 2014 , taxpayers may generally apply the same reasonable interpretation standard described in the preceding paragraph. However, if such a distribution is made from a designated Roth account, the allocation of the pretax amounts must be

made in accordance with the rules set forth in the § 402A regulations that were in effect on the date of the distribution.

The IRS also intends to revise the safe harbor explanations that may be provided to recipients of eligible rollover distributions from an employer plan in order to satisfy § 402(f) to reflect this revised method for applying the last sentence of § 402(c)(2).

DRAFTING INFORMATION

The principal author of this notice is Kathleen Herrmann of the Employee Plans, Tax Exempt and Government Entities Division. Questions regarding this notice may be sent via e-mail to RetirementPlanQuestions@irs.gov .

Additional Permitted Election Changes for Health Coverage under § 125 Cafeteria Plans

Notice 2014–55

PURPOSE

This notice expands the application of the permitted change rules for health coverage under a § 125 cafeteria plan (cafeteria plan). In particular, this notice addresses two specific situations in which a cafeteria plan participant may wish to revoke, during a period of coverage (commonly a plan year), the employee’s election for employer-sponsored health coverage under the cafeteria plan in order to purchase a Qualified Health Plan through a competitive marketplace established under § 1311 of the Patient Protection and Affordable Care Act, commonly referred to as an Exchange or a Health Insurance Marketplace (Marketplace). The first situation involves a participating employee whose hours of service are reduced so that the employee is expected to average less than 30 hours of service per week but for whom the reduction does not affect the eligibility for coverage under the employer’s group health plan. (This may occur, for example, under certain employer plan designs intended to avoid any potential assessable payment under § 4980H of the Internal Revenue Code.) The second situation involves an employee participating in an employer’s

group health plan who would like to cease coverage under the group health plan and purchase coverage through a Marketplace without that resulting either in a period of duplicate coverage under the employer’s group health plan and the coverage purchased through a Marketplace or in a period of no coverage.

This notice permits a cafeteria plan to allow an employee to revoke his or her election under the cafeteria plan for coverage under the employer’s group health plan (other than a flexible spending arrangement (FSA)) during a period of coverage in each of those situations provided specified conditions are met. The Treasury Department and the IRS intend to modify the regulations under § 125 consistent with the provisions of this notice, but taxpayers may rely on this notice immediately.

BACKGROUND

Section 125(d)(1) defines a cafeteria plan as a written plan maintained by an employer under which all participants are employees, and all participants may choose among two or more benefits consisting of cash and qualified benefits. Section 125(f) defines a qualified benefit as any benefit which, with the application of § 125(a), is not includable in the gross income of the employee by reason of an express provision of the Code (with certain exceptions). Qualified benefits include employer-provided accident and health plans excludable from gross income under §§ 106 and 105(b), but exclude long term care insurance and certain Qualified Health Plans offered through Marketplaces.

Proposed § 1.125–1(c)(1)(iii) of the Income Tax Regulations, consistent with longstanding rules for cafeteria plans, states that a written cafeteria plan must provide that elections are irrevocable except to the extent that the optional change in status rules in Treas. Reg. § 1.125–4 have been included in the cafeteria plan. Treas. Reg. § 1.125–4 provides rules on the circumstances in which a cafeteria plan may permit changes to elections under the plan. Cafeteria plans are not required to allow any of the changes permitted under Treas. Reg. § 1.125–4.

Treas. Reg. § 1.125–4(c) permits a cafeteria plan to allow an employee to revoke

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plan could not allow the employee to change the employee’s election under the cafeteria plan during the period of coverage.

Interaction with Enrollment in a Qualified Health Plan Through a Marketplace

Under the current change in status rules under Treas. Reg. § 1.125–4, a cafeteria plan may not allow an employee to revoke an election under the group health plan during a period of coverage solely to enroll in a Qualified Health Plan through a Marketplace. For an individual enrolled through a cafeteria plan in a group health plan with a calendar plan year, the employee may continue his or her coverage under the plan for the remainder of the plan year and then immediately begin coverage under a Qualified Health Plan purchased through a Marketplace. However, an individual enrolled through a cafeteria plan in a group health plan with a noncalendar plan year might not be able to synchronize the change in coverage to avoid an overlapping period of coverage or a period without coverage because the open enrollment period rules for Marketplaces do not permit the purchase of coverage commencing upon the end of the noncalendar cafeteria plan year.

Also, under Treas. Reg. § 1.125–4(b) a cafeteria plan may allow an employee to revoke an election under a group health plan during a period of coverage and to make a new election that corresponds with special enrollment rights under § 9801(f). Special enrollment rights under § 9801(f) relate only to enrollment in another group health plan, not to enrollment in a Qualified Health Plan offered through a Marketplace. Thus, Treas. Reg. § 1.125–4(b) does not permit a cafeteria plan to allow an employee to revoke an election under a group health plan during a period of coverage and enroll in a Qualified Health Plan offered through a Marketplace as the result of an employee’s eligibility to enroll in a Qualified Health Plan during Special Enrollment Period for the Marketplace ¹

(even though most of the events giving rise to special enrollment rights under § 9801(f) correspond to the events giving

an election during a period of coverage with respect to coverage under an accident or health plan as defined in Treas. Reg. § 1.105–5, and make a new election for the remaining portion of the period, if under the facts and circumstances (i) a change in status occurs, and (ii) the election change satisfies the consistency requirements of Treas. Reg. § 1.125– 4(c)(3). A change of status for this purpose includes changes in employment status as described in Treas. Reg. § 1.125– 4(c)(2)(iii). A change in employment status for this purpose only includes a change in an individual’s employment status that results in a change in the individual’s eligibility for coverage under the group health plan. Thus, under the existing regulations, a change in employment status that does not result in an employee either becoming or ceasing to be eligible for coverage under the group health plan is not a change in status for which a plan may allow the employee to revoke an election of health coverage under the cafeteria plan during a period of coverage.

Even if the change in status results in a change in eligibility for coverage under the group health plan, any revocation of an election must meet the consistency requirements of Treas. Reg. §§ 1.125– 4(c)(3)(i) and 1.125–4(c)(3)(iii). Those requirements provide that if an employee’s change in status only results in some of the individuals covered by a group health plan due to their relationship to the employee ceasing to satisfy eligibility requirements for coverage, the employee’s election under the cafeteria plan to cancel coverage under the group health plan for any individual other than the individuals losing eligibility fails to correspond with that change in status. Similarly, if a change in status results in an individual gaining eligibility for coverage under a group health plan, an employee’s election to cease or decrease coverage for that individual under the cafeteria plan corresponds with the change in status only if the individual enrolls in the coverage for which the individual is newly eligible. That is, an individual gaining eligibility for coverage under a group health plan cannot use that change in status to revoke coverage.

Treas. Reg. § 1.125–4(b) permits a cafeteria plan to allow an employee to revoke an election under the group health plan during a period of coverage and to make a new election that corresponds with the special enrollment rights under § 9801(f). Special enrollment rights under § 9801(f) concern rights to enroll in a group health plan due to loss of other coverage or certain family events, but do not include the ability to enroll in a Qualified Health Plan through a Marketplace.

Interaction with § 4980H

Under § 4980H, an applicable large employer is subject to an assessable payment if the applicable large employer does not offer minimum essential coverage to its full time employees and one or more full time employees receive the premium tax credit under § 36B. Under Treas. Reg. § 54.4980H–3(d), an applicable large employer may use the look-back measurement method to determine the status of an employee as full-time or not full-time. Under the look-back measurement method, for purposes of § 4980H, an employee determined to be full-time based on hours of service during a measurement period must be treated as a full-time employee during a subsequent stability period, regardless of the employee’s hours of service during the stability period. Thus, under the look-back measurement method, an employee could have a change in employment status (for example, a change from a full-time position to a parttime position) resulting in a reduction in hours that does not change the employee’s status as a full-time employee for purposes of § 4980H, at least for some period of time. Under certain health plan designs intended to avoid any potential assessable payment under § 4980H by offering coverage to employees for all periods during which the employees are classified as fulltime employees for § 4980H purposes, the change in employment status would not result in a change in an employee’s eligibility for the group health plan. Because the change in employment status would not result in a change in the employee’s eligibility for the group health plan, under Treas. Reg. § 1.125–4(c), the cafeteria

1Marketplaces must provide Special Enrollment Periods during which qualified individuals may enroll in Qualified Health Plans offered through Marketplaces. See 45 CFR 155.420(d).

Bulletin No. 2014–41 673 October 6, 2014

rise to Special Enrollment Periods for a Qualified Health Plan). However, in the case of an event such as a birth or marriage, it may be more advantageous for some individuals to enroll themselves and their families in a Qualified Health Plan rather than to add family members to an employer’s group health plan. To permit access to Qualified Health Plans in these cases, this notice permits a cafeteria plan to allow a participating employee to revoke an election in order to obtain coverage through a Marketplace.

GUIDANCE

A cafeteria plan may allow an employee to prospectively revoke an election of coverage under a group health plan that is not a health FSA and that provides minimum essential coverage (as defined in § 5000A(f)(1)) provided the following conditions are met:

Conditions for revocation due to reduction in hours of service

(1) The employee has been in an employment status under which the employee was reasonably expected to average at least 30 hours of service per week and there is a change in that employee’s status so that the employee will reasonably be expected to average less than 30 hours of service per week after the change, even if that reduction does not result in the employee ceasing to be eligible under the group health plan; and

(2) The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee, and any related individuals who cease coverage due to the revocation, in another plan that provides minimum essential coverage with the new coverage effective no later than the first day of the second month following the month that includes the date the original coverage is revoked.

A cafeteria plan may rely on the reasonable representation of an employee who is reasonably expected to have an average of less than 30 hours of service per week for future periods that the employee and related individuals have enrolled or intend to enroll in another plan that provides minimum essential coverage for new coverage that is effective no later

than the first day of the second month following the month that includes the date the original coverage is revoked.

Conditions for revocation due to enrollment in a Qualified Health Plan

(1) The employee is eligible for a Special Enrollment Period to enroll in a Qualified Health Plan through a Marketplace pursuant to guidance issued by the Department of Health and Human Services and any other applicable guidance, or the employee seeks to enroll in a Qualified Health Plan through a Marketplace during the Marketplace’s annual open enrollment period; and

(2) The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee and any related individuals who cease coverage due to the revocation in a Qualified Health Plan through a Marketplace for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.

A cafeteria plan may rely on the reasonable representation of an employee who has an enrollment opportunity for a Qualified Health Plan through a Marketplace that the employee and related individuals have enrolled or intend to enroll in a Qualified Health Plan for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.

EFFECTIVE DATE AND PLAN AMENDMENTS

The guidance in this notice is effective on September 18, 2014. The Treasury Department and the IRS intend to amend Treas. Reg. § 1.125–4 to reflect the guidance in this notice. Taxpayers may rely on the guidance in this notice pending further guidance.

To allow the new permitted election changes under this notice, a cafeteria plan must be amended to provide for such election changes. The amendment must be adopted on or before the last day of the plan year in which the elections are allowed, and may be effective retroactively to the first day of that plan year, provided that the cafeteria plan operates in accor

dance with the guidance under this notice and the employer informs participants of the amendment, and provided further that a cafeteria plan may be amended to adopt the new permitted election changes for a plan year that begins in 2014 at any time on or before the last day of the plan year that begins in 2015. However, in no event may an election to revoke coverage on a retroactive basis be allowed.

DRAFTING INFORMATION

The principal author of this notice is R. Lisa Mojiri-Azad of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding the clarification in this notice, contact Ms. MojiriAzad at (202) 317-5500 (not a toll free number).

Sections 4375 & 4376 — Insured and Self-Insured Health Plans Adjusted Applicable Dollar Amount for Fee Imposed by §§ 4375 and 4376

Notice 2014–56

PURPOSE

This notice provides the adjusted applicable dollar amount to be multiplied by the average number of covered lives for purposes of the fee imposed by §§ 4375 and 4376 of the Internal Revenue Code for policy years and plan years that end on or after October 1, 2014, and before October 1, 2015. This notice also provides that the adjusted applicable dollar amount for policy years and plan years that end on or after October 1, 2015, will be published in guidance of general applicability published in the Internal Revenue Bulletin.

BACKGROUND

Section 4375 imposes a fee on the issuer of a specified health insurance policy for each policy year ending after September 30, 2012, and before October 1, 2019. Section 4376 imposes a fee on the plan sponsor of an applicable self-insured health plan for each plan year ending after September 30, 2012, and before October

October 6, 2014 674 Bulletin No. 2014–41

1, 2019. The fee imposed by §§ 4375 and 4376 helps to fund the Patient-Centered Outcomes Research Institute (PCORI) and is calculated using the average number of lives covered under the policy or plan and the applicable dollar amount for that policy year or plan year. Under §§ 4375(a) and 4376(a), the applicable dollar amount is $2 for policy and plan years ending on or after October 1, 2013, and before October 1, 2014. ¹ Treas. Reg. §§ 46.4375–1(c)(4) and 46.4376–1(c)(3).

Under §§ 4375(d) and 4376(d) and Treas. Reg. §§ 46.4375–1(c)(4) and 46.4376–1(c)(3), the applicable dollar amount for policy years and plan years ending in any Federal fiscal year beginning on or after October 1, 2014 is increased based on increases in the projected per capita amount of National Health Expenditures. Specifically, the applicable dollar amount is the sum of (i) The applicable dollar amount for the policy year or plan year ending in the previous Federal fiscal year; plus

(ii) The amount equal to the product of – (A) The applicable dollar amount for the policy year or plan year ending in the previous Federal fiscal year; and

(B)The percentage increase in the projected per capita amount of the National Health Expenditures most recently released by the Department of Health and Human Services (HHS) before the beginning of the Federal fiscal year.

Based on the percentage increase in the projected per capita amount of the National Health Expenditures published by HHS on September 3, 2014, the applicable dollar amount that must be used to calculate the fee imposed by §§ 4375 and 4376 for policy years and plan years that end on or after October 1, 2014, and before October 1, 2015, is $2.08. See www.cms.gov/Research-Statistics-Data- and-Systems/Statistics-Trends-and- Reports/NationalHealthExpendData/ Downloads/Proj2013tables.zip, Table 3.

ADJUSTED APPLICABLE DOLLAR AMOUNT

For policy years and plan years ending on or after October 1, 2014, and before

October 1, 2015, the adjusted applicable dollar amount is $2.08.

For policy years and plan years ending on or after October 1, 2015, and before October 1, 2019, the adjusted applicable dollar amount will be published in guidance of general applicability published in the Internal Revenue Bulletin.

I. EFFECTIVE DATE

This notice is effective for policy years and plan years ending on or after October 1, 2014.

II. DRAFTING INFORMATION

The principal author of this notice is R. Lisa Mojiri-Azad of the Office of Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this notice, contact Ms. MojiriAzad at (202) 317-5500 (not a toll free number).

26 CFR 601.204: Changes in accounting periods and in methods of accounting. (Also Part I, §§ 168, 446, 481; 1.168(i)–1, 1.168(i)–7, 1.168(i)–8, 1.446–1.)

Rev. Proc. 2014–54