Section 4191(b)(1) provides that, in general, a “taxable medical device” is any device, as defined in section 201(h) of the Federal Food, Drug & Cosmetic Act (FFDCA) (codified as amended at 21 U.S.C. 301 et seq. (2006)) that is intended for humans.

The proposed regulations provide that for purposes of the medical device excise tax, a device defined in section 201(h) of the FFDCA that is intended for humans means a device that is listed as a device with the Food and Drug Administration (FDA) under section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements. The proposed regulations further provide that if a device is not listed with the FDA, but the FDA later determines that the device should have been listed as a device, the device will be deemed to have been listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required.

One commenter suggested that the listing rule is overbroad because it includes virtually all types of medical devices in the tax base. The commenter requested that the final regulations narrow the definition of a taxable medical device so that the excise tax is imposed only on devices that Congress specifically intended to subject to the tax.

The final regulations do not adopt this suggestion. Congress linked the definition of a taxable medical device to the definition of a “device” under section 201(h) of the FFDCA. In general, the FDA requires a device defined in section 201(h) of the FFDCA that is intended for humans to be listed as device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, subject to certain limited exceptions. The final regulations track this FDA requirement by defining a taxable medical device as a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807. This provides taxpayers with greater certainty as to which devices are subject to the tax.

Several commenters requested that the final regulations clarify that the definition of a taxable medical device does not include the category of products reviewed as devices by the FDA Center for Biologics Evaluation and Research (CBER).

In general, CBER licenses biologics, such as in vitro diagnostic tests for blood donor screening, after the filing of a Biologics License Application (BLA) under the Public Health Service Act. Biologics are listed with the FDA under 21 CFR part 607.

Under the final regulations a taxable medical device is a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements. Therefore, devices that CBER regulates that are listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 are taxable medical devices. Devices that CBER regulates that are not listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, such as biologics that are listed under 21 CFR part 607, are not taxable medical devices.

A number of commenters suggested that certain devices, such as sterilization process indicators, software, and containers used to hold or transport medical products and specimens, should be excluded from the definition of a taxable medical device on the basis that they are not “intended for humans.” Commenters argued that even if the FDA requires certain such devices to be listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, the devices should not be taxable medical devices because they are not used in the direct treatment, diagnosis, or monitoring of a patient.

Section 4191 links the definition of a taxable medical device to the definition of a device in section 201(h) of the FFDCA. Section 201(h) of the FFDCA provides generally that the term “device” means an instrument, apparatus, etc., that is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals; or intended to affect the structure or any function of the body of man or other animals, and that does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and that is not dependent upon being metabolized for the achievement of its primary intended purposes. Section 201(h) of the FFDCA includes devices intended for “man” and devices intended for “other animals.” Thus, the phrase “intended for humans” included in section 4191(b) limits the definition of a taxable medical device to the devices defined in section 201(h) of the FFDCA that are intended for “man” (intended for humans) and excludes from the section 201(h) definition the devices that are intended for “other animals.”

There is no support in the statute, or in either the legislative history or the Joint Committee on Taxation’s General Explanation (Joint Committee on Taxation General Explanation of Tax Legislation Enacted in the 111th Congress (JCS-2-11), March 2011, at 365-367) (JCT General Explanation) for the proposition that Congress included the statutory phrase “intended for humans” in section 4191(b) to distinguish between devices defined in section 201(h) of the FFDCA that are intended for use directly on patients or directly in patient care from other devices defined in section 201(h) of the FFDCA that are otherwise used in human medicine. Accordingly, the final regulations do not adopt this suggestion.

One commenter stated that the listing requirement is insufficient to distinguish medical devices for human use from those intended for use in veterinary medicine for purposes of applying the medical device excise tax. The commenter suggested that subjecting devices to the medical device excise tax because the device is listed with the FDA under section 510(j) of the FFDCA disadvantages certain manufacturers. Specifically, the commenter noted that medical device manufacturers selling devices for both human use and veterinary use must pay the excise tax on sales into the veterinary market. The commenter requested that the final regulations provide that devices that are labeled “not for human use” or “veterinary use only” are not taxable medical devices.

The definition of a device in section 201(h) of the FFDCA includes devices used in veterinary medicine. Section 4191 limits the definition of a taxable medical device to devices described in section 201(h) of the FFDCA that are intended for humans, but does not provide that the device must be intended exclusively for humans. Under existing FDA regulations, a device intended for use exclusively in veterinary medicine is not required to be listed as a device with the FDA, whereas a device intended for use in human medicine is required to be listed as a device with the FDA even if the device may also be used in veterinary medicine. Thus, the FDA’s listing requirement effectively tracks those devices that are intended for humans within the meaning of section 4191. Accordingly, the final regulations retain the definition of a taxable medical device from the proposed regulations. Therefore, a device defined in section 201(h) of the FFDCA that is intended for humans means a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements. Because devices that are intended for use exclusively in veterinary medicine are not listed as devices under section 510(j) of the FFDCA and 21 CFR part 807, they are not taxable medical devices within the meaning of section 4191.

The IRS and the Treasury Department received public comments and several informal inquiries on dual use devices. These comments suggested that the sale of a device defined in section 201(h) of the FFDCA that is listed as a device with the FDA under 21 CFR part 807 but that is used for a non-medical purpose should not be subject to the medical device excise tax. One commenter recommended that the sale of a taxable medical device be exempt where the manufacturer or importer can provide evidence that the product was purchased specifically for use in non-medical applications.

One commenter noted that because it sells directly to the end user and installs its devices at the end user’s facilities, it can easily identify when it sells a device for a non-medical purpose, as opposed to a medical purpose. The commenter also noted that it must list a device with the FDA even if it makes only some sales of that device for a medical purpose. Accordingly, all of the commenter’s sales will be subject to tax, while sales of the same device by competitors who sell the device only for non-medical purposes, and thus do not have to list their devices with the FDA, will not be subject to tax.

The final regulations do not adopt the commenters’ suggestions. The language of section 4191 does not limit the definition of a taxable medical device to a device that is intended exclusively for medical purposes. Whether or not a given device is a taxable medical device depends upon whether it is a device defined in section 201(h) of the FFDCA. Although section 4191 provides a number of exemptions, the statute does not provide an exemption based on whether a given end user intends to use a particular device for a medical purpose or a non-medical purpose.

One commenter asked that the final regulations clarify that Humanitarian Use Devices (HUDs) for which the FDA has approved a Humanitarian Device Exemption (HDE) are exempt from the medical device excise tax.

A HUD is a device within the meaning of section 201(h) of the FFDCA that is intended to benefit patients by treating or diagnosing a disease or condition that affects or is manifested in fewer than 4,000 individuals in the United States per year. 21 CFR 814.3(n). A manufacturer must obtain an approved HDE from the FDA to market a HUD. HUDs that are marketed under an HDE exemption are not exempt from the FDA’s listing requirements.

There is no statutory basis for excluding HUDs from the definition of taxable medical device. Therefore, the final regulations do not distinguish HUDs from other taxable medical devices, and a HUD that is marketed under an HDE exemption is a taxable medical device unless it falls within one of the statutory exemptions to the tax in section 4191(b)(2), such as the retail exemption.

Two commenters asked that the final regulations provide that sales of software upgrades are not taxable. One commenter noted that software upgrades should not be subject to the medical device excise tax where the software itself is not listed but is merely a component part of a listed device. A second commenter suggested that the final regulations should differentiate between a listed software product and software updates.

Under the final regulations, a taxable medical device is a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807. Accordingly, software and software updates that are not required to be separately listed with the FDA do not fall within the definition of a taxable medical device, and sales of such software and software updates are not subject to the tax.

Two commenters objected to the rule in the proposed regulations that deems a device to have been listed on the date the FDA provides written notice to the manufacturer or importer that corrective action with respect to listing is required. One commenter suggested that the rule be clarified so that a device is not deemed to be listed until the FDA delivers final written notice to the manufacturer or importer that corrective action with respect to listing is required.

The final regulations do not adopt this suggestion. If the FDA initially notifies a manufacturer that corrective action with respect to listing is required but later determines that the device is not required to be listed, a credit or refund may be available for tax paid on sales of the device during the intervening period. See section 6416(a) and the regulations under section 6416(a) for rules regarding the requirements for filing a claim for credit or refund.

The IRS received several informal inquiries on the tax consequences of listing a product as a device with the FDA when the FDA does not require the product to be listed.

If a manufacturer lists a device with the FDA, but the device was not required to be listed, a credit or refund may be available for tax paid on sales of the device once the device has been de-listed. See section 6416(a) and the regulations under section 6416(a) for rules regarding the requirements for filing a claim for credit or refund.

Section 4191(b)(2) provides that the term taxable medical device does not include eyeglasses, contact lenses, hearing aids, and any other medical device determined by the Secretary to be of a type that is generally purchased by the general public at retail for individual use (the retail exemption).

The proposed regulations provide a facts and circumstances approach to evaluating whether a medical device is of a type that is generally purchased by the general public at retail for individual use. Under the proposed regulations, a device is considered to be of a type generally purchased by the general public at retail for individual use if (i) the device is regularly available for purchase and use by individual consumers who are not medical professionals, and (ii) the device’s design demonstrates that it is not primarily intended for use in a medical institution or office, or by medical professionals.

The proposed regulations provide a non-exclusive list of factors to be considered in determining whether a device is regularly available for purchase and use by individual consumers who are not medical professionals. Those factors are (i) whether consumers who are not medical professionals can purchase the device through retail businesses that also sell items other than medical devices, including drug stores, supermarkets, and similar vendors; (ii) whether consumers who are not medical professionals can safely and effectively use the device for its intended medical purpose with minimal or no training from a medical professional; and (iii) whether the device is classified by the FDA under Subpart D of 21 CFR part 890 (Physical Medicine Devices) (referred to collectively herein as the “positive factors”).

The proposed regulations also provide a non-exclusive list of factors to be considered in determining whether the design of a device demonstrates that it is primarily intended for use in a medical institution or office, or by medical professionals, and therefore not intended for purchase and use by individual consumers. The factors are (i) whether the device generally must be implanted, inserted, operated, or otherwise administered by a medical professional; (ii) whether the cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing expenditure that is not affordable for the average consumer; (iii) whether the device is a Class III device under the FDA system of classification; (iv) whether the device is classified by the FDA under certain enumerated parts or subparts of 21 CFR; and (v) whether the device qualifies as durable medical equipment (DME), prosthetics, orthotics, and supplies (collectively, DMEPOS) for which payment is available exclusively on a rental basis under the Medicare Part B payment rules and is an “item requiring frequent and substantial servicing” as defined in 42 CFR 414.222 (referred to collectively herein as the “negative factors”).

To provide greater certainty, the proposed regulations also include a safe harbor provision that identifies certain categories of medical devices that the IRS and the Treasury Department have determined fall within the retail exemption. The safe harbor includes (i) devices that are identified in the FDA’s IVD Home Use Lab Tests (Over-the-Counter Tests) database, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfIVD/Search.cfm; (ii) devices described as “OTC” or “over the counter” devices in the relevant FDA classification regulation heading; and (iii) devices that are described as “OTC” or “over the counter” devices in the FDA’s product code name, the FDA’s device classification name, or the “classification name” field in the FDA’s device registration and listing database, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfrl/rl.cfm. The safe harbor also includes devices that qualify as DMEPOS (as described in Subpart C of 42 CFR part 414 (Parenteral and Enteral Nutrition) and Subpart D of 42 CFR part 414 (Durable Medical Equipment and Prosthetic and Orthotic Devices)) for which payment is available on a purchase basis under Medicare Part B payment rules (in accordance with the fee schedule published by Centers for Medicare and Medicaid Services (CMS)), and are (i) “prosthetic and orthotic devices,” as defined in 42 CFR 414.202, that do not require implantation or insertion by a medical professional; (ii) “parenteral and enteral nutrients, equipment, and supplies” as defined in 42 CFR 411.351 and described in 42 CFR 414.102(b); (iii) “customized items” as described in 42 CFR 414.224; (iv) “therapeutic shoes,” as described in 42 CFR 414.228(c); or (v) supplies necessary for the effective use of DME, as described in section 110.3 of chapter 15 of the Medicare Benefit Policy Manual (Centers for Medicare and Medicaid Studies Publication 100-02).

One commenter asked that the regulations clarify that the mere fact that a particular device is sold for use in medical offices and institutions is not determinative of whether the device falls within the retail exemption.

As the regulations make clear, whether or not a device falls within the retail exemption is based on all relevant facts and circumstances. Therefore, the mere fact that an individual device is sold for use in a professional setting is not determinative of whether that type of device falls within the retail exemption.

Several commenters requested that the final regulations confirm that the factors enumerated in the facts and circumstances test for the retail exemption are non-exclusive, and that other factors may also be relevant in determining whether a particular device qualifies for the retail exemption. Commenters also asked for clarification that a device need not meet every positive factor, and that the fact that a device meets a negative factor is not determinative of whether a device qualifies for the retail exemption.

The final regulations retain the facts and circumstances approach to determining whether a particular device falls within the retail exemption. The facts and circumstances approach requires a balancing of factors enumerated in §48.4191-2(b)(2). No one factor is determinative. Thus, a device may qualify for the retail exemption without meeting all of the positive factors listed under paragraph §48.4191-2(b)(2)(i). Additionally, a device may qualify for the retail exemption even if it meets one or more negative factors under paragraph §48.4191-2(b)(2)(ii).

Accordingly, the final regulations state that there may be facts and circumstances that are relevant in evaluating whether a device is of a type generally purchased by the general public at retail for individual use in addition to those described as factors in §48.4191-2(b)(2)(i) and (ii). In addition, the final regulations include seven additional examples that illustrate the process for determining whether a device falls within the retail exemption, including examples that illustrate the balancing of different factors for a particular device.

Several commenters suggested that internet sales should be included in the factor described in §48.4191-2(b)(2)(i)(A) that looks to whether consumers who are not medical professionals can purchase the device at certain retail businesses. Other commenters suggested that the fact that consumers who are not medical professionals can purchase a device over the internet should be a factor that indicates that a device is “regularly available for purchase and use by individual consumers,” regardless of whether the internet site is associated with a bricks and mortar store.

Several commenters also suggested that retail sales should include those made over the telephone.

In addition, several commenters suggested that the retail businesses identified in §48.4191-2(b)(2)(i)(A) should explicitly include medical supply stores and retailers that primarily sell medical devices (for example, specialty medical stores).

The final regulations adopt all of these suggestions. Under the final regulations, the factor in §48.4191-2(b)(2)(i)(A) provides that consumers who are not medical professionals can purchase the device in person, over the telephone, or over the internet, through retail businesses such as drug stores, supermarkets, or medical supply stores and retailers that primarily sell medical devices (for example, specialty medical stores, DMEPOS suppliers, and similar vendors).

One commenter requested that final regulations remove the factor that looks to whether consumers who are not medical professionals can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional. The commenter reasoned that many taxable medical devices that would otherwise qualify for the retail exemption require at least some basic level of training. The commenter then noted that the suggestion that training would cause a taxable medical device to no longer qualify for the retail exemption is not appropriate.

The final regulations do not adopt the commenter’s suggestion. The IRS and the Treasury Department believe that whether more than minimal training from a medical professional is required to safely and effectively use a device is a relevant consideration. At the same time, however, the factor that considers training is only one of many factors to be considered in determining whether a device falls within the retail exemption, and it is possible that a device could qualify for the retail exemption even if it does not satisfy this factor.

One commenter requested clarification that the phrase “administered by a medical professional” in the factor described in §48.4191-2(b)(2)(ii)(A) does not include the initial and periodic fitting or adjustment with respect to an orthotic or prosthetic device that is not implanted.

The final regulations provide a safe harbor for certain devices that fall under the retail exemption. Prosthetic and orthotic devices, as defined in 42 CFR 414.202, that do not require implantation or insertion by a medical professional, fall under the retail exemption safe harbor described in §48.4191-2(b)(2)(iii)(D)(1). Accordingly, prosthetic and orthotic devices within the meaning of 42 CFR 414.202 that do not require implantation or insertion by a medical professional are considered to be of a type generally purchased by the general public at retail for individual use, without regard to whether they require initial or periodic fitting or adjustment.

A prosthetic or orthotic device that is not in the safe harbor may qualify for the retail exemption based on an application of the facts and circumstances test. The final regulations include an example of a prosthetic device that falls within the retail exemption.

Two commenters suggested that the factor enumerated in §48.4191-2(b)(2)(ii)(B) that considers a device’s cost should not be included in the final regulations. One commenter stated that whether or not a device is affordable depends on the consumer’s insurance coverage and cost alternatives.

The final regulations do not adopt this suggestion. The final regulations take a facts and circumstances approach to the retail exemption. The facts and circumstances test is comprised of a number of non-exclusive factors; each factor is one of several to be considered in determining whether a device falls within the retail exemption. Devices used in hospitals, doctors offices and other medical institutions, such as x-ray machines, magnetic resonance imaging (MRI) systems, and computed tomography (CT scan) or computed axial tomography (CAT scan) equipment, would likely be prohibitively expensive for an average individual user. Accordingly, the factor that considers cost is meaningful in determining whether a type of device is primarily for use in a medical institution or office or by a medical professional.

Several commenters requested that the final regulations not include classification as a Class III device as a factor, because the JCT General Explanation noted that the retail exemption is not limited by device class.

The final regulations do not adopt this suggestion. Although the JCT General Explanation notes that the retail exemption is not limited by device class, it does not state that classification in Class I, Class II, or Class III is irrelevant to the determination of whether a device falls within the retail exemption. The IRS and the Treasury Department, in consultation with FDA, have determined that the vast majority of Class III types of devices are not devices that are of a type generally purchased by the general public at retail for individual use. Accordingly, the factor that considers whether a device is a Class III type of device is meaningful in determining whether a type of device is primarily for use in a medical institution or office or by a medical professional.

Two commenters suggested that 21 CFR part 868 (Anesthesiology Devices) should not be included in the list of FDA classification categories in §48.4191-2(b)(2)(ii)(D) that suggest that a device is primarily for use in a medical institution or office or by a medical professional. The commenters noted that certain portable oxygen systems are classified in 21 CFR part 868.

One commenter requested that 21 CFR part 876 (Gastroenterology-Urology Devices) be removed from the list of FDA classification categories in §48.4191-2(b)(2)(ii)(D) because 21 CFR part 876 contains many devices, such as ostomy supplies, that would otherwise fall within the retail exemption.

The final regulations do not remove any FDA classification categories from those enumerated in §48.4191-2(b)(2)(ii)(D). The IRS and the Treasury Department have determined, after consultation with the FDA, that the overwhelming majority of devices that fall within these regulatory categories are not of a type generally purchased by the general public at retail for individual use. Further, classification in one of the enumerated parts or subparts is not determinative of whether a device falls within the retail exemption. Devices in these categories must be evaluated in light of all relevant facts and circumstances.

The final regulations include an example that weighs the facts and circumstances with respect to a portable oxygen concentrator, including the fact that it is a device under 21 CFR part 868, and concludes that the portable oxygen concentrator falls within the retail exemption. The final regulations also include an example that illustrates that a urinary ileostomy bag, which is a device under 21 CFR part 876, is included in the safe harbor set forth in §48.4191-2(b)(2)(iii)(D)(1).

Several commenters suggested that the final regulations include a factor that considers whether a device’s packaging and labeling suggests that the device is intended for use by individuals who are not medical professionals. One commenter noted that product labeling that is easy for someone who is not a medical or health care professional to understand suggests that the device is regularly available for purchase and use by individual consumers who are not medical professionals.

The final regulations do not adopt this suggestion. Device manufacturers determine the packaging and labeling of a device. Manufacturers may package and label a device in a consumer-friendly manner, even if the device is of a type that is primarily intended for use in a medical institution or office, or by medical professionals. Therefore, the IRS and the Treasury Department have determined that a device’s packaging and labeling are not instructive as to whether a device is generally purchased by the general public at retail for individual use.

One commenter requested that the final regulations include a factor that looks to whether documents submitted to the FDA, such as a Premarket Notification (510(k)) or application for Premarket Approval (PMA), state that the device is intended for individual use.

The final regulations do not adopt this suggestion. After consultation with the FDA, the IRS and the Treasury Department have determined that documents submitted to the FDA, such as 510(k) documents and PMA applications, are not consistently reliable indicators of whether a device is of a type that is generally purchased by the general public for individual use.

One commenter suggested that the retail exemption safe harbor defined in §48.4191-2(b)(2)(iii)(D) be expanded to include all devices that fall under the definition of DMEPOS in 42 CFR 414.202.

The final regulations do not adopt this suggestion. However, devices that fall within the definition of DMEPOS that are not included in the retail exemption safe harbor in §48.4191-2(b)(2)(iii)(D), such as oxygen equipment and other rental durable medical equipment devices, may qualify for the retail exemption by application of the facts and circumstances test. The final regulations provide an example that evaluates whether a portable oxygen concentrator falls within the retail exemption based upon an evaluation of such a device under the facts and circumstances test.

One commenter suggested that the safe harbor defined in §48.4191-2(b)(2)(iii)(D) be expanded to include “capped rental” devices, within the meaning of 42 CFR 414.229, for which title transfers to the individual user (the Medicare beneficiary) at the end of the rental term.

The category of capped rental DME consists of DME that is not subject to the payment provisions set forth in 42 CFR 414.220 through 42 CFR 414.228. Medicare pays for capped rental DME other than complex rehabilitation power-driven wheelchairs on a rental basis. See 42 CFR 414.229. Payment is made on a rental basis, not to exceed a period of continuous use of longer than 13 months. On the first day after 13 continuous rental months during which payment is made, the supplier must transfer title to the equipment to the Medicare beneficiary. See 42 CFR 414.229(f)(2). Medicare also pays for complex rehabilitation power-driven wheelchairs on a capped rental or lump-sum purchase basis. The supplier of the complex rehabilitation power-driven wheelchair must offer Medicare beneficiaries the option to purchase the complex rehabilitation power-driven wheelchair at the time the equipment is initially furnished. See 42 CFR 414.229(h). If the beneficiary does not elect to purchase the complex rehabilitation power-driven wheelchair, payment is made on a capped rental basis in accordance with the rules described above for other capped rental DME. See 42 CFR 414.229(f).

The IRS and the Treasury Department, in consultation with the Center for Medicare and Medicaid Services (CMS), have determined that, in most instances, the rental period of a capped rental device terminates before the transfer of title. Further, information on the capped rental devices for which title has transferred to the individual user does not suggest a pattern of title transfer for specific types of devices. Accordingly, capped rental devices cannot be categorically said to qualify as devices that are generally purchased by the general public at retail for individual use. They may, however, qualify for the retail exemption by an application of the facts and circumstances test. Therefore, safe harbor treatment is not appropriate for capped rental devices, and the final regulations do not adopt the commenter’s suggestion.

One commenter noted that 42 CFR 414.202 excludes from the definition of prosthetic and orthotic devices medical supplies such as catheters, catheter supplies, ostomy bags, and supplies related to ostomy care that are furnished by a Home Health Agency (HHA) as part of home health services under 42 CFR 409.40(e). The commenter asked that the final regulations address the significance, if any, of the exclusion of products furnished by an HHA on the breadth of the safe harbor in §48.4191-2(b)(2)(iii)(D)(1) for prosthetic and orthotic devices as defined in 42 CFR 414.202.

The IRS and the Treasury Department, in consultation with CMS, have determined that the HHA language in 42 CFR 414.202 is a provision that clarifies that when individual devices are furnished by an HHA, they are payable as home health services under 42 CFR 409 subpart E. The HHA language in 42 CFR 414.202 does not exclude any type of device from the definition of prosthetic and orthotic devices and, therefore, has no impact on the retail exemption safe harbor in §48.4191-2(b)(2)(iii)(D).

Section 4191(b)(2) provides that the term taxable medical device does not include eyeglasses, contact lenses, hearing aids, and any other medical device determined by the Secretary to be of a type that is generally purchased by the general public at retail for individual use. Several commenters requested that final regulations define a “type” of device to include all devices that are categorized in the same FDA product code.

The final regulations do not adopt this suggestion. In consultation with the FDA, the IRS and the Treasury Department determined that the breadth and variety of devices within a particular product code and across product codes can vary greatly. Therefore, the product code designation is generally too broad to be useful in determining which devices fall within the retail exemption.

One commenter noted that the FDA requires some components of devices to be separately listed as devices. The commenter suggested that the final regulations exempt listed components that are ultimately used as component parts of a device that is exempt under section 4191(b) and §48.4191-2(b), such as component parts of certain completed prosthetic or orthotic devices.

The safe harbor provision in §48.4191-2(b)(2)(iii)(D) includes some components of prosthetic and orthotic devices. The IRS and the Treasury Department request public comments to help identify listed components of devices that are exempt under section 4191(b) and §48.4191-2(b) that are not included in a safe harbor or that do not otherwise fall within the retail exemption by an application of the facts and circumstances test.

Several commenters suggested that dental devices that are customized for an individual patient, such as crowns, bridges, and braces, should qualify for the retail exemption because they are sold directly to individual consumers. Further, one commenter noted that the factor described in §48.4191-2(b)(2)(ii)(A), which considers whether a device “generally must be implanted, inserted, operated, or otherwise administered by a medical professional,” creates an unnecessary distinction between devices that an individual can insert and remove, and devices that a dentist must embed or affix within the patient’s mouth.

The final regulations do not create a special rule for dental devices. The final regulations take a facts and circumstances approach to the retail exemption. The facts and circumstances test is comprised of a number of non-exclusive factors. A customized dental device will qualify for the retail exemption if, based on the totality of the facts and circumstances, the device is of a type that is generally purchased by the general public at retail for individual use.

Combination products are therapeutic and diagnostic products that combine drugs, devices, and/or biological products. See 21 CFR 3.2(e). The proposed regulations tie the definition of taxable medical device to the FDA’s listing requirements for devices. Therefore, under the proposed regulations, a combination product that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 and that does not fall under a statutory exemption, such as the retail exemption, is subject to the medical device excise tax.

Several commenters requested that the final regulations provide that a manufacturer will not be required to pay the medical device excise tax on a combination product that is taken into account in computing the branded prescription drug (BPD) fee enacted under section 9008 of the ACA.

The final regulations do not adopt this suggestion. The ACA enacted both the medical device excise tax and the BPD fee, but provided no coordination between the provisions. Therefore, there is no statutory basis for providing an exclusion from the tax under section 4191 for a combination product with both a device component and a drug component, even if the combination product is taken into account for purposes of computing the BPD fee. Moreover, the comments did not raise any likely scenarios in which both the BPD fee and the medical device excise tax apply to the same product. Based on consultation with the FDA, the IRS and the Treasury Department anticipate that few, if any, combination products will be subject to both the medical device excise tax and the BPD fee. Accordingly, under the final regulations, a combination product that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 is a taxable medical device.

The ACA added section 4191 to chapter 32, subtitle D of the Code, which relates to taxes imposed on the sales of taxable articles by manufacturers, producers, and importers (commonly referred to as “manufacturers excise taxes”). Accordingly, the preamble to the proposed regulations states that the existing chapter 32 rules apply to the medical device excise tax.

One commenter requested that the final regulations include a presumption that a manufacturer who lists a device with the FDA is the manufacturer of the device for excise tax purposes.

The final regulations do not adopt this suggestion. There are longstanding rules with respect to the definition of “manufacturer” or “importer” for chapter 32 purposes. These rules are contained in statutory and regulatory provisions, and they have been developed further through other published guidance and case law. Therefore, the definitions of manufacturer and importer under chapter 32 apply to section 4191; whether a person is considered a manufacturer or importer for FDA purposes is not relevant.

Numerous commenters suggested that the IRS apply the constructive sale price rules with flexibility and sensitivity to data limitations that medical device companies face. The IRS and the Treasury Department recognize that the medical device industry will likely face some implementation issues when the medical device excise tax goes into effect on January 1, 2013, and the IRS intends to work with stakeholders on compliance-related issues, such as the determination of price.

Numerous commenters requested that the final regulations extend the principle of Revenue Ruling 80-273, 1980-2 C.B. 315, to taxable medical devices. Rev. Rul. 80-273 holds that when a manufacturer or importer sells a taxable article directly to an unrelated end user at retail, the excise tax may be based on a sale price of 75 percent of the retail sale price, after any adjustments under section 4216(a), such as for containers, packing, and transportation charges. The holding applies only to the excise taxes imposed under the Code sections explicitly listed in the revenue ruling. Commenters also requested that the final regulations clarify that sales “at retail” in the medical device context include sales to hospitals and other medical service providers. Although the final regulations do not adopt this suggestion, the IRS and the Treasury Department will issue separate interim guidance along with these regulations to address sale price issues and have considered these comments in the context of such guidance.

One commenter requested that the final regulations provide that taxpayers can use transfer pricing under section 482 to determine the taxable sale price of a taxable medical device.

The final regulations do not adopt the commenter’s suggestion. Because the standards are not the same under the section 482 regulations and section 4216, an arm’s length result determined under section 482 is not an appropriate proxy for the constructive sale price or fair market price under section 4216. While in certain circumstances facts used to support a transfer price for purposes of section 482 may be relevant to determining the sale price under section 4216, transfer pricing documentation or studies developed for purposes of section 482 or section 6662(e) will not be conclusive.

Finally, the IRS received several informal inquiries about whether the 2.3% medical device excise tax may be excluded from the sale price upon which the medical device excise tax is imposed. Section 4216(a) provides that in determining the price for which an article is sold there should be excluded the amount of tax imposed, whether or not stated as a separate charge. See section 4216(a) and §48.4216(a)-2(a) of the Manufacturers and Retailers Excise Tax Regulations for the rules regarding the exclusion of tax from sale price.

Several commenters requested transition relief for installment sales and leases of taxable medical devices where the contract is entered into prior to the effective date of the tax on January 1, 2013.

The final regulations do not provide transition relief for all contracts entered into prior to January 1, 2013. However, the final regulations do provide transition relief for contracts entered into prior to March 30, 2010, the date the ACA was enacted. More specifically, the final regulations provide that payments made on or after January 1, 2013, pursuant to a written binding contract for the lease, installment sale, or sale on credit of a taxable medical device that was in effect prior to March 30, 2010, are not subject to tax under section 4191 unless the contract is materially modified on or after March 30, 2010. For purposes of this transition relief, a material modification includes only a modification that materially affects the property to be provided under the contract, the terms of payment under the contract, or the amount payable under the contract. A material modification does not include a modification to the contract required by applicable Federal, State, or local law.

Payments made pursuant to a contract that was entered into on or after March 30, 2010, are subject to tax under section 4191 and the existing provisions of sections 4216(c) and 4217, and §§48.4216(c)-1 and 48.4217-2 apply.

Several commenters requested that the final regulations specifically provide that the following are not taxable uses where the manufacturer receives no direct benefit in the form of money, services, or other property: (i) demonstration products used for health care professionals and product awareness, such as samples used to demonstrate the type of device to be implanted in a patient; (ii) evaluation products provided to help health care professionals determine whether and when to use, order, purchase, or recommend the device; (iii) loaned devices to facilitate procedures utilizing a sold taxable medical device, such as instruments specifically designed to implant a particular orthopedic joint; (iv) testing and development products; and (v) product donations and charitable contributions.

The final regulations do not adopt this suggestion because it is necessary to have consistent rules for all manufacturers excise taxes. Section 4218 generally imposes a tax on certain uses of an article by the article’s manufacturer. In general, under §48.4218-1(b), if the manufacturer of a taxable article uses the article for any purpose other than in the manufacture of another taxable article, then the manufacturer is liable for tax on the article as if the manufacturer had sold it.

With regard to demonstration products, the provision or use of a taxable medical device as a demonstration product may constitute a taxable use, depending on the facts and circumstances of the arrangement. See Rev. Rul. 60-290, 1960-2 C.B. 331, and Rev. Rul. 72-563, 1972-1 CB 568.

With regard to evaluation and testing products, Rev. Rul. 76-119, 1976-1 C.B. 345, holds that if a manufacturer uses a taxable article in the testing of another article of its own manufacture, the use of the taxable article is not a taxable use.

The existing chapter 32 rules do not specifically address whether a donation of a taxable article to charity constitutes a taxable use under section 4218. However, the IRS and the Treasury Department will issue separate interim guidance along with these regulations to address donations of taxable medical devices.

Several commenters requested that the final regulations provide manufacturers with the option of excluding from the sale price a reasonable estimate of purchase price adjustments for rebates, with a later true-up based on the actual rebate amounts. These commenters suggest that manufacturers have reliable historical data on past rebate performance, so they are able to project rebate amounts with reasonable certainty.

The final regulations do not adopt this suggestion. Section 48.4216(a)-3(c) provides that a manufacturer may take a rebate into account in determining sale price only to the extent the rebate is made prior to the close of the quarter during which the sale associated with the rebate is made. In addition, if the manufacturer subsequently allows a rebate for taxable articles on which tax has been paid, the manufacturer may make a claim for credit or refund of that portion of the tax that is proportionate to the part of the price that is rebated.

One commenter requested clarification with respect to the taxability of software that is sold together with services and/or maintenance contracts.

Section 48.4216(a)-1(e) provides that where a taxable article and a nontaxable article are sold by the manufacturer as a unit, the tax attaches to that portion of the manufacturer’s sale price of the unit that is properly allocable to the taxable article. Because the definition of a taxable medical device is tied to the FDA’s device listing requirements, if the software and service bundle is not listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 (in other words, if the entire bundle is not a taxable medical device), the medical device excise tax attaches only to the sale of the devices within the bundle that are listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807.

Several commenters requested guidance on how the medical device excise tax will apply to sales of refurbished and remanufactured medical devices. One commenter requested that the definition of manufacturer in §48.0-2(a)(4) be clarified to ensure that repairing, refurbishing, or rebuilding an already taxed medical device does not create another taxable medical device and is not considered manufacturing.

The final regulations do not adopt these suggestions. Under existing chapter 32 rules, remanufacturing or refurbishing constitutes manufacture if the remanufacturing or refurbishing process produces a new and different taxable article. See Rev. Rul. 86-130, 1986-2 C.B. 179, Rev. Rul. 83-149, 1983-2 C.B. 186, Rev. Rul. 68-40, 1968-1 C.B. 452, Rev. Rul. 64-202, 1964-2 C.B .431, and Rev. Rul. 58-586, 1958-2 C.B. 806. If a remanufacturer or refurbisher produces a new and different taxable article, the tax is imposed upon the sale or use of the remanufactured or refurbished article.

Two commenters suggested that parts used to replace an existing part or component in a taxable medical device should not be subject to the tax, even if the part or component is listed separately as a device with the FDA.

The final regulations do not adopt this suggestion. Under existing law, if a taxable article is returned to the manufacturer under a warranty and the manufacturer provides a replacement article free or at a reduced price, the tax on the replacement article is computed on the actual amount, if any, paid to the manufacturer for the replacement article. See §48.4216(a)-3(b) and Rev. Rul. 75-272, 1975-2 C.B. 421.

With regard to replacements that are not made under warranty, replacement parts that are listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 are taxable medical devices, and their sale by the manufacturer is generally subject to tax.

One commenter requested clarification on whether the licensing of software that is a taxable medical device is a taxable event.

Under existing chapter 32 rules, the manufacturers excise tax generally attaches upon the sale or use of a taxable article by the manufacturer. The lease of a taxable article by the manufacturer is considered a sale. Neither the existing chapter 32 rules nor the final regulations address the issue of whether the licensing of a taxable article is a taxable event. However, the IRS and the Treasury Department will issue separate interim guidance along with these regulations to address this issue.

The medical device excise tax is reported on Form 720, Quarterly Federal Excise Tax Return. Several commenters requested that the IRS and the Treasury Department permit manufacturers and importers of taxable medical devices who are members of a affiliated group for income tax purposes to file Form 720 on a consolidated basis.

The final regulations do not adopt this suggestion. Section 1501 provides generally that an affiliated group of corporations shall have the privilege of making a consolidated return with respect to the income tax imposed by chapter 1 for the taxable year in lieu of separate returns. There is no similar provision that applies to excise tax. Thus, the privilege to file consolidated returns applies only to income tax returns and not to excise tax returns. Accordingly, for excise tax purposes, each business unit that has or is required to have a separate employer identification number is treated as a separate person with separate tax liability, and each such business unit must file a separate Form 720.

Registration through the Form 637 application process is necessary to effectuate tax-free sales. Several commenters requested that final regulations allow one entity in an affiliated group to register on behalf of the group with respect to intra-group sales.

The final regulations do not adopt this suggestion. The IRS and the Treasury Department have determined that it is necessary in the interest of effective tax administration to require each entity with a separate employer identification number to apply for registration under Application for Registration (For Certain Excise Tax Activities) (Form 637) to verify the activity for which the entity seeks registration. Once an entity is registered for a particular activity, the registration does not expire. Therefore, for most entities, the initial application process is the extent of the entity’s obligation with respect to registration.

One commenter suggested that the quarterly reporting requirement is unduly burdensome on small medical device manufacturers. The commenter suggested that the final regulations initially require only annual reporting for small medical device manufacturers to enable those taxpayers to become familiar with the excise tax rules and implement the proper accounting practices and procedures.

The final regulations do not adopt this suggestion. The ACA added section 4191 to chapter 32. Therefore, the existing rules governing chapter 32 apply. Manufacturers excise taxes, including the medical device excise tax, are reported on Form 720. In general, Form 720 must be filed on a quarterly basis. For more information about reporting requirements, see §40.6011(a)-1(a).

Several commenters suggested that the semimonthly deposit requirements under section 6302 are burdensome to medical device manufacturers because device manufacturers have little or no experience with returning and paying federal excise taxes and because manufacturers need time to develop their systems to implement these final regulations. Some of those commenters requested that final regulations specifically carve out taxable medical devices from the deposit rules set forth in section 6302 and the regulations thereunder. Other commenters requested that the IRS and the Treasury Department waive on a reasonable cause basis any tax penalty applicable to the failure to deposit the correct amount of tax.

The final regulations do not carve taxable medical devices out of the semimonthly deposit rules. Therefore, medical device manufacturers will generally be required to make semimonthly deposits of tax unless the manufacturer’s net tax liability does not exceed $2,500 for the quarter. See section 6302 and the regulations thereunder for the rules regarding semimonthly deposits.

The IRS and the Treasury Department recognize that the application of the manufacturers excise tax rules, particularly with regard to sale price, may present certain challenges. The IRS and the Treasury Department further recognize that manufacturers and importers in the medical device industry may not have prior experience complying with the rules regarding semimonthly deposits. Given that the tax goes into effect on January 1, 2013, the IRS and the Treasury Department will issue separate interim guidance along with these regulations that addresses penalties under section 6656.

One commenter requested that the IRS and the Treasury Department amend the regulations under section 7701 to allow entities that are disregarded as separate from their owners for income tax purposes to be similarly disregarded for excise tax purposes.

The final regulations do not adopt this suggestion because it is necessary to have a consistent rule for all excise taxes. Specifically, §1.1361-4(a)(8) and §301.7701-2(c)(2)(v) treat a qualified subchapter S subsidiary and a single-owner eligible entity that is disregarded as an entity separate from its owner under §301.7701-2 as a separate entity for purposes of excise taxes imposed by chapter 32 of the Code. These rules were adopted because of the difficulties that arise from the interaction of the disregarded entity rules and the federal excise tax rules. For example, the manufacturers excise tax rules rely on state law, rather than Federal law, to determine attachment of a tax. See §48.0-2(b) (providing that excise taxes attach when title to an article passes to the purchaser, which is based on the laws of the local jurisdiction where the sale is made in the absence of express intention of the parties to the sale). Accordingly, a Form 720 reporting the medical device excise tax imposed on sales of taxable medical devices by the manufacturer or importer after December 31, 2012, must be filed under the name and employer identification number of the entity rather than under the name and EIN of the disregarded entity’s owner.

Several commenters highlighted the compliance challenges associated with implementation of the medical device excise tax. These commenters requested that the IRS and the Treasury Department temporarily waive all tax penalties relating to the filing of Form 720.

The final regulations do not adopt this suggestion. Section 6651(a) imposes penalties for failure to file any return required under subchapter A of chapter 61 and for failure to pay the amount shown as tax on any such return, unless it is shown that the failure is due to reasonable cause and not willful neglect. Under §301.6651-1(c), a taxpayer may avoid penalties under section 6651 for the failure to file a tax return or pay tax if the taxpayer makes an affirmative showing of all facts necessary to establish a reasonable cause for the taxpayer’s failure to file a return or pay tax on time. If the taxpayer exercised ordinary business care and prudence but was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause. A failure to pay will be considered to be due to a reasonable cause to the extent the taxpayer has made a satisfactory showing that the taxpayer exercised ordinary business care and prudence in providing for payment of the taxpayer’s tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship (as described in §1.6161-1(b)) if the taxpayer paid on the due date.

Section 6662 imposes an accuracy-related penalty for, among other things, negligence or disregard of the rules or regulations. Under section 6662(c), the term “negligence” includes any failure to make a reasonable attempt to comply with the provisions of the Code, and the term “disregard” includes any careless, reckless, or intentional disregard.

The IRS and the Treasury Department recognize that the application of the manufacturers excise tax rules may present certain implementation challenges. The IRS and the Treasury Department also recognize that manufacturers and importers in the medical device industry may not have prior experience with filing a Form 720. However, the IRS and the Treasury Department believe that the existing reasonable cause provisions under section 6651(a) and §301.6651-1(c) and the negligence standard in section 6662 provide taxpayers with an appropriate mechanism for relief. If a penalty is assessed under section 6651 or section 6662, the IRS encourages taxpayers to call the telephone number on the penalty notice to discuss abatement options.

Under the proposed regulations, a taxable medical device is a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807. Therefore, under the proposed regulations, a listed kit is a taxable medical device. The proposed regulations define a “kit” as a set of two or more articles packaged in a single bag, tray, or box for the convenience of the end user. In addition, the proposed regulations provide that if a kit is a taxable medical device, then the use of other taxable medical devices in the assembly of the kit constitutes “further manufacture” within the meaning of section 4221(a)(1) of the Code by the person who produces the kit.

The IRS and the Department of Treasury received numerous public comments regarding kits. Several commenters noted that taxing the kit will result in taxing items contained in the kit that, standing alone, are not taxable medical devices.

Some public comments pointed to certain FDA rules governing kits as evidence that kits should receive a different tax treatment than other devices that are listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807. The commenters suggested that kits should receive special tax treatment because many kits are not subject to FDA premarket notification requirements.

Additionally, several commenters suggested that the producer of a kit is not a “manufacturer” within the meaning of section 48.0-2(a)(4)(i). Other commenters requested that the final regulations exclude kits from the definition of “further manufacture” within the meaning of section 4221(a)(1), so that the sale of a kit is not subject to the medical device excise tax.

The final regulations do not explicitly provide that the use of other taxable medical devices in the assembly of the kit constitutes further manufacture, within the meaning of section 4221(a)(1), by the person who produces the kit. The IRS and the Treasury Department will issue separate interim guidance along with these regulations on the treatment of kits for purposes of the medical device excise tax.

Several commentators requested that the final regulations confirm that the use of a kit by a hospital or medical institution that produced the kit is not a taxable use within the meaning of section 4218.

Hospitals or medical institutions that produce kits for their own use are known as self-kitters. Self-kitters are exempt from the FDA’s registration and listing requirements. See 21 CFR 807.65(f). Therefore, under the definition of a taxable medical device in both the proposed regulations and the final regulations, a kit produced by a hospital or medical institution for its own use would not be a “taxable medical device.” Accordingly, the use of the self-produced kits by the hospital or medical institution would not be a taxable use under the rules of section 4218.

(a) Imposition of tax. Under section 4191(a), tax is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of the device. For the definition of the term taxable medical device, see §48.4191-2.

(b) Rate of tax. Tax is imposed on the sale of a taxable medical device at the rate of 2.3 percent of the price for which the device is sold. For the definition of the term price, see section 4216 and §§48.4216(a)-1 through 48.4216(e)-3.

(c) Liability for tax. The manufacturer, producer, or importer making the sale of a taxable medical device is liable for the tax imposed by section 4191(a). For rules relating to the determination of who the manufacturer, producer, or importer is for purposes of section 4191, see §48.0-2(a)(4). For the definition of the term sale, see §48.0-2(a)(5). For rules relating to the lease of an article by the manufacturer, producer, or importer, see section 4217 and §48.4217-1 through §48.4217-2. For rules relating to the use of an article by the manufacturer, producer, or importer, see section 4218 and §48.4218-1 through §48.4218-5.

(d) Procedural rules. For the procedural rules relating to section 4191, see part 40 of this chapter.

(e) Tax-free sales for further manufacture or export. For rules relating to tax-free sales of taxable medical devices for further manufacture or export, see section 4221 and §48.4221-1 through §48.4221-3.

(f) Payments made on or after January 1, 2013, pursuant to lease, installment sale, or sale on credit contracts. For rules relating to the taxability of payments made on or after January 1, 2013, pursuant to a lease, installment sale, or sale on credit contract entered into on or after March 30, 2010, see §48.4216(c)-1(e)(1). For rules relating to the taxability of payments made on or after January 1, 2013, pursuant to a lease, installment sale, or sale on credit contract entered into before March 30, 2010, see §48.4216(c)-1(e)(2).

(g) Effective/applicability date. This section applies to sales of taxable medical devices on and after January 1, 2013.

(a) Taxable medical device—(1) In general. A taxable medical device is any device, as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA), that is intended for humans. For purposes of this section, a device defined in section 201(h) of the FFDCA that is intended for humans means a device that is listed as a device with the Food and Drug Administration (FDA) under section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements.

(2) Devices that should have been listed with the FDA. If a device is not listed as a device with the FDA but the FDA determines that the device should have been listed as a device, the device will be deemed to be listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required.

(b) Exemptions—(1) Specific exemptions. The term taxable medical device does not include eyeglasses, contact lenses, and hearing aids.

(2) Retail exemption. The term taxable medical device does not include any device of a type that is generally purchased by the general public at retail for individual use (the retail exemption). A device will be considered to be of a type generally purchased by the general public at retail for individual use if it is regularly available for purchase and use by individual consumers who are not medical professionals, and if the design of the device demonstrates that it is not primarily intended for use in a medical institution or office or by a medical professional. Whether a device is of a type described in the preceding sentence is evaluated based on all the relevant facts and circumstances. Factors relevant to this evaluation are enumerated in paragraphs (b)(2)(i) and (ii) of this section. Further, there may be facts and circumstances that are relevant in evaluating whether a device is of a type generally purchased by the general public at retail for individual use in addition to those described in paragraphs (b)(2)(i) and (ii) of this section. The determination of whether a device is of a type that qualifies for the retail exemption is made based on the overall balance of factors relevant to the particular type of device. The fact that a device is of a type that requires a prescription is not a factor in the determination of whether or not the device falls under the retail exemption.

(i) Regularly available for purchase and use by individual consumers. The following factors are relevant in determining whether a device is of a type that is regularly available for purchase and use by individual consumers who are not medical professionals:

(A) Whether consumers who are not medical professionals can purchase the device in person, over the telephone, or over the internet, through retail businesses such as drug stores, supermarkets, or medical supply stores and retailers that primarily sell devices (for example, specialty medical stores, durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) suppliers and similar vendors);

(B) Whether consumers who are not medical professionals can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional; and

(C) Whether the device is classified by the FDA under Subpart D of 21 CFR part 890 (Physical Medicine Devices).

(ii) Primarily for use in a medical institution or office or by a medical professional. The following factors are relevant in determining whether a device is designed primarily for use in a medical institution or office or by a medical professional:

(A) Whether the device generally must be implanted, inserted, operated, or otherwise administered by a medical professional;

(B) Whether the cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing expenditure that is not affordable for the average individual consumer;

(C) Whether the device is a Class III device under the FDA system of classification;

(D) Whether the device is classified by the FDA under—

(1) 21 CFR part 862 (Clinical Chemistry and Clinical Toxicology Devices), 21 CFR part 864 (Hematology and Pathology Devices), 21 CFR part 866 (Immunology and Microbiology Devices), 21 CFR part 868 (Anesthesiology Devices), 21 CFR part 870 (Cardiovascular Devices), 21 CFR part 874 (Ear, Nose, and Throat Devices), 21 CFR part 876 (Gastroenterology — Urology Devices), 21 CFR part 878 (General and Plastic Surgery Devices), 21 CFR part 882 (Neurological Devices), 21 CFR part 886 (Ophthalmic Devices), 21 CFR part 888 (Orthopedic Devices), or 21 CFR part 892 (Radiology Devices);

(2) Subpart B, Subpart D, or Subpart E of 21 CFR part 872 (Dental Devices);

(3) Subpart B, Subpart C, Subpart D, Subpart E, or Subpart G of 21 CFR part 884 (Obstetrical and Gynecological Devices); or

(4) Subpart B of 21 CFR part 890 (Physical Medicine Devices); and

(E) Whether the device qualifies as durable medical equipment, prosthetics, orthotics, and supplies for which payment is available exclusively on a rental basis under the Medicare Part B payment rules, and is an “item requiring frequent and substantial servicing” as defined in 42 CFR 414.222.

(iii) Safe Harbor. The following devices will be considered to be of a type generally purchased by the general public at retail for individual use:

(A) Devices that are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests) database, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfIVD/Search.cfm.

(B) Devices that are described as “OTC” or “over the counter” devices in the relevant FDA classification regulation heading.

(C) Devices that are described as “OTC” or “over the counter” devices in the FDA’s product code name, the FDA’s device classification name, or the “classification name” field in the FDA’s device registration and listing database, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfrl/rl.cfm.

(D) Devices that qualify as durable medical equipment, prosthetics, orthotics, and supplies, as described in Subpart C of 42 CFR part 414 (Parenteral and Enteral Nutrition) and Subpart D of 42 CFR part 414 (Durable Medical Equipment and Prosthetic and Orthotic Devices), for which payment is available on a purchase basis under Medicare Part B payment rules, and are—

(1) “Prosthetic and orthotic devices,” as defined in 42 CFR 414.202, that do not require implantation or insertion by a medical professional;

(2) “Parenteral and enteral nutrients, equipment, and supplies” as defined in 42 CFR 411.351 and described in 42 CFR 414.102(b);

(3) “Customized items,” as described in 42 CFR 414.224;

(4) “Therapeutic shoes,” as described in 42 CFR 414.228(c); or

(5) Supplies necessary for the effective use of durable medical equipment (DME), as described in section 110.3 of chapter 15 of the Medicare Benefit Policy Manual (Centers for Medicare and Medicaid Studies Publication 100-02).

(iv) Examples. The following examples illustrate the rules of this paragraph (b)(2).

Example 1. X manufactures non-sterile absorbent tipped applicators. X sells the applicators to distributors Y and Z, which, in turn, sell the applicators to medical institutions and offices, medical professionals, and retail businesses. The FDA requires manufacturers of non-sterile absorbent tipped applicators to list the applicators as a device with the FDA. The applicators are classified by the FDA under 21 CFR part 880 (General Hospital and Personal Use Devices) and product code KXF.

Absorbent tipped applicators do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the absorbent tipped applicators are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals can regularly purchase the absorbent tipped applicators at drug stores, supermarkets, cosmetic supply stores or other similar businesses, and can use the applicators safely and effectively for their intended medical purpose without training from a medical professional. Further, the absorbent tipped applicators do not need to be implanted, inserted, operated, or otherwise administered by a medical professional, do not require a large investment and/or ongoing expenditure, are not a Class III device, are not classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222.

Thus, the applicators have multiple factors under paragraph (b)(2)(i) of this section that tend to show they are regularly available for purchase and use by individual consumers and none of the factors under paragraph (b)(2)(ii) of this section tend to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the applicators are devices that are of a type that are generally purchased by the general public at retail for individual use.

Example 2. X manufactures adhesive bandages. X sells the adhesive bandages to distributors Y and Z, which, in turn, sell the bandages to medical institutions and offices, medical professionals, and retail businesses. The FDA requires manufacturers of adhesive bandages to list the bandages as a device with the FDA. The adhesive bandages are classified by the FDA under 21 CFR part 880 (General Hospital and Personal Use Devices) and product code KGX.

Adhesive bandages do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the adhesive bandages are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals can regularly purchase the adhesive bandages at drug stores, supermarkets, or other similar businesses, and can use the adhesive bandages safely and effectively for their intended medical purpose without training from a medical professional. Further, the adhesive bandages do not need to be implanted, inserted, operated, or otherwise administered by a medical professional, do not require a large investment and/or ongoing expenditure, are not Class III devices, are not classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222.

Thus, the adhesive bandages have multiple factors under paragraph (b)(2)(i) of this section that tend to show they are regularly available for purchase and use by individual consumers and none of the factors under paragraph (b)(2)(ii) of this section tend to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the adhesive bandages are devices that are of a type that are generally purchased by the general public at retail for individual use.

Example 3. X manufactures snake bite suction kits. X sells the snake bite suction kits to distributors Y and Z, which, in turn, sell the kits to medical institutions and offices, medical professionals, and retail businesses. The FDA requires manufacturers of snake bite suction kits to list the kits as a device with the FDA. The FDA classifies the snake bit suction kits under 21 CFR part 880 (General Hospital and Personal Use Devices) and product code KYP.

Snake bite suction kits do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the snake bite suction kits are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals can regularly purchase the snake bite suction kits at sporting goods stores, camping stores, or other similar retail businesses, and can use the kits safely and effectively for their intended medical purpose without training from a medical professional. Further, the snake bite suction kits do not need to be implanted, inserted, operated, or otherwise administered by a medical professional, do not require a large investment and/or ongoing expenditure, are not Class III devices, are not classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222.

Thus, the snake bite suction kits have multiple factors under paragraph (b)(2)(i) of this section that tend to show they are regularly available for purchase and use by individual consumers and none of the factors under paragraph (b)(2)(ii) of this section tend to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the snake bite suction kits are devices that are of a type that are generally purchased by the general public at retail for individual use.

Example 4. X manufactures denture adhesives. X sells the denture adhesives to distributors Y and Z, which, in turn, sell the adhesives to dental offices and retail businesses. The FDA requires manufacturers of denture adhesives to list the adhesive as a device with the FDA. The FDA classifies the denture adhesives under 21 CFR part 872 (Dental Devices) and product code KXX.

The denture adhesives do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the denture adhesives are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals can regularly purchase the denture adhesives at drug stores, supermarkets, or other similar businesses, and can use the adhesives safely and effectively for their intended medical purpose with minimal or no training from a medical professional. Further, the denture adhesives do not need to be implanted, inserted, operated, or otherwise administered by a medical professional, do not require a large investment and/or ongoing expenditure, are not Class III devices, are not classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222.

Thus, the denture adhesives have multiple factors under paragraph (b)(2)(i) of this section that tend to show they are regularly available for purchase and use by individual consumers and none of the factors under paragraph (b)(2)(ii) of this section tend to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the denture adhesives are devices that are of a type that are generally purchased by the general public at retail for individual use.

Example 5. X manufactures mobile x-ray systems. X sells the x-ray systems to distributors Y and Z, which, in turn, sell the systems generally to medical institutions and offices, as well as medical professionals. The FDA requires manufacturers of mobile x-ray systems to list the systems as a device with the FDA. The FDA classifies the mobile x-ray systems under 21 CFR part 892 (Radiology Devices) and product code IZL.

Mobile x-ray systems do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the mobile x-ray systems are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals can regularly purchase the mobile x-ray systems over the internet. However, individual consumers cannot use the x-ray systems safely and effectively for their intended medical purpose without training from a medical professional. Although the mobile x-ray systems are not Class III devices and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222, they need to be operated by a medical professional, may require a large investment and/or ongoing expenditure, and are classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section (21 CFR part 892 (Radiology Devices).

Thus, with regard to the factors under paragraph (b)(2)(i) of this section, the mobile x-ray systems have one factor that tends to show they are regularly available for purchase and use by individual consumers and one factor that tends to show that they are not regularly available for purchase and use by individual consumers. With regard to the factors under paragraph (b)(2)(ii) of this section, the mobile x-ray systems have multiple factors that tend to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the mobile x-ray systems are not devices that are of a type generally purchased by the general public at retail for individual use.

Example 6. X manufactures pregnancy test kits. X sells the kits to distributors Y and Z, which, in turn, sell the pregnancy test kits to medical institutions and offices, medical professionals, and retail businesses. The FDA requires manufacturers of pregnancy test kits to list the kits as a device with the FDA. The FDA classifies the kits under 21 CFR part 862 (Clinical Chemistry and Clinical Toxicology Devices) and product code LCX.

The pregnancy test kits are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests) database. Therefore, the over the counter pregnancy test kits fall within the safe harbor set forth in paragraph (b)(2)(iii)(A) of this section. Further, the FDA product code name for LCX is “Kit, Test, Pregnancy, HCG, Over The Counter.” Therefore, the pregnancy test kits also fall within the safe harbor set forth in paragraph (b)(2)(iii)(C) of this section. Accordingly, the pregnancy test kits are devices that are of a type generally purchased by the general public at retail for individual use.

Example 7. X manufactures blood glucose monitors, blood glucose test strips, and lancets. X sells the blood glucose monitors, test strips, and lancets to distributors Y and Z, which, in turn, sell the monitors, test strips, and lancets to medical institutions and offices, medical professionals, and retail businesses. The FDA requires manufacturers of blood glucose monitors, test strips, and lancets to list the items as devices with the FDA. The FDA classifies the blood glucose monitors under 21 CFR part 862 (Clinical Chemistry and Clinical Toxicology Devices) and product code NBW. The FDA classifies the test strips under 21 CFR part 862 (Clinical Chemistry and Clinical Toxicology Devices) and product code NBW. The FDA classifies the lancets under 21 CFR part 878 (General and Plastic Surgery Devices) and product code FMK.

The blood glucose monitors and test strips are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests) database. Therefore, the blood glucose monitors and test strips fall within the safe harbor set forth in paragraph (b)(2)(iii)(A) of this section. Further, the FDA product code name for NBW is “System, Test, Blood Glucose, Over the Counter.” Therefore, the blood glucose monitors and test strips also fall within the safe harbor set forth in paragraph (b)(2)(iii)(C) of this section.

In addition, the lancets are supplies necessary for the effective use of DME as described in chapter 15 of the Medicare Policy Benefit Manual. Therefore, the lancets fall within the safe harbor set forth in paragraph (b)(2)(iii)(D)(5) of this section.

Accordingly, the blood glucose monitors, test strips, and lancets are devices that are of a type generally purchased by the general public at retail for individual use.

Example 8. X manufactures single axis endoskeletal knee shin systems, which are used in the manufacture of prosthetic legs. X sells the knee shin systems to Y, a business that makes prosthetic legs. The FDA requires manufacturers of knee shin systems and prosthetic legs to list the items as devices with the FDA. The FDA classifies prosthetic leg components, including knee shin systems, as external limb prosthetic components under Subpart D of 21 CFR part 890.3420 and product code ISH. The FDA classifies prosthetic legs as an external assembled lower limb prosthesis under 21 CFR part 890.3500 and product code ISW / KFX. In addition, the Centers for Medicare and Medicaid Services have assigned the knee shin systems Healthcare Procedure Coding System code L5810.

Prosthetic legs and certain prosthetic leg components, including single axis endoskeletal knee shin systems, fall within the safe harbor for prosthetic and orthotic devices that do not require implantation or insertion by a medical profession that is set forth in paragraph (b)(2)(iii)(D)(1) of this section. Accordingly, both the single axis endoskeletal knee shin systems manufactured by X and the prosthetic legs made by Y are devices that are of a type generally purchased by the general public at retail for individual use.

Example 9. X manufactures mechanical and powered wheelchairs. X sells the wheelchairs to distributors Y and Z, which, in turn, sell the wheelchairs to medical institutions and offices, medical professionals, nursing homes, and retail businesses. The FDA requires manufacturers of manual and powered wheelchairs to list the items as devices with the FDA. The FDA classifies the manual and powered wheelchairs under Subpart D of 21 CFR part 890 (Physical Medicine Devices). The FDA classifies mechanical wheelchairs under product code IOR. The FDA classifies powered wheelchairs under product code product code ITI.

Mechanical and powered wheelchairs do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the mechanical and powered wheelchairs are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals can regularly purchase the wheelchairs in drug stores, medical specialty stores, or DME suppliers, as well as over the internet. In addition, individual consumers can use the wheelchairs safely and effectively for their intended medical purpose with minimal or no training from a medical professional, and the wheelchairs are classified by the FDA under Subpart D of 21 CFR part 890 (Physical Medicine Devices). Further, although the wheelchairs may require a large initial investment and/or ongoing expenditure, they do not need to be implanted, inserted, operated, or otherwise administered by a medical professional, are not Class III devices, are not classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222.

Thus, the wheelchairs have multiple factors under paragraph (b)(2)(i) of this section that tend to show they are regularly available for purchase and use by individual consumers and, at most, only one factor under paragraph (b)(2)(ii) of this section tends to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the mechanical and powered wheelchairs are devices that are of a type that are generally purchased by the general public at retail for individual use.

Example 10. X manufactures portable oxygen concentrators. X sells the portable oxygen concentrators to distributors Y and Z, which, in turn, sell the portable oxygen concentrators to medical institutions and offices, medical professionals, and retail businesses. The FDA requires manufacturers of portable oxygen concentrators to list the items as devices with the FDA. The FDA classifies the oxygen regulators under 21 CFR part 868 (Anesthesiology Devices) and product code CAW.

Portable oxygen concentrators do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the oxygen concentrators are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals can regularly purchase the portable oxygen concentrators in retail pharmacies, medical specialty stores, or DME suppliers, as well as over the internet. In addition, individual consumers can use the portable oxygen concentrators safely and effectively for their intended medical purpose with minimal or no training from a medical professional. Further, although the portable oxygen concentrators are classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section, they do not need to be implanted, inserted, operated, or otherwise administered by a medical professional, do not require a large investment and/or ongoing expenditure, are not Class III devices, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222.

Thus, the portable oxygen concentrators have multiple factors under paragraph (b)(2)(i) of this section that tend to show they are regularly available for purchase and use by individual consumers and only one factor under paragraph (b)(2)(ii) of this section that tends to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the portable oxygen concentrators are devices that are of a type that are generally purchased by the general public at retail for individual use.

Example 11. X manufactures urinary ileostomy bags. X sells the urinary ileostomy bags to distributors Y and Z, which, in turn, sell the urinary ileostomy bags to medical institutions and offices, medical professionals, and retail businesses. The FDA requires manufacturers of urinary ileostomy bags to list the items as devices with the FDA. The FDA classifies the urinary ileostomy bags under 21 CFR part 876 (Gastroenterology — Urology Devices) and product code EXH.

The urinary ileostomy bags are “Prosthetic and orthotic devices,” as defined in 42 CFR 414.202, that do not require implantation or insertion by a medical professional. Therefore, the urinary ileostomy bags fall within the safe harbor set forth in paragraph (b)(2)(iii)(D)(1) of this section. Accordingly, the urinary ileostomy bags are devices that are of a type generally purchased by the general public at retail for individual use.

Example 12. X manufactures nonabsorbable silk sutures. X sells the nonabsorbable silk sutures to distributors Y and Z, which, in turn, sell the nonabsorbable silk sutures to medical institutions and offices, medical professionals, and retail businesses. The FDA requires manufacturers of nonabsorbable silk sutures to list the items as devices with the FDA. The FDA classifies the nonabsorbable silk sutures under 21 CFR part 878 (General and Plastic Surgery Devices) and product code GAP.

Nonabsorbable silk sutures do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the nonabsorbable silk sutures are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals can regularly purchase the nonabsorbable silk sutures over the internet. However, individual consumers cannot use nonabsorbable silk sutures safely and effectively for their intended medical purpose with minimal or no training from a medical professional. Further, although the nonabsorbable silk sutures do not require a large investment and/or ongoing expenditure, are not Class III devices, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222, the nonabsorbable silk sutures are classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section, and they need to be administered by a medical professional.

Thus, with regard to the factors under paragraph (b)(2)(i) of this section, the nonabsorbable silk sutures have one factor that tends to show they are regularly available for purchase and use by individual consumers and one factor that tends to show that they are not regularly available for purchase and use by individual consumers. With regard to the factors under paragraph (b)(2)(ii) of this section, the nonabsorbable silk sutures have multiple factors that tend to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the nonabsorbable silk sutures are not devices that are of a type that are generally purchased by the general public at retail for individual use.

Example 13. X manufactures nuclear magnetic resonance imaging (NMRI) systems (also known as magnetic resonance imaging (MRI) systems). X sells the NMRI systems to distributor Y, which, in turn, sells the systems to medical institutions. The FDA requires manufacturers of NMRI systems to list the systems as a device with the FDA. The FDA classifies the magnetic resonance diagnostic device under 21 CFR part 892 (Radiology Devices) and product code LNH.

NMRI systems do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the NMRI systems are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals may be able to regularly purchase the NMRI systems over the internet. However, individual consumers cannot use the NMRI systems safely and effectively for their intended medical purpose without training from a medical professional. Although the NMRI systems are not Class III devices and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222, they need to be operated by a medical professional, and are of a type classified by the FDA under 21 CFR part 892 (Radiology Devices). Further, the cost to acquire, maintain, and/or use the NMRI systems requires a large initial investment and/or ongoing expenditure that is not affordable for the average consumer.

Thus, with regard to the factors under paragraph (b)(2)(i), the NMRI systems have, at most, one factor that tends to show that they are regularly available for purchase and use by individual consumers and at least one factor that tends to show that they are not regularly available for purchase and use by individual consumers. With regard to the factors under paragraph (b)(2)(ii), the NMRI systems have multiple factors that tend to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the NMRI systems are not devices that are of a type generally purchased by the general public at retail for individual use.

Example 14. X manufactures therapeutic AC powered adjustable home use beds. X sells the beds to distributors Y and Z, which, in turn, sell the beds to retail businesses. The FDA requires manufacturers of therapeutic AC powered adjustable home use beds to list the items as devices with the FDA. The FDA classifies the therapeutic AC powered adjustable home use beds under 21 CFR part 880 (General Hospital Devices) and product code LLI.

Therapeutic AC powered adjustable home use beds do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the beds are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Although the beds may require a large initial investment and/or ongoing expenditure, individual consumers who are not medical professionals can regularly purchase the beds in medical specialty stores or from DME suppliers, as well as over the internet. In addition, individual consumers can use the beds safely and effectively for their intended medical purpose with minimal or no training from a medical professional. Further, the beds are not classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section, do not need to be implanted, inserted, operated, or otherwise administered by a medical professional, are not Class III devices, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222.

Thus, the therapeutic AC powered adjustable home use beds have multiple factors under paragraph (b)(2)(i) of this section that tend to show they are regularly available for purchase and use by individual consumers and, at most, only one factor under paragraph (b)(2)(ii) of this section that tends to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the therapeutic AC powered adjustable home use beds are devices that are of a type that are generally purchased by the general public at retail for individual use.

Example 15. X manufactures powered flotation therapy beds. X sells the beds to distributors Y and Z, which, in turn, sell the beds to medical institutions and offices, and medical professionals. The FDA requires manufacturers of powered flotation therapy beds to list the items as devices with the FDA. The FDA classifies the powered flotation therapy beds under 21 CFR part 890 (Physical Medicine Devices) and product code IOQ.

Powered flotation therapy beds do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the beds are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis.

Individual consumers who are not medical professionals may be able to regularly purchase the beds over the internet. However, individual consumers cannot use the beds safely and effectively for their intended medical purpose with minimal or no training from a medical professional. Although the powered flotation therapy beds are not Class III devices and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222, they need to be operated or otherwise administered by a medical professional. Further, the cost to acquire, maintain, and/or use the powered flotation therapy beds requires a large initial investment and/or ongoing expenditure that is not affordable for the average consumer.

Thus, with regard to the factors under paragraph (b)(2)(i) of this section, the powered flotation therapy beds have, at most, one factor that tends to show they are regularly available for purchase and use by individual consumers and at least one factor that tends to show they are not regularly available for purchase and use by individual consumers. With regard to the factors under paragraph (b)(2)(ii) of this section, the powered flotation therapy beds have multiple factors that tend to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the powered flotation therapy beds are not devices that are of a type that are generally purchased by the general public at retail for individual use.

(c) Effective/applicability date. This section applies to sales of taxable medical devices on and after January 1, 2013.

Par. 4. Section 48.4216(c)-1 is amended by adding paragraphs (e)(1), (e)(2), and (e)(3) to read as follows:

* * * * *

(e) Contracts for the lease, installment sale, or sale on credit, of a taxable medical device.

(1) General rule. Payments made on or after January 1, 2013, pursuant to a contract for the lease, installment sale, or sale on credit of a taxable medical device that was entered into on or after March 30, 2010, are subject to tax under section 4191, and the provisions of paragraphs (a), (b), and (c) of this section apply.

(2) Exception for payments made on or after January 1, 2013, pursuant to written binding contracts entered into prior to March 30, 2010. Payments made on or after January 1, 2013, pursuant to a written binding contract for the lease, installment sale, or sale on credit of a taxable medical device that was in effect prior to March 30, 2010, are not subject to tax under section 4191. This exception includes payments made on or after January 1, 2013, if they are made pursuant to a written binding contract that was entered into prior to March 30, 2010. This exception does not apply to payments made under any contract that is materially modified on or after March 30, 2010. For this purpose, a material modification includes only a modification that materially affects the property to be provided under the contract, the terms of payment under the contract, or the amount payable under the contract. Notwithstanding the foregoing, a material modification does not include a modification to the contract required by applicable Federal, State, or local law.

(3) Effective/applicability date. This section applies on and after January 1, 2013.

Par. 5. Section 48.4221-1 is amended by adding paragraph (a)(2)(vii) to read as follows:

(a) * * *

(2) * * *

(vii) The exemptions under section 4221(a)(3) through (a)(6) do not apply to the tax imposed by section 4191 (medical device tax).

* * * * *

Par. 6. Section 48.6416(b)(2)-2 is amended by adding paragraph (a)(4) to read as follows:

(a) * * *

(4) Beginning on January 1, 2013, sections 6416(b)(2)(B), (C), (D), and (E) do not apply to any tax paid under section 4191 (medical device tax).

* * * * *

Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.

Approved November 30, 2012.

Mark J. Mazur,
Assistant Secretary
of the Treasury (Tax Policy).

Section 4375 imposes a fee on an issuer of a specified health insurance policy for each policy year ending on or after October 1, 2012, and before October 1, 2019. Under section 4375(a), the fee is two dollars (one dollar in the case of policy years ending before October 1, 2013) multiplied by the average number of lives covered under the policy. Under section 4375(d), for policy years ending on or after October 1, 2014, the fee is increased based on increases in the projected per capita amount of National Health Expenditures. Section 4375(b) provides that the fee imposed by section 4375(a) shall be paid by the issuer of the policy.

Section 4375(c) defines a specified health insurance policy as any accident or health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the United States. Section 4375(c)(2) excludes from a specified health insurance policy any insurance if substantially all of its coverage is of excepted benefits described in section 9832(c). Section 4375(c)(3) provides that a specified health insurance policy includes any prepaid health coverage arrangement described in section 4375(c)(3)(B). An arrangement is described in section 4375(c)(3)(B) if, under the arrangement, fixed payments or premiums are received as consideration for a person’s agreement to provide or arrange for the provision of accident or health coverage to residents of the United States, regardless of how the coverage is provided or arranged to be provided.

Section 4376 imposes a fee on a plan sponsor of an applicable self-insured health plan for each plan year ending on or after October 1, 2012, and before October 1, 2019.^[1] Under section 4376(a), the fee is two dollars (one dollar for plan years ending before October 1, 2013) multiplied by the average number of lives covered under the plan. Under section 4376(d), for plan years ending on or after October 1, 2014, the fee is increased based on increases in the projected per capita amount of National Health Expenditures. Section 4376(b)(1) provides that the fee imposed by section 4376(a) shall be paid by the plan sponsor.

Section 4376(b)(2) defines a plan sponsor as the employer in the case of a plan established or maintained by a single employer, or the employee organization in the case of a plan established or maintained by an employee organization. Section 4376(b)(2) also provides that, in the case of (1) a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, (2) a multiple employer welfare arrangement, or (3) a voluntary employees’ beneficiary association described in section 501(c)(9), the plan sponsor is the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan. Section 4376(b)(2) further provides that in the case of a plan established or maintained by a rural electric cooperative (as defined in section 3(40)(B)(iv) of the Employee Retirement Income Security Act of 1974 (ERISA)) or rural telephone cooperative association (as defined in section 3(40)(B)(v) of ERISA), the plan sponsor is the cooperative or association that established or maintained the plan.

Section 4376(c) defines an applicable self-insured health plan as any plan for providing accident or health coverage if any portion of the coverage is provided other than through an insurance policy, and the plan is established or maintained (1) by one or more employers for the benefit of their employees or former employees, (2) by one or more employee organizations for the benefit of their members or former members, (3) jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees, (4) by a voluntary employees’ beneficiary association described in section 501(c)(9), (5) by any organization described in section 501(c)(6), or (6) if not previously described, by a multiple employer welfare arrangement (as defined in section 3(40) of ERISA), a rural electric cooperative (as defined in section 3(40)(B)(iv) of ERISA), or a rural telephone cooperative association (as defined in section 3(40)(B)(v) of ERISA).

Section 4377 includes definitions and special rules that apply for purposes of sections 4375 and 4376. Section 4377(a)(1) defines accident and health coverage as any coverage that, if provided by an insurance policy, would cause the policy to be a specified health insurance policy (as defined in section 4375(c)).

Section 4377(b)(1)(B) provides that “[n]otwithstanding any other law or rule of law, governmental entities shall not be exempt from” the fees imposed by sections 4375 and 4376 unless the policy or plan is an exempt governmental program. Section 4377(b)(3) defines an exempt governmental program as (1) any insurance program established under title XVIII of the Social Security Act (42 U.S.C. 1395 et. seq.) (Medicare), (2) the medical assistance program established by title XIX (42 U.S.C. 1396 et. seq.) (Medicaid) or title XXI of the Social Security Act (42 U.S.C. 1397aa et. seq.) (Children’s Health Insurance Program), (3) any program established by Federal law for providing medical care (other than through insurance policies) to individuals (or the spouses and dependents thereof) by reason of such individuals being members of the Armed Forces of the United States or veterans, and (4) any program established by Federal law for providing medical care (other than through insurance policies) to members of Indian tribes (as defined in section 4(d) of the Indian Health Care Improvement Act, 25 U.S.C. 1603). Under these special rules, a governmental entity (including a federally recognized Indian tribal government) that is the plan sponsor of an applicable self-insured health plan that does not meet the definition of an exempt governmental program must pay the fee imposed by section 4376.

Section 4377(c) provides that the fees imposed by sections 4375 and 4376 are treated as taxes for purposes of subtitle F of the Code (sections 6001 through 7874 that set forth the rules of federal tax procedure and administration).

On June 8, 2011, the IRS released Notice 2011-35, 2011-25 I.R.B. 879, which requested comments on how the fees imposed under sections 4375 and 4376 (referred to collectively as the PCORI fee) should be calculated and paid, including possible rules and safe harbors. The Treasury Department and the IRS received numerous comments in response to Notice 2011-35 and considered all comments in issuing proposed regulations under sections 4375, 4376, and 4377 (77 FR 22,691). The Treasury Department and the IRS received 26 written comments on the proposed regulations. After consideration of the comments, these final regulations adopt the provisions of the proposed regulations with certain modifications, the most significant of which are highlighted in the Summary of Comments and Explanation of Revisions. See §601.601(d)(2).

Section 4375(a) imposes a fee on an issuer of a specified health insurance policy for each policy year ending on or after October 1, 2012, and before October 1, 2019. Section 46.4375-1(b)(1) of these regulations defines a specified health insurance policy as any accident and health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the United States. Section 46.4375-1(b)(1)(ii) provides exceptions to the term specified health insurance policy. Section 4375(c)(2) and §46.4375-1(b)(1)(ii)(A) provide an exclusion for any insurance if substantially all of its coverage is of excepted benefits described in section 9832(c). While §46.4376-1(b)(ii)(B) excludes from the definition of applicable self-insured health plan an employee assistance program (EAP), disease management program, or wellness program, if the program does not provide significant benefits in the nature of medical care or treatment, no similar exclusion was included in the proposed regulations for a specified health insurance policy.

One commentator explained that California and Nevada regulate EAPs that provide for four or more counseling, treatment, or therapy visits as insurance thereby requiring the issuance of an insurance policy. The commentator argued that in any other state, identical EAPs would be excluded from the definition of applicable self-insured plan and not subject to the PCORI fee. In recognition of the unique California and Nevada requirements that certain employee assistance plans be treated as insurance, the commentator asked that an exception be added to the definition of specified health insurance policy to exclude those EAPs. In response to this comment, these final regulations provide that the definition of a specified health insurance policy does not include any insurance policy to the extent that the policy provides for an EAP, disease management program, or wellness program, if the program does not provide significant benefits in the nature of medical care or treatment. No inference is intended whether the specific health benefits cited by the commentator constitute insignificant benefits.

As noted in the preamble to the proposed regulations, sections 4375 and 4376 may apply to a retiree-only plan because, although group health plans that have fewer than two participants who are current employees (such as retiree-only plans) are excluded from the requirements of chapter 100 (setting forth requirements applicable to group health plans such as portability, nondiscrimination, and market reform requirements), this exclusion does not apply to sections 4375 and 4376 because these sections are in chapter 34. In addition, section 4376(c)(2)(A) states explicitly that an applicable self-insured health plan includes a plan established or maintained by one or more employers for the benefit of their employees or former employees. Some commentators requested that the final regulations exempt from the PCORI fee retiree coverage on public policy grounds, but generally agreed that a retiree-only insured plan or retiree coverage under an applicable self-insured health plan may be subject to the PCORI fee. Consistent with the statutory language, the final regulations apply the PCORI fee to specified health insurance policies or applicable self-insured health plans that provide accident and health coverage to retirees, including retiree-only policies and plans.

Commentators requested clarification of whether sections 4375 and 4376 apply to continuation coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) or similar continuation coverage under other federal law or under state law (referred to collectively as “continuation coverage”) and asked that the final regulations explicitly exclude continuation coverage from application of those sections. If the coverage provided under the continuation coverage arrangement is accident and health coverage, there is no basis to exclude the arrangement from the PCORI fee. The requirements of sections 4375 and 4376 apply to specified health insurance policies that provide accident and health coverage and plans that are applicable self-insured health plans, regardless of whether provided through the individual market, to an active employee as part of a group health plan, or as continuation coverage to an active employee, former employee, or otherwise qualifying beneficiary. In response to comments, these final regulations state explicitly that continuation coverage must be taken into account in determining the PCORI fee, unless the arrangement is otherwise excluded.

The fee imposed on an issuer of a specified health insurance policy under section 4375 is based on the average number of lives covered under the policy during the policy year. The fee imposed on a plan sponsor of an applicable self-insured health plan under section 4376 is based on the average number of lives covered under the plan during the plan year.

Commentators acknowledged that separate fees are imposed by sections 4375 and 4376, but argued that this only reflects congressional intent for the PCORI fee to extend to both insured and self-insured arrangements. Several commentators requested that the final regulations provide that the PCORI fee does not apply multiple times if accident and health coverage is provided to one individual through more than one policy or self-insured arrangement (for example, where an individual is covered by a fully-insured major medical insurance policy and a self-insured prescription arrangement). Commentators also requested that the final regulations clarify that the issuer or plan sponsor is required to pay only once with respect to each covered life under the specified health insurance policy or applicable self-insured health plan.

The final regulations do not adopt the requested change that the fee apply only once with respect to each covered life because it would be contrary to the explicit statutory language applying the fee to each specified health insurance policy or applicable self-insured health plan. For example, for an employee covered by both a group insurance policy and a health reimbursement arrangement (HRA), the group insurance policy falls within the definition of a specified health insurance policy to which section 4375 applies a fee, and the HRA falls within the definition of an applicable self-insured health plan, to which section 4376 applies a fee to the plan sponsor. Because there are no allocation rules or other method of applying the fee on an aggregated basis in the statute or legislative history, there is no evidence that the statutory provisions were intended to be applied in a manner that aggregated these separate arrangements for a single covered individual and allocated the fee between them. However, in response to comments, the final regulations permit an applicable self-insured health plan that provides accident and health coverage through fully-insured options and self-insured options to determine the fee imposed by section 4376 by disregarding the lives that are covered solely under the fully-insured options. (See also discussion under section V of this preamble relating to the special rule for plan sponsors that establish or maintain multiple self-insured arrangements with the same plan year and section VI of this preamble relating to special rules for health reimbursement arrangements and flexible spending arrangements). Except as otherwise provided, the final regulations do not permit an issuer or plan sponsor to disregard a covered life merely because that individual is also covered under another specified health insurance policy or applicable self-insurance plan.

Section 46.4376-1(b)(1)(iii) of the proposed regulations provided that for purposes of section 4376, two or more arrangements established or maintained by the same plan sponsor that provide for accident and health coverage other than through an insurance policy and that have the same plan year may be treated as a single applicable self-insured health plan for purposes of calculating the fee imposed by section 4376.

A few commentators described self-insured arrangements that are coordinated with an underlying health plan, including a plan of an unrelated entity. Commentators pointed to collectively bargained arrangements under which the union sponsors a prescription-only or premium-only plan that is tied to an insured health plan of the employers that have entered into a collective bargaining agreement between the employee representatives and one or more employers. These commentators requested that the final regulations include special rules that exempt from the PCORI fee certain applicable self-insured health plans that are established or maintained by a union because the lives covered under the union plan are taken into account for the fee imposed on the employer, if the employer’s plan is also an applicable self-insured health plan, or the issuer, if the employer’s plan is an insured plan. One commentator requested that the final regulations permit collectively bargained plans to be aggregated with the employer’s plan, without regard to whether they have the same sponsor or plan year, for purposes of determining the fee with respect to the same lives covered.

One commentator pointed out that the Medical Loss Ratio (MLR) Interim Final Rule issued by HHS allows affiliated issuers to report their premiums and expenditures on an aggregate basis if one issuer provides in-network coverage and the second provides out-of network coverage for one group health plan. The commentator requested the same approach provided in §46.4376-1(b)(1)(iii) (permitting two or more applicable self-insured health plans with the same plan sponsor and same plan year to be treated as a single applicable self-insured health plan) be provided for group health plans that provide separate benefits to a participant or beneficiary during the same plan year under two or more insurance policies or through a self-insured plan and an insured plan. Specifically, the commentator suggested that if insurance policies covering the same individual qualify for aggregation under the MLR rebate reporting rules, the IRS should allow issuers to aggregate their policies for purposes of the PCORI fee.

Sections 4375 and 4376 specifically apply the PCORI fee to, respectively, an issuer of a specified health insurance policy and to the sponsor of an applicable self-insured health plan (subject to certain exceptions). The commentators have shown no statutory basis for combining arrangements involving different issuers or different plan sponsors. The statute specifically contemplated that different arrangements having different plan sponsors would be subject to separate fees imposed by section 4376. See section 4376(b)(2) (naming the different types of plan sponsors for different types of applicable self-insured health plans). Commentators, however, point to the proposed rule, adopted in these final regulations, permitting a plan sponsor to treat two different applicable self-insured health plans with the same plan year and plan sponsor as one plan as the basis for adopting the suggested change. There is no significant difference between that arrangement and a single plan, or “umbrella” plan containing both self-insured arrangements. In contrast, if the two arrangements are sponsored by two different plan sponsors, there is no single plan equivalent. Accordingly, this suggestion is not adopted in the final regulations.

Section 46.4376-1(b)(1)(ii) of the proposed regulations defined an applicable self-insured health plan to include HRAs (as described in Notice 2002-45, 2002-2 C.B. 93) and health flexible spending arrangements (as described in section 106(c)(2)) (FSAs) that do not satisfy the requirements to be treated as an excepted benefit (within the meaning of section 9832(c) and §54.9831-1(c)(3)(v)). The proposed regulations also provided additional rules that permitted the plan sponsor to assume one covered life for each employee with an HRA and for each employee with an FSA that is not an excepted benefit. The final regulations retain these rules. See §601.601(d)(2).

Commentators requested that the definition of applicable self-insured health plan be revised to exclude all HRAs, or alternatively that the final regulations exclude from the definition HRAs that are “integrated” with coverage under a self-insured or fully-insured arrangement. One commentator requested that the final regulations exempt from the definition of applicable self-insured health plan premium-only HRAs for Medicare-eligible retirees. As discussed in the preamble to the proposed regulations, an HRA is not subject to a separate fee under section 4376 if the plan sponsor also maintains a separate applicable self-insured health plan with a calendar year (referred to as the other plan). In such circumstances, the plan sponsor is permitted to treat the HRA and other plan as a single applicable self-insured health plan for purposes of section 4376 and therefore determine and pay the PCORI fee once with respect to each life covered under the HRA and other plan. Because the statutory structure provides that the fee imposed by section 4375 is separate from the fee imposed by section 4376, these regulations do not permit a plan sponsor to treat the HRA and a fully-insured plan as a single plan or arrangement for purposes of the PCORI fee, and these final regulations include additional examples to clarify the application of the PCORI fee to an HRA, including an HRA and other plan.

For the same reasons, the final regulations do not adopt the request to provide that the PCORI fee does not apply to an employee’s FSA that does not meet the requirements for being an excepted benefit if the employee is covered by a major medical plan.

The term specified health insurance policy includes only an accident and health insurance policy that is issued with respect to an individual residing in the United States. The final regulations adopt the rule in the proposed regulations that provides that if the address on file with the issuer or plan sponsor for the primary insured is outside of the United States, the issuer or plan sponsor may treat the primary insured and the primary insured’s spouse, dependents, or other beneficiaries covered under the policy as having the same place of abode and not residing in the United States. For this purpose, the term primary insured refers to the individual covered by the policy whose eligibility for coverage was not due to his or her status as a spouse, dependent, or other beneficiary of another insured individual. Also as provided in the proposed regulations, these final regulations clarify that for purposes of the PCORI fee, “an individual residing in the United States” means an individual who has a place of abode in the United States.

Two commentators suggested that an issuer or plan sponsor should be permitted to find that a primary insured who is on a temporary U.S. visa does not have a place of abode in the United States. The commentators argued that because many (if not most) health insurance issuers offering expatriate plans request, for compliance purposes, an overview of citizenship and visa status from an employee covered under an employer-sponsored international plan, visa information and citizenship information should be available to them and can be relied upon in determining whether the employee’s place of abode is the United States or elsewhere.

The final regulations do not adopt this requested change. To exclude covered individuals who are residing in the United States would be contrary to Congressional intent that the PCORI fee applies to policies and plans that cover individuals residing in the United States. An individual on a temporary U.S. visa who has a place of abode in the United States is residing in the United States. For purposes of sections 4375, 4376, and 4377, the determination of place of abode is based on the most recent address on file with the issuer or plan sponsor.

As in the proposed regulations, these final regulations provide that the term specified health insurance policy does not include any group policy issued to an employer if the facts and circumstances show that the group policy was designed and issued specifically to cover primarily employees who are working and residing outside of the United States. One commentator requested clarification that similar self-insured plans are also excepted for purposes of the fee under section 4376. The final regulations clarify that the term applicable self-insured health plan does not include a self-insured plan if the facts and circumstances show that the self-insured plan was designed specifically to cover primarily employees who are working and residing outside of the United States.

Under the proposed regulations, issuers and plan sponsors were permitted to use alternative methods for determining the average number of lives for the year. Issuers could choose any of four alternative methods to determine the average number of lives covered under policies that it issues for purposes of the fee imposed by section 4375: (1) the actual count method, (2) the snapshot method, (3) the member months method, or (4) the state form method. While the actual count and snapshot methods count lives covered on the policy-by-policy basis for each policy having a policy year that ends in the reporting period (which is based on the calendar year), the member months or state form methods count all lives covered during the calendar year for all policies in effect during the calendar year irrespective of when actual policy years end. Plan sponsors could use one of three alternative methods to determine the average number of lives covered under a plan for purposes of the fee imposed by section 4376: (1) the actual count method, (2) the snapshot method, or (3) the Form 5500 method.

One of the permitted methods — the “snapshot method” — would have required issuers and plan sponsors to determine the average lives by adding the number of lives covered on one date (or an equal number of dates) in each quarter during the plan year or policy year and dividing that sum by the number of dates on which the count was made. Commentators suggested that issuers and plan sponsors using the snapshot method should not be required to use the same date for each quarter, but should be permitted to use different dates to determine the number of lives covered during a quarter to address holidays, weekend days, or other similar issues. The Treasury Department and the IRS recognize the need for flexibility but also the need to avoid permitting issuers and plan sponsors to pick the most advantageous dates (that is, the dates on which the number of lives covered is the lowest so that under the facts and circumstances the snapshot method does not fairly approximate the average number of lives covered for the applicable year). In response to these comments, the final regulations require an issuer or a plan sponsor that uses the snapshot method to determine the counts used based on a date during the first, second, or third month of each quarter (or more dates in each quarter if an equal number of dates is used for each quarter). Each date used for the second, third, and fourth quarters must be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates used must fall within the same policy year or plan year. If an issuer or plan sponsor uses multiple dates for the first quarter, the issuer or plan sponsor must use dates in the second, third, and fourth quarters that correspond to each of the dates used for the first quarter or are within three days of such corresponding dates, and all dates used must fall within the same policy year or plan year. The 30^th and 31^st day of a month are treated as the last day of the month for purposes of determining the corresponding date for any month that has fewer than 31 days (for example, if either March 30 or 31 are used as snapshot dates for a calendar year plan, June 30 is the corresponding date for the second quarter). Thus, for example, under the final regulations, if a plan sponsor uses the snapshot method to determine the average number of lives covered under an applicable self-insured health plan with a calendar year plan year and uses Monday, January 7, 2013, as the counting date for the first quarter, the plan sponsor may use any date beginning with Thursday, April 4, 2013, and ending with Wednesday, April 10, 2013, as the counting date for the second quarter (because all of those days are within three days of April 7, 2013, the date that corresponds to the January 7, 2013 counting date for the first quarter).

One commentator stated that the actual count and snapshot methods may pose significant operational challenges for many issuers. Because these methods require a determination of the number of lives covered by reference to the policy year for each health insurance policy that is subject to the fee, the commentator anticipates that issuers with a significant number of insurance policies that have policy years that begin at different dates during a calendar year will have difficulty implementing this approach. The commentator suggested that, regardless of the actual policy year, issuers who choose to use the actual count method should be permitted to measure lives covered on all days of a calendar year and then divide the result by 365. The commentator also suggested that, regardless of the actual policy year, issuers who choose to use the snapshot method should be permitted to measure lives covered using calendar year quarters and then average the results.

The final regulations do not adopt this requested change. The fee imposed by section 4375 applies to policies based on their policy year. For administrative ease and to facilitate the use of available information that is compiled by issuers, these regulations provide the member months method and the state form method as alternatives for all policies in effect during a calendar year. Under each of these alternatives, the data permitted to be used is already reported by the issuer based on the calendar year. Issuers may use calendar year information in lieu of policy year information only if they use the member months method or the state form method.

The member months data and the data reported on state forms are based on the calendar year. To adjust for the fee being applicable to policy years ending after September 30, 2012, but before January 1, 2013, and after December 31, 2018, but before October 1, 2019, these final regulations adopt the pro rata approach set out in the proposed regulations for calculating the average number of lives covered using the member months method or the state form method for 2012 and 2019. For example, the member months number for 2012 is divided by 12 and the resulting number is multiplied by one-quarter to arrive at the average number of lives covered for October through December 2012. The proposed regulations further treated the amount calculated under this pro rata approach as the average number of lives covered for policies with policy years that end on or after October 1, 2012, and before January 1, 2013. Similar rules are provided for 2019.

Commentators suggested that the special pro rata approach for calculating the average number of lives covered using the member months method or the state form method for 2012 and 2019 should be applied to all years the fee is in effect, to appropriately reflect the change in the fee during each of such intervening years. One commentator argued that this revision is needed to prevent issuers that use these methods from being unfairly penalized by paying the rate determined as of December 31 of each year, resulting in an unanticipated higher liability for an issuer using those methods.

The final regulations do not adopt this requested change. The special pro rata approach for calculating the average number of lives covered was the least administratively burdensome way for the first and last policy years to which the fee applies to incorporate data from the NAIC annual report and similar state reporting requirements with the applicability dates for the PCORI fee related to policy years ending in 2012 and 2019. Other years are not affected by the applicability date issues. In addition, issuers are not required to use the member months or state form method and can use another permissible method.

The fee imposed by section 4376 applies to plan years ending on or after October 1, 2012, and before October 1, 2019. Under the proposed regulations, an applicable self-insured health plan was required to determine the fee using the applicable dollar amount that applies for the plan year and the average number of lives covered during the plan year. Unlike the section 4375 fee, which is based on policy years, the application and amount of the section 4376 fee is based on the applicable dollar amount under section 4376 that is in effect on the last day of the plan year. One commentator requested additional examples illustrating the plan years covered by the fee, including the first plan year to which the PCORI fee applies. In response, §46.4376-1(a) of the final regulations includes examples illustrating the plan years (calendar and fiscal years) subject to the PCORI fee and the applicable dollar amount that must be used to determine the section 4376 fee for that plan year.

Consistent with the proposed regulations, these final regulations require an issuer of a specified health insurance policy and plan sponsor of an applicable self-insured health plan to report and pay the PCORI fee for a policy year or plan year no later than July 31 of the year following the last day of the policy or plan year.

One commentator asked that the final regulations provide that the reporting and payment due date for a plan sponsor that uses the Form 5500 method to determine the PCORI fee be the due date (including extensions) for the plan’s Form 5500. The extended due date for a Form 5500 for a plan with a calendar year plan year is generally October 15 of the following year. As discussed earlier in this preamble, the Institute is funded in part from the PCORI fee. Under current rules, the PCORI fee ceases to apply after the end of the last policy and plan year ending before October 1, 2019, (with a due date of July 31, 2020) and funding for the Institute terminates on September 30, 2019. This lag between the last year of the PCORI fee (policy and plan years ending before October 1, 2019) and the proposed due date for the fee for the last year (July 31, 2020) means that the PCORI fee collected for the last year will not be available to the Institute. A delay for policy or plan years ending in years before 2019, as requested, would permit the PCORI fee for the policy or plan year ending during 2018 to be paid after September 30, 2019, and result in the Institute losing an additional year of funding. Accordingly, the Treasury Department and IRS have determined that delaying the proposed due date would result in additional complications and burdens for the Institute. Thus, these final regulations retain the proposed rule set forth in §40.6071(a)-1(c) that all plan sponsors and issuers report and pay the PCORI fee no later than July 31 of the calendar year following the last day of the policy or plan year.

One commentator requested that the final regulations provide that plan sponsors may correct, without penalty, inadvertent errors if correction is within a specified period or if the error is de minimis. These final regulations do not adopt this change and, therefore, do not explicitly address corrections. As discussed in the preamble to the proposed regulations, the PCORI fee must be reported and paid on the Form 720, “Quarterly Federal Excise Tax Return.”

The applicable penalties related to late filing of the applicable form or late payment of the applicable fee, however, may be waived or abated if the issuer or plan sponsor has reasonable cause and the failure was not due to willful neglect. See §301.6651-1(c) relating to rules for showing of reasonable cause. Issuers and plan sponsors may use Form 720X, “Amended Quarterly Federal Excise Tax Return,” to make adjustments to liabilities reported on a previously filed Form 720, including adjustments that result in an overpayment.

The Treasury Department and the IRS recognized when issuing the proposed regulations that in certain instances the policy or plan year to which the PCORI fee would apply had already commenced, and therefore that transition relief was appropriate for purposes of counting lives covered under the policy or plan during the period before the issuance of the proposed regulations. Two commentators requested additional transition relief, including extending the good faith compliance period provided under the proposed regulations. These final regulations do not adopt this request because the Treasury Department and IRS have determined that the relief provided in the proposed regulations is sufficient.

Accordingly, consistent with the proposed regulations, these final regulations provide that an issuer using the actual count method for determining the average number of lives covered under a policy with a policy year that ends on or after October 1, 2012, could begin counting lives covered under a policy as of May 14, 2012 (30 days after the date that the proposed regulations were published in the Federal Register), rather than the first day of the policy year, and divide by the appropriate number of days remaining in the policy year. Similarly, for policy years that end on or after October 1, 2012, but that began before May 14, 2012, these regulations provide that issuers using the snapshot method could use counts from quarters beginning on or after May 14, 2012, to determine the average number of lives covered under the policy. These final regulations also permit a plan sponsor to use any reasonable method to determine the average number of lives covered under an applicable self-insured health plan for a plan year beginning before July 11, 2012 (90 days after the date that the proposed regulations were published in the Federal Register), and ending on or after October 1, 2012.

The proposed regulations did not permit third-party reporting or payment of the PCORI fee. One commentator requested that the final regulations permit third-party reporting and payment. Another commentator requested that the final regulations permit affiliated insurers to designate an insurer that will be responsible for payment of the section 4375 fee as long as the responsible insurer consents to such designation. Because the PCORI fee ceases to apply to policy years and plan years that end on or after October 1, 2019, the Treasury Department and IRS have determined that the burden and complexity that would have to be addressed by issuers, plan sponsors and the IRS to develop and operate a third-party reporting and payment regime significantly outweigh the benefits of such a regime. Therefore, the final regulations do not permit or include rules for third-party reporting or payment of the PCORI fee.

(a) * * * References in this part to “taxes” also include references to the fees imposed by sections 4375 and 4376. * * *

* * * * *

Par. 3. Section 40.6011(a)-1 is amended by:

1. In paragraph (a)(2)(i), first sentence, the language “paragraph (b) of this section” is removed and the language “paragraphs (b) and (c) of this section” is added in its place.

2. Paragraph (c) is added.

The addition reads as follows:

* * * * *

(c) Fees on health insurance policies and self-insured health plans—(1) In general. A return that reports liability imposed by section 4375 or 4376 is a return for policies or plans with policy or plan years ending in the previous calendar year, and, for issuers that determine the average number of lives covered under a policy for purposes of section 4375 using the member months method under §46.4375-1(c)(2)(v) or the state form method under §46.4375-1(c)(2)(vi) of this chapter, the return is for all policies in effect during the previous calendar year. The second sentence of paragraph (a)(2)(i) of this section (relating to filing quarterly returns regardless of whether liability is incurred) does not apply to a person that files a Form 720, “Quarterly Federal Excise Tax Return,” only to report liability imposed by section 4375 or 4376.

(2) Applicability date. This paragraph (c) applies to returns that report liability imposed by section 4375 or 4376.

Par. 4. Section 40.6071(a)-1 is amended as follows:

1. Paragraph (c) is revised.

2. Paragraph (d) is added.

The revision and addition read as follows:

* * * * *

(c) Fees on health insurance policies and self-insured health plans—(1) Specified health insurance policies. A return that reports liability for the fee imposed by section 4375 must be filed by July 31 of the calendar year immediately following the last day of the policy year. For issuers that determine the average number of lives covered under the policy for section 4375 using the member months method under §46.4375-1(c)(2)(v) or the state form method under §46.4375-1(c)(2)(vi), the return must be filed by July 31 of the immediately following calendar year. Thus, for example, a return that reports liability for the fee imposed by section 4375 for the year ending on December 31, 2012, must be filed by July 31, 2013.

(2) Applicable self-insured health plans. A return that reports liability for the fee imposed by section 4376 for a plan year must be filed by July 31 of the calendar year immediately following the last day of the plan year. Thus, for example, a return that reports liability for the fee imposed by section 4376 for the plan year ending on January 31, 2013, must be filed by July 31, 2014.

(d) Effective/Applicability date. Paragraphs (a) and (b) of this section apply to returns for calendar quarters beginning on or after October 1, 2001, and paragraph (c) of this section applies to returns that report liability imposed by section 4375 or 4376.

* * * * *

(e) * * *

(1) * * *

(iv) Sections 4375 and 4376 (relating to fees on health insurance policies and self-insured health plans).

* * * * *

(a) In general. An issuer of a specified health insurance policy is liable for a fee imposed by section 4375 for policy years ending on or after October 1, 2012, and before October 1, 2019. Paragraph (b) of this section provides definitions that apply for purposes of section 4375 and this section. Paragraph (c) of this section provides rules for calculating the fee under section 4375. Paragraph (d) of this section provides the applicability date. For rules relating to filing the required return and paying the fee, see §§40.6011(a)-1 and 40.6071(a)-1 of this chapter.

(b) Definitions. The following definitions apply for purposes of section 4375 and this section. See also §46.4377-1 for additional definitions.

(1) Specified health insurance policy—(i) In general. Except as provided in paragraph (b)(1)(ii) of this section and §46.4377-1, specified health insurance policy means any accident and health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the United States (as defined in §46.4377-1(a)(2)), including prepaid health coverage arrangements described in paragraph (b)(2) of this section. Specified health insurance policy also includes any policy that provides accident and health coverage to an active employee, former employee, or qualifying beneficiary, as continuation coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) or similar continuation coverage under other Federal law or state law.

(ii) Exceptions. The term specified health insurance policy does not include—

(A) Any insurance policy if substantially all of its coverage is of excepted benefits described in section 9832(c);

(B) Any group policy issued to an employer where the facts and circumstances show that the group policy was designed and issued specifically to cover primarily employees who are working and residing outside of the United States (as defined in §46.4377-1(a)(3));

(C) Any stop loss or indemnity reinsurance policy; or

(D) Any insurance policy to the extent it provides an employee assistance program, disease management program, or wellness program if the program does not provide significant benefits in the nature of medical care or treatment.

(iii) Stop loss policy. For purposes of paragraph (b)(1)(ii) of this section, stop loss policy means an insurance policy in which—

(A) The insurer that issues the policy to a person establishing or maintaining a self-insured health plan becomes liable for all, or an agreed upon portion of, losses that person incurs in covering the applicable lives in excess of a specified amount; and

(B) The person establishing or maintaining the self-insured health plan retains its liability to, and its contractual relationship with, the applicable lives covered.

(iv) Indemnity reinsurance policy. For purposes of paragraph (b)(1)(ii) of this section, indemnity reinsurance policy means an agreement between two or more insurance companies under which—

(A) The reinsuring company agrees to accept and to indemnify the issuing company for all or part of the risk of loss under policies specified in the agreement; and

(B) The issuing company retains its liability to, and its contractual relationship with, the applicable lives covered.

(2) Prepaid health coverage arrangement. The term prepaid health coverage arrangement means an arrangement under which fixed payments or premiums are received as consideration for a person’s agreement to provide or arrange for the provision of accident and health coverage to individuals residing in the United States, regardless of how such coverage is provided or arranged to be provided. For example, any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract is a specified health insurance policy.

(c) Calculation of fee—(1) In general. The amount of the fee for a policy for a policy year is equal to the product of the average number of lives covered under the policy for the policy year (determined in accordance with paragraphs (c)(2) and (c)(3) of this section) and the applicable dollar amount (determined in accordance with paragraph (c)(4) of this section). For purposes of computing the fee under this paragraph (c), in the case of an issuer that determines the average number of lives covered for all policies in effect during a calendar year using the member months method under paragraph (c)(2)(v) of this section or the state form method under paragraph (c)(2)(vi) of this section, the applicable dollar amount with respect to such issuer’s policies for such calendar year is the applicable dollar amount for policy years ending on December 31 of such calendar year (determined in accordance with paragraph (c)(4) of this section), except that the applicable dollar amount with respect to such an issuer’s policies for calendar year 2019 is the applicable dollar amount for policy years ending on September 30, 2019. For more information, see the examples in paragraphs (c)(2)(iii)(B), (c)(2)(iv)(B), (c)(2)(v)(B), and (c)(2)(vi)(B) of this section.

(2) Determination of the average number of lives covered under a policy—(i) In general. To determine the average number of lives covered under a specified health insurance policy during a policy year, an issuer must use one of the following methods—

(A) The actual count method (described in paragraph (c)(2)(iii) of this section);

(B) The snapshot method (described in paragraph (c)(2)(iv) of this section);

(C) The member months method (described in paragraph (c)(2)(v) of this section); or

(D) The state form method (described in paragraph (c)(2)(vi) of this section).

(ii) Consistency requirements. An issuer must use the same method of calculating the average number of lives covered under a policy consistently for the duration of the year. In addition, for all policies for which a liability is reported on a Form 720, “Quarterly Federal Excise Tax Return,” for a particular year, the issuer must use the same method of computing lives covered. An issuer that determines the average number of lives covered by using the actual count method described in paragraph (c)(2)(iii) of this section or the snapshot method described in paragraph (c)(2)(iv) of this section may change its method of computing the average lives covered to the snapshot method or actual count method, respectively, provided that the issuer uses the same method for computing the average lives covered for all policies for which a liability is reported on the Form 720 for that year. For example, an issuer with a policy having a policy year that ends on June 30, Policy A, may determine the average number of lives covered under Policy A for July 1, 2013, to June 30, 2014, using the actual count method if the issuer uses the actual count method for all policies for which a liability will be reported on the Form 720 due by July 31, 2015 (the due date for return that will include the liability for the July 2013 to June 2014 policy year for Policy A). The issuer may change its method for determining the average number of lives covered under Policy A to the snapshot method for the July 1, 2014, to June 30, 2015, policy year, provided that the snapshot method is used for all policies for which a liability will be reported on the Form 720 due by July 31, 2016 (the due date for return that will include the liability for the July 2014 to June 2015 policy year for Policy A). An issuer that determines the average number of lives covered by using the member months method under paragraph (c)(2)(v) of this section or the state form method under paragraph (c)(2)(vi) of this section must use the same method for calculating lives covered for all policy years for which the fee applies.

(iii) Actual count method—(A) Calculation method. An issuer may determine the average number of lives covered under a policy for a policy year by adding the total number of lives covered for each day of the policy year and dividing that total by the number of days in the policy year.

(B) Example. The following example illustrates the principles of paragraphs (c)(1) and (c)(2)(iii)(A) of this section:

Example. Insurance Company A issues three policies that are in effect during 2014, Group Health Insurance Policy A, which has a policy year from December 1 to November 30, Group Health Insurance Policy B, which has a policy year from March 1 to February 28, and Group Health Insurance Policy C, which has a policy year from January 1 to December 31. To calculate the average number of lives covered for 2014, Insurance Company A must calculate the average number of lives covered for each of its three policies for the policy year that ends in 2014. Insurance Company A chooses to use the actual count method under paragraph (c)(2)(iii)(A) of this section to determine average lives covered for policies having a policy year that ends in 2014. Insurance Company A calculates the sum of lives covered under Policy A for each day of the policy year ending November 30, 2014, as 3,285,000. The average number of lives covered under Policy A for the policy year ending November 30, 2014, is 3,285,000 divided by 365, or 9,000. Insurance Company A calculates the sum of lives covered under Policy B for each day of the policy year ending February 28, 2014, as 547,500. The average number of lives covered under Policy B for the policy year ending on February 28, 2014, is 547,500 divided by 365, or 1,500. Insurance Company A calculates the sum of lives covered under Policy C for each day of the policy year ending December 31, 2014, as 4,380,000. The average number of lives covered under Policy C for the policy year ending December 31, 2014, is 4,380,000 divided by 365, or 12,000. To calculate the section 4375 fee under paragraph (c)(1) of this section for calendar year 2014, Insurance Company A must first determine the applicable dollar amount for each policy under paragraph (c)(4) of this section and multiply that amount by the average number of lives covered for that policy. Insurance Company A then adds the total fees for all three policies to determine the total fee under section 4375 that it must pay for calendar year 2014.

(iv) Snapshot method—(A) Calculation method. An issuer may determine the average number of lives covered under a policy for a policy year by adding the totals of lives covered on a date during the first, second, or third month of each quarter (or more dates in each quarter if an equal number of dates is used for each quarter), and dividing that total by the number of dates on which a count is made. For purposes of this paragraph (c)(2)(iv)(A), each date used for the second, third and fourth quarters must be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates used must be within the same policy year. If an issuer uses multiple dates for the first quarter, the issuer must use dates in the second, third, and fourth quarters that correspond to each of the dates used for the first quarter or are within three days of such corresponding dates, and all dates used must be within the same policy year. The 30^th and 31^st day of a month are treated as the last day of the month for purposes of determining the corresponding date for any month that has fewer than 31 days (for example, if either March 30 or March 31 is used as a counting date for a calendar year policy, June 30 is the corresponding date for the second quarter).

(B) Example. The following example illustrates the principles of paragraphs (c)(1) and (c)(2)(iv)(A) of this section:

Example. (i) Insurance Company B issues three policies with 12-month policy years that end in 2014, Group Health Insurance Policy A, which has a policy year from December 1 to November 30, Group Health Insurance Policy B, which has a policy year from March 1 to February 28, and Group Health Insurance Policy C, which has a policy year from January 1 to December 31. To calculate the average number of lives covered for 2014, Insurance Company B must calculate the average number of lives covered for each of its three policies for the policy year that ends in 2014. Insurance Company B chooses to determine the average lives covered using the snapshot method for all policies that have a policy year that ends in 2014 and chooses to count lives covered on a single date of the first month of each quarter of the policy years. Thus, for Policy A, Insurance Company B must count lives covered on a single date falling in each of December 2013, March 2014, June 2014 and September 2014; for Policy B, Insurance Company B must count lives covered on a single date falling in each of March 2014, June 2014, September 2014 and December 2014; and for Policy C, Insurance Company B must count lives covered on a single date falling in each of January 2014, April 2014, July 2014 and October 2014. In addition, the date for each of the second, third, and fourth quarters must fall within three days of the date in such quarter that corresponds to the date used for the first quarter, and must fall within the same policy year.

(ii) On December 6, 2013, Policy A covers 8,900 lives, on March 7, 2014, 9,100 lives, on June 6, 2014, 9,050 lives, and on September 5, 2014, 9,050 lives. Insurance Company B treats the average number of lives covered under Policy A for the policy year ending November 30, 2014, as 36,100 (8,900 + 9,100 + 9,050 + 9,050) divided by 4, or 9,025.

(iii) On March 4, 2013, Policy B covers 1,500 lives, on June 7, 2013, 1,350 lives, on September 6, 2013, 1,400 lives, and on December 6, 2013, 1,550 lives. Insurance Company B treats the average number of lives covered under Policy B for the policy year ending February 28, 2014, as 5,800 (1,500 + 1,350 + 1,400 + 1,550) divided by 4, or 1,450.

(iv) On January 6, 2014, Policy C covers 12,500 lives, on April 4, 2014, 12,250 lives, on July 7, 2014, 12,000 lives, and on October 3, 2014, 11,250 lives. Insurance Company B treats the average number of lives covered under Policy C for the policy year ending December 31, 2014, as 47,750 (12,500 + 12,250 + 12,000 + 11,250) divided by 4, or 12,000.

(v) To calculate the section 4375 fee under paragraph (c)(1) of this section for calendar year 2014, Insurance Company B must first determine the applicable dollar amount for each policy under paragraph (c)(4) of this section and multiply that amount by the number of average lives covered for that policy. Insurance Company B then adds the total fees for all three policies to determine the total fee under section 4375 that it must pay for calendar year 2014.

(v) Member months method—(A) Calculation method. An issuer may determine the average number of lives covered under all policies in effect for a calendar year based on the member months (an amount that equals the sum of the totals of lives covered on pre-specified days in each month of the reporting period) reported on the National Association of Insurance Commissioners (NAIC) Supplemental Health Care Exhibit filed for that calendar year. Under this method, the average number of lives covered under the policies in effect for the calendar year equals the member months divided by 12.

(B) Example. The following example illustrates the principles of paragraphs (c)(1) and (c)(2)(v)(A) of this section:

Example. Insurance Company C chooses to determine the average number of lives covered for all years to which the section 4375 fee applies using the member months method of paragraph (c)(2)(v)(A) of this section. Insurance Company C reports 12,000,000 as its member months on the NAIC Supplemental Health Care Exhibit filed for calendar year 2013. Under the member months method, Insurance Company C calculates the average number of lives covered for all its specified health insurance policies in force during calendar year 2013 by dividing 12,000,000 (member months) by 12 (number of months in the reporting period), which equals 1,000,000. To determine the section 4375 fee it must pay for calendar year 2013, Insurance Company C multiplies 1,000,000 by the applicable dollar amount that is in effect at the end of the calendar year under paragraph (c)(4) of this section.

(vi) State form method—(A) Calculation method. An issuer that is not required to file NAIC annual financial statements may determine the number of lives covered under all policies in effect for the calendar year using a form that is filed with the issuer’s state of domicile and a method similar to that described in paragraph (c)(2)(v) of this section, if the form reports the number of lives covered in the same manner as member months are reported on the NAIC Supplemental Health Care Exhibit.

(B) Example. The following example illustrates the principles of paragraphs (c)(1) and (c)(2)(vi)(A) of this section:

Example. Insurance Company D is not required to file the NAIC Supplemental Health Care Exhibit, but files a form with its state of domicile. Insurance Company D chooses to determine the average number of lives covered for all years to which the section 4375 fee applies using the state form method of paragraph (c)(2)(vi)(A) of this section. The state form reports the number of lives covered in the same manner as member months is reported on the NAIC Supplemental Health Care Exhibit. For calendar year 2013, Insurance Company D reports 12,000,000 as its equivalent member months on the state form. Under the state form method, Insurance Company D calculates the average number of lives covered for all of its specified health insurance policies in force during calendar year 2013 by dividing 12,000,000 (equivalent member months) by 12 (number of months in the reporting period), which equals 1,000,000. To determine the section 4375 fee it must pay for calendar year 2013, Insurance Company D multiplies 1,000,000 by the applicable dollar amount that is in effect at the end of the calendar year under paragraph (c)(4) of this section.

(3) Special rules for the first year and the last year the fee is in effect—(i) Calculation of the average number of lives covered under the policy for the first year the fee is in effect. For issuers that determine the average number of lives covered using data reported on the 2012 NAIC Supplemental Health Care Exhibit or a permitted state form that covers the 2012 calendar year, the average number of lives covered under all policies in effect for the 2012 calendar year equals the average number of lives covered for that year (as determined under paragraph (c)(2)(v) or (vi) of this section) multiplied by 1/4. The resulting number is deemed to be the average number of lives covered for policies with policy years ending on or after October 1, 2012, and before January 1, 2013. For policy years beginning before May 14, 2012, and ending on or after October 1, 2012, issuers that determine the average number of lives covered using the actual count method under paragraph (c)(2)(iii) of this section may calculate the average number of lives covered using data from the period beginning May 14, 2012, through the end of the policy year. For policy years beginning before May 14, 2012, and ending on or after October 1, 2012, issuers that determine the average number of lives covered using the snapshot method under paragraph (c)(2)(iv) of this section may calculate the average number of lives covered using dates from the quarters remaining in the policy year starting on or after May 14, 2012. If an abbreviated year is used, the issuer will divide the number of lives covered by the number of days from May 14, 2012, through the end of the policy year (for the actual count method) or the number of days on which a count was made (for the snapshot method).

(ii) Calculation of the average number of lives covered under the policy for the last year the fee is in effect. For issuers that determine the average number of lives covered using data reported on the 2019 NAIC Supplemental Health Care Exhibit or a permitted state form that covers the 2019 calendar year, the average number of lives covered for all policies in effect during the 2019 calendar year equals the average number of lives covered for that year (as determined under paragraph (c)(2)(v) or (vi) of this section) multiplied by 3/4. The resulting number is deemed to be the average number of lives covered for policies with policy years ending on or after January 1, 2019, and before October 1, 2019.

(iii) Examples. The following examples illustrate the principles of paragraph (c)(3) of this section:

Example 1. Insurance Company E issues Group Health Insurance Policy C, which has a policy year that ends on November 30, 2012. Insurance Company E determines the average number of lives covered under a policy by using the actual count method. Under that method, for that policy year, Insurance Company E calculates the sum of lives covered under Policy C for each day between May 14, 2012, and November 30, 2012, as 10,000. The average number of lives covered under Policy C for that policy year is 10,000 divided by the number of days from May 14, 2012, through November 30, 2012. Alternatively, Insurance Company E could have counted the number of lives covered for the entire policy year and divided the sum by 365.

Example 2. Insurance Company F reports 12,000,000 as its member months on its NAIC Supplemental Health Care Exhibit filed for calendar year 2012. Under the member months method, Insurance Company F calculates the average number of lives covered for 2012 by dividing 12,000,000 (member months) by 12 (number of months in the reporting period), and then multiplying the result (1,000,000) by 1/4, which equals 250,000. Accordingly, the average number of lives covered for policies with policy years ending on or after October 1, 2012, and before January 1, 2013, is 250,000.

(4) Applicable dollar amount. For policy years ending on or after October 1, 2012, and before October 1, 2013, the applicable dollar amount is $1. For policy years ending on or after October 1, 2013, and before October 1, 2014, the applicable dollar amount is $2. For any policy year ending in any Federal fiscal year beginning on or after October 1, 2014, the applicable dollar amount is the sum of—

(i) The applicable dollar amount for the policy 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 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 before the beginning of the Federal fiscal year.

(d) Effective/Applicability date. This section applies for policies with policy years ending on or after October 1, 2012, and before October 1, 2019.

(a) In general—(1) General rule. A plan sponsor of an applicable self-insured health plan is liable for a fee imposed by section 4376 for plans with plan years ending on or after October 1, 2012, and before October 1, 2019. Paragraph (b) of this section provides the definitions that apply for purposes of section 4376 and this section. Paragraph (c) of this section provides the requirements for calculating the fee imposed by section 4376. Paragraph (d) of this section provides the applicability date. For rules relating to filing the required return and paying the fee, see §§40.6011(a)-1 and 40.6071(a)-1.

(2) [Reserved]

(b) Definitions. The following definitions apply for purposes of section 4376 and this section. See §46.4377-1 for additional definitions.

(1) Applicable self-insured health plan—(i) In general. Except as provided in paragraph (b)(1)(ii) of this section and §46.4377-1, applicable self-insured health plan means a plan that provides for accident and health coverage (within the meaning of §46.4377-1(a)) if any portion of the coverage is provided other than through an insurance policy and the plan is established or maintained—

(A) By one or more employers for the benefit of their employees or former employees;

(B) By one or more employee organizations for the benefit of their members or former members;

(C) Jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees;

(D) By a voluntary employees’ beneficiary association, as described in section 501(c)(9);

(E) By an organization described in section 501(c)(6); or

(F) By a multiple employer welfare arrangement (as defined in section 3(40) of the Employee Retirement Income Security Act of 1974 (ERISA)), a rural electric cooperative (as defined in section 3(40)(B)(iv) of ERISA), or a rural cooperative association (as defined in section 3(40)(B)(v) of ERISA).

(ii) Exceptions. The term applicable self-insured health plan does not include any of the following:

(A) A plan that provides benefits substantially all of which are excepted benefits, as defined in section 9832(c). For example, a health flexible spending arrangement (health FSA) (as described in section 106(c)(2)) that satisfies the requirements to be treated as an excepted benefit under section 9832(c) and §54.9831-1(c)(3)(v) of this chapter is not an applicable self-insured health plan. A health FSA that is not treated as an excepted benefit under section 9832(c) and §54.9831-1(c)(3)(v) is an applicable self-insured health plan.

(B) An employee assistance program, disease management program, or wellness program if the program does not provide significant benefits in the nature of medical care or treatment.

(C) A plan that, as demonstrated by the facts and circumstances surrounding the adoption and operation of the plan, was designed specifically to cover primarily employees who are working and residing outside the United States (as defined in §46.4377-1(a)(3)).

(iii) Multiple self-insured arrangements established or maintained by the same plan sponsor. For purposes of section 4376, two or more arrangements established or maintained by the same plan sponsor that provide for accident and health coverage (within the meaning of §46.4377-1(a)) other than through an insurance policy and that have the same plan year may be treated as a single applicable self-insured health plan for purposes of calculating the fee imposed by section 4376. For example, if a plan sponsor establishes or maintains a self-insured arrangement providing major medical benefits, and a separate self-insured arrangement with the same plan year providing prescription drug benefits, the two arrangements may be treated as one applicable self-insured health plan so that the same life covered under each arrangement would count as only one covered life under the plan for purposes of calculating the fee. Similarly, if a plan sponsor provides a Health Reimbursement Arrangement (HRA) and another applicable self-insured health plan that provides major medical coverage, the HRA and the major medical plan may be treated as one applicable self-insured health plan if the HRA and the self-insured plan have the same plan year.

(iv) Examples. The following examples illustrate the principle of this paragraph (b)(1):

Example 1. (i) Plan Sponsor D sponsors and maintains three separate plans to provide certain benefits to its employees — Plan 501, Plan 502, and Plan 503.

(ii) Plan 501 is a calendar year plan that provides accident and health benefits, other than through insurance (that is, on a self-insured basis), to employees of Plan Sponsor D. Plan 502 is a calendar year HRA that can be used to pay for qualified accident and medical expenses for employees of Plan Sponsor D and their eligible dependents. Plan 503 provides dental and vision benefits for employees of Plan Sponsor D and eligible dependents, other than through insurance (that is, on a self-insured basis).

(iii) Because Plan 501 and Plan 502 provide accident and health coverage (within the meaning of §46.4377-1(a)) and are maintained by Plan Sponsor D for the benefit of its employees, Plans 501 and 502 are applicable self-insured health plans that are subject to the fee imposed by section 4376. Because dental and vision benefits are excepted benefits, as defined in section 9832(c), Plan 503 is not an applicable self-insured health plan subject to the section 4376 fee. Under the special rule set forth in §46.4376-2(b)(1)(iii), Plan Sponsor D may treat Plans 501 and 502 (both self-insured plans with a calendar year plan year) as a single plan for purposes of calculating the fee imposed by section 4376.

Example 2. Same facts as Example 1, except Plan 503 is not a Plan that provides dental and vision benefits, but rather a plan that provides accident and health coverage solely to employees who are working and residing outside the United States and does not provide any benefits to employees who are not working and residing outside the United States. Plan 503 is designed specifically to provide coverage to employees working and residing outside the United States because it limits coverage to these employees. Therefore, in accordance with the exception described in §46.4376-1(b)(1)(ii)(C), Plan 503 is not an applicable self-insured health plan.

(2) Plan sponsor—(i) In general. The term plan sponsor means—

(A) The employer, in the case of an applicable self-insured health plan established or maintained by a single employer;

(B) The employee organization, in the case of an applicable self-insured health plan established or maintained by an employee organization;

(C) The joint board of trustees, in the case of a multiemployer plan (as defined in section 414(f));

(D) The committee, in the case of a multiple employer welfare arrangement (as defined in section 3(40) of ERISA);

(E) The cooperative or association that establishes or maintains an applicable self-insured health plan established or maintained by a rural electric cooperative (as defined in section 3(40)(B)(iv) of ERISA) or rural cooperative association (as defined in section 3(40)(B)(v) of ERISA);

(F) The trustee, in the case of an applicable self-insured health plan established or maintained by a voluntary employees’ beneficiary association (meaning that the voluntary employees’ beneficiary association is not merely serving as a funding vehicle for a plan that is established or maintained by an employer or other person); or

(G) In the case of an applicable self-insured health plan the plan sponsor of which is not described in paragraphs (b)(2)(i)(A) through (F) of this section, the person identified by the terms of the document under which the plan is operated as the plan sponsor, or the person designated by the terms of the document under which the plan is operated as the plan sponsor for section 4376 purposes, provided that designation is made in writing, and that person has consented to the designation in writing, by no later than the date by which the return paying the fee under section 4376 for that plan year is required to be filed, after which date that designation for that plan year may not be changed or revoked, and provided further that a person may be designated as the plan sponsor only if the person is one of the persons establishing or maintaining the plan (for example, one of the employers that establishes or maintains the plan with one or more other employers or employee organizations).

(H) In the case of an applicable self-insured health plan the sponsor of which is not described in paragraphs (b)(2)(i)(A) through (F) of this section, and for which no identification or designation of a plan sponsor has been made pursuant to paragraph (b)(2)(i)(G) of this section, each employer that establishes or maintains the plan (with respect to employees of that employer), each employee organization that establishes or maintains the plan (with respect to members of that employee organization), and each board of trustees, cooperative, or association that establishes or maintains the plan, meaning that each plan sponsor must file a separate Form 720, “Quarterly Federal Excise Tax Return,” reflecting its separate liability under section 4376.

(ii) Examples. The following examples illustrate the principles of paragraph (b)(2) of this section:

Example 1. (i) Corporation XYZ is a holding company with no employees that owns all the issued and outstanding shares of Employer X, Employer Y, and Employer Z. Employer X, Employer Y, and Employer Z have established the XYZ Group Health Plan to provide accident and health coverage, provided other than through an insurance policy, for the benefit of their employees. The XYZ Group Health Plan has a calendar year plan year. In addition, there is no plan sponsor identified or designated in the plan document.

(ii) Because the XYZ Group Health Plan provides accident and health coverage other than through an insurance policy, and is established by one or more employers for the benefit of their employees, the XYZ Group Health Plan is an applicable self-insured health plan under section 4376(c)(2)(A) and paragraph (b)(1)(i)(A) of this section. Because a plan sponsor is not identified or designated in the governing plan document, the plan sponsor, for purposes of section 4376, is determined under paragraph (b)(2)(i)(H) of this section as each employer that establishes or maintains the plan (Employer X, Employer Y, and Employer Z), each with respect to its employees covered under the plan. Accordingly, Employer X, Employer Y, and Employer Z each must file a Form 720 reflecting their separate liabilities under section 4376, calculated based on lives covered that are employees of that employer (or spouses, dependents, or other beneficiaries of employees of that employer) and the applicable dollar amount in effect for the plan year.

Example 2. The same facts as Example 1, except that the governing plan document designates Employer X as the plan sponsor of the XYZ Group Health Plan for purposes of the fee under section 4376 and Employer X consents to this designation no later than the due date for paying the fee under section 4376. Accordingly, the plan sponsor for purposes of section 4376 is determined under paragraph (b)(2)(i)(G) of this section as Employer X. Employer X must file a Form 720 reflecting liabilities under section 4376, calculated based upon lives covered that are employees of Employer X, Employer Y, or Employer Z, or spouses, dependents, or other beneficiaries of employees of those employers and the applicable dollar amount in effect for the plan year.

(c) Calculation of fee—(1) In general. The amount of the fee for a plan year is equal to the product of the average number of lives covered under the plan for the plan year (determined in accordance with paragraph (c)(2) of this section) and the applicable dollar amount (determined in accordance with paragraph (c)(3) of this section).

(2) Determination of the average number of lives covered under the plan—(i) In general. To determine the average number of lives covered under an applicable self-insured health plan during a plan year, a plan sponsor must use one of the following methods—

(A) The actual count method (described in paragraph (c)(2)(iii) of this section);

(B) The snapshot method (described in paragraph (c)(2)(iv) of this section); or

(C) The Form 5500 method (described in paragraph (c)(2)(v) of this section).

(ii) Consistency within plan year. A plan sponsor must use the same method of calculating the average number of lives covered under the plan consistently for the duration of the plan year. However, a plan sponsor may use a different method from one plan year to the next.

(iii) Actual count method—(A) In general. A plan sponsor may determine the average number of lives covered under a plan for a plan year by adding the totals of lives covered for each day of the plan year and dividing that total by the number of days in the plan year.

(B) Example. The following example illustrates the principles of paragraphs (c)(1) and (c)(2)(iii)(A) of this section:

Example. Employer A is the plan sponsor of the Employer A Self-Insured Health Plan, which has a calendar year plan year. Employer A calculates the sum of lives covered under the plan for each day of the plan year ending December 31, 2013 as 3,285,000. The average number of lives covered under the plan for the plan year ending December 31, 2013, is 3,285,000 divided by 365, or 9,000. To calculate the section 4376 fee for the plan under paragraph (c)(1) of this section for the plan year ending December 31, 2013, Employer A must determine the applicable dollar amount under paragraph (c)(3) of this section and multiply that amount by 9,000.

(iv) Snapshot method—(A) In general. A plan sponsor may determine the average number of lives covered under an applicable self-insured health plan for a plan year by adding the totals of lives covered on a date during the first, second, or third month of each quarter of the plan year (or more dates in each quarter if an equal number of dates is used in each quarter), and dividing that total by the number of dates on which a count was made. For purposes of this paragraph (c)(2)(iv), each date used for the second, third and fourth quarter must be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates used must fall within the same plan year. If a plan sponsor uses multiple dates for the first quarter, the plan sponsor must use dates in the second, third, and fourth quarters that correspond to each of the dates used for the first quarter or are within three days of such corresponding dates, and all dates used must fall within the same plan year. The 30^th and 31^st day of a month are treated as the last day of the month for purposes of determining the corresponding date for any month that has fewer than 31 days (for example, if either March 30 or March 31 is used for a calendar year plan, June 30 is the corresponding date for the second quarter). For purposes of this paragraph (c)(2)(iv), the number of lives covered on a designated date may be determined using either the snapshot factor method described in paragraph (c)(2)(iv)(B) of this section or the snapshot count method described in paragraph (c)(2)(iv)(C) of this section.

(B) Snapshot factor method. Under the snapshot factor method, the number of lives covered on a date is equal to the sum of—

(i) The number of participants with self-only coverage on that date; plus

(ii) The number of participants with coverage other than self-only coverage on the date multiplied by 2.35.

(C) Snapshot count method. Under the snapshot count method, the number of lives covered on a date equals the actual number of lives covered on the designated date.

(D) Examples. The following examples illustrate the principles of paragraphs (c)(1) and (c)(2)(iv) of this section:

Example 1. (i) Employer B is the plan sponsor of the Employer B Self-Insured Health Plan, which has a calendar year plan year. Employer B uses the snapshot method to determine the average number of lives covered under the plan and uses the snapshot count method to determine the number of lives covered on a day in the first month of each calendar quarter of the plan year.

(ii) On January 4, 2013, the Employer B Self-Insured Health Plan covers 2,000 lives, on April 5, 2013, 2,100 lives, on July 5, 2013, 2,050 lives, and on October 4, 2013, 2,050 lives. Under the snapshot method, Employer B must determine the average number of lives covered under the Employer B Self-Insured Health Plan for the plan year ending December 31, 2013, as 8,200 (2,000 + 2,100 + 2,050 + 2,050) divided by 4, or 2,050. To calculate the section 4376 fee under paragraph (c)(1) of this section for the plan year ending December 31, 2013, Employer B must determine the applicable dollar amount under paragraph (c)(3) of this section and multiply that amount by 2,050.

Example 2. (i) Same facts as Example 1, except that for the 2014 plan year Employer B determines the number of lives covered that are not covered by self-only coverage using the snapshot factor method (that is, based on the number of participants with coverage other than self-only coverage multiplied by 2.35 (the factor set forth in (c)(2)(iv) of this section)).

(ii) On January 10, 2014, Employer B Self-Insured Health Plan provides self-only coverage to 600 employees and other than self-only coverage to 800 employees. On April 11, 2014, Employer B Self-Insured Health Plan provides self-only coverage to 608 employees and other than self-only coverage to 800 employees. On July 11, 2014 and October 10, 2014, Employer B Self-Insured Health Plan provides self-only coverage to 610 employees and other than self-only coverage to 809 employees.

(iii) Under the snapshot factor method, Employer B must determine the average number of lives covered under the Employer B Self-Insured Health Plan for the plan year ending December 31, 2014 as 9,988 [(600+(800 x 2.35)) + (608 + (800 x 2.35)) + (610 + (809 x 2.35)) + (610 + (809 x 2.35))] divided by 4, or 2,497. To calculate the section 4376 fee under paragraph (c)(1) of this section for the plan year ending December 31, 2014, Employer B must determine the applicable dollar amount under paragraph (c)(3) of this section and multiply that amount by 2,497.

(v) Form 5500 method—(A) Calculation method. A plan sponsor may determine the average number of lives covered under a plan for a plan year based on the number of participants reported on the Form 5500, “Annual Return/Report of Employee Benefit Plan,” or the Form 5500-SF, “Short Form Annual Return/Report of Small Employee Benefit Plan,” that is filed for the applicable self-insured health plan for that plan year, provided that the Form 5500 or Form 5500-SF is filed no later than the due date for the fee imposed by section 4376 for that plan year. For purposes of this paragraph (c)(2)(v), the average number of lives covered under the plan for the plan year for a plan offering only self-only coverage equals the sum of the total participants covered at the beginning and the end of the plan year, as reported on the Form 5500 or Form 5500-SF for the applicable self-insured health plan, divided by 2. For purposes of this paragraph (c)(2)(v), the average number of lives covered under the plan for the plan year for a plan offering self-only coverage and coverage other than self-only coverage equals the sum of total participants covered at the beginning and the end of the plan year, as reported on the Form 5500 or Form 5500-SF filed for the applicable self-insured health plan.

(B) Examples. The following examples illustrate the principles of paragraphs (c)(1) and (c)(2)(v)(A) of this section:

Example 1. Employer C is the plan sponsor of the Employer C Self-Insured Health Plan, which has a calendar year plan year ending on December 31, 2013. Employer C is required to file a Form 5500 for the plan for the 2013 plan year by July 31, 2014. However, on July 30, 2014, Employer C obtains an automatic 2-1/2 month extension for filing the 2013 Form 5500. Employer C files the 2013 Form 5500 on September 30, 2014 (that is, before the October 15 extended due date). Employer C is not eligible to use the Form 5500 method to determine the average number of lives covered under Plan C for the plan year ending on December 31, 2013, because the 2013 Form 5500 was not filed by the original due date (that is, by July 31, 2014) for the return that reports liability for the fee imposed by section 4376 for the 2013 plan year.

Example 2. Same facts as Example 1, except that the Employer C Self-Insured Health Plan has a fiscal year plan year ending on July 31, 2013, and offers only self-only coverage. Employer C files a Form 5500 for the Employer C Self-Insured Health Plan for the plan year ending July 31, 2013 (the 2012 Form 5500), on the extended due date for filing the 2012 Form 5500 (May 15, 2014). Employer C is eligible to use the Form 5500 method to determine the average number of lives covered under Plan C for the plan year ending on July 31, 2013, because the 2012 Form 5500 had been filed by the due date for the return that reports liability for the fee imposed by section 4376 for that plan year (July 31, 2014).

Example 3. Same facts as Example 2, provided further that the Employer C Self-Insured Health Plan 2012 Form 5500 reports 4,000 plan participants on the first day of the plan year and 4,200 plan participants on the last day of the 2012 plan year. For purposes of calculating the fee under section 4376 using the Form 5500 method, Employer C must treat the number of lives covered for the plan year ending July 31, 2013, as equal to the sum of 4,000 and 4,200 or 8,200, divided by 2, or 4,100. To calculate the section 4376 fee under paragraph (c)(1) of this section for the plan year ending July 31, 2013, Employer C must determine the applicable dollar amount under paragraph (c)(3) of this section and multiply that amount by 4,100.

Example 4. Same facts as Example 3, except that the Employer C Self-Insured Health plan offers self-only coverage and family coverage. For purposes of calculating the fee under section 4376 using the Form 5500 method, Employer C must treat the number of lives covered for the plan year ending July 31, 2013, as equal to the sum of 4,000 and 4,200, or 8,200. To calculate the section 4376 fee under paragraph (c)(1) of this section for the plan year ending July 31, 2013, Employer C must determine the applicable dollar amount under paragraph (c)(3) of this section and multiply that amount by 8,200.

(vi) Special rule for health FSAs and HRAs. For purposes of this section, if a plan sponsor does not establish or maintain an applicable self-insured health plan other than a health flexible spending arrangement (health FSA) (as described in section 106(c)(2)) or a health reimbursement arrangement (as described in Notice 2002-45, 2002-2 C.B. 93) (HRA), the plan sponsor may treat each participant’s health FSA or HRA as covering a single life (and therefore the plan sponsor is not required to include as lives covered any spouse, dependent, or other beneficiary of the individual participant in the health FSA or HRA, as applicable). If a health FSA or HRA that is an applicable self-insured health plan has the same plan sponsor and plan year as another applicable self-insured health plan other than a health FSA or HRA, the two arrangements may be treated as a single plan under paragraph (b)(1)(iii) of this section. However, the special counting rule in this paragraph applies only for purposes of the health FSA or HRA and, therefore, applies only for purposes of the participants in the health FSA or HRA that do not participate in the other applicable self-insured health plan. The participants in the health FSA or HRA that participate in the other applicable self-insured health plan will be counted in accordance with the method applied for counting lives covered under that other plan as described in paragraph (b)(2)(i) of this section. See §601.601(d)(2) of this chapter.

(vii) Special rule for lives covered solely by the fully-insured options under an applicable self-insured health plan—(A) In general. If an applicable self-insured health plan provides accident and health coverage through fully-insured options and self-insured options, the plan sponsor is permitted to disregard the lives that are covered solely under the fully-insured options in determining the lives covered taken into account for the actual count method (described in paragraph (c)(2)(iii) of this section), the snapshot method (described in paragraph (c)(2)(iv) of this section), and the Form 5500 method (described in paragraph (c)(2)(v) of this section).

(B) Example. The following example illustrates the principles of paragraph (c)(2)(vii) of this section:

Example. (i) Employer C is the plan sponsor of the Employer C Health Plan (Plan P). The Plan offers self-only or family health and accident coverage under fully-insured or self-insured options. On June 28, 2015, Employer C files a Form 5500 for Plan P for the plan year ending December 31, 2014 indicating: (1) a total of 4,000 plan participants on the first day of the 2014 plan year; and (2) a total of 4,200 plan participants on the last day of the plan year. Employer C determines that there were 3,000 plan participants (and their families, as applicable) covered under the fully-insured option offered under the plan on the first day of the 2014 plan year, and 2,900 plan participants (and their families, as applicable) covered under the fully-insured option on the last day of the 2014 plan year. Employer C uses the Form 5500 method to calculate the number of lives covered for the 2014 plan year.

(ii) Pursuant to paragraph (c)(2)(vii) of this section, Employer C determines the number of lives covered for the 2014 plan year as: the sum of 1,000 (4,000 total participants on the first day of the plan year - 3,000 participants covered by the specified health insurance policy on the first day of the plan year) and 1,300 (4,200 total participants - 2,900 participants covered by the specified health insurance policy on the first day of the plan year), or 2,300. To calculate the section 4376 fee under paragraph (c)(1) of this section for the 2014 plan year, Employer C must determine the applicable dollar amount under paragraph (c)(3) of this section and multiply that amount by 2,300.

(viii) Special rule for the first year the fee is in effect. Notwithstanding paragraph (c)(2)(i) of this section, for a plan year beginning before July 11, 2012, and ending on or after October 1, 2012, a plan sponsor may determine the average number of lives covered under the plan for the plan year using any reasonable method.

(3) Applicable dollar amount. For a plan year ending on or after October 1, 2012, and before October 1, 2013, the applicable dollar amount is $1. For a plan year ending on or after October 1, 2013, and before October 1, 2014, the applicable dollar amount is $2. For any plan year ending in any Federal fiscal year beginning on or after October 1, 2014, the applicable dollar amount is equal to the sum of—

(i) The applicable dollar amount for the 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 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 before the beginning of the Federal fiscal year.

(4) Examples. The following examples illustrate the principle of paragraph (c)(3) of this section.

Example 1. (Calendar year plan). (i) Plan Sponsor C maintains Plan X which has a calendar year plan year; the plan continues in operation for the entire calendar years 2012 through 2019. Plan X is an applicable self-insured health plan, within the meaning of §46.4376-1(b)(1), and Plan Sponsor C is liable for the fee imposed by section 4376, determined in accordance with these regulations, beginning with the 2012 plan year — the plan year beginning January 1, 2012, and ending December 31, 2012 — and ending with the 2018 plan year — the plan year beginning January 1, 2018, and ending December 31, 2018. In accordance with §40.6071(a)-1(c) of this chapter:

(ii) The first Form 720 that must be filed to report and pay the fee imposed by section 4376 for Plan X covers the 2012 plan year (January 1, 2012, through December 31, 2012) and must be filed no later than July 31, 2013, and the fee reported on this form must be calculated by multiplying the average number lives by $1 (the applicable dollar amount in effect for plans with plan years beginning on or after October 1, 2012, and before October 1, 2013); and

(ii) The last Form 720 that must be filed to report and pay the fee imposed by section 4376 for Plan X covers the 2018 plan year (January 1, 2018, through December 31, 2018) and must be filed no later than July 31, 2019, and the fee reported on this form must be calculated using the applicable dollar amount in effect for plan years ending on or after October 1, 2018, and before October 1, 2019.

Example 2. (Fiscal year plan). (i) Plan Sponsor B maintains Plan W, which has a fiscal year plan year ending on July 31; the plan continues in operation for the entire fiscal year plan years from August 1, 2012, through July 31, 2019. Plan W is an applicable self-insured health plan, within the meaning of §46.4376-1(b)(1), and Plan Sponsor B is liable for the fee imposed by section 4376, determined in accordance with these regulations, beginning with the 2012 plan year — the plan year beginning on August 1, 2012, and ending on July 31, 2013 — and ending with the 2018 plan year — plan year beginning on August 1, 2018, and ending July 31, 2019. In accordance with §40.6071(a)-1(c) of this chapter:

(ii) The first Form 720 that must be filed to report and pay the fee imposed by section 4376 for Plan X covers the 2012 plan year (August 1, 2012, through July 31, 2013) and must be filed no later than July 31, 2014, and the fee reported on this form must be calculated by multiplying the average number lives by $1 (the applicable dollar amount in effect for plans with plans years beginning on or after October 1, 2012, and before October 1, 2013); and

(iii) The last Form 720 that must be filed to report and pay the fee imposed by section 4376 for Plan X covers the 2018 plan year (August 1, 2018, through July 31, 2019) and must be filed no later than July 31, 2020, and the fee must be calculated using the applicable dollar amount in effect for plan years ending on or after October 1, 2018, and before October 1, 2019.

(d) Effective/Applicability date. This section applies for plan years that end on or after October 1, 2012, and before October 1, 2019.

(a) Definitions. The following definitions apply for purposes of sections 4375 and 4376 and §§46.4375-1 and 46.4376-1.

(1) Accident and health coverage. The term accident and health coverage means any coverage that, if provided by an insurance policy, would cause such policy to be a specified health insurance policy (as defined in section 4375(c) and §46.4375-1(b)(1)). Accident and health coverage also includes coverage for an active employee, a former employee, or a qualifying beneficiary that is continuation coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) or similar continuation coverage under other federal law or under state law.

(2) Individual residing in the United States—(i) The term individual residing in the United States means an individual with a place of abode in the United States.

(ii) Determination of place of abode. For purposes of paragraph (a)(2) of this section, an issuer or a plan sponsor may rely on the most recent address on file with the issuer or plan sponsor and may treat the primary insured and the primary insured’s spouse, dependents, or other beneficiaries covered by the policy as having the same place of abode. For this purpose, the primary insured is the individual covered by the policy whose eligibility for coverage was not due to that individual’s status as the spouse, dependent, or other beneficiary of another covered individual.

(3) United States. The term United States includes American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, the Virgin Islands, and any other possession of the United States.

(4) Federal fiscal year. The term Federal fiscal year means the year beginning on October 1 and ending on the following September 30.

(b) Treatment of exempt governmental programs—(1) In general. The fees imposed by sections 4375 and 4376 do not apply to any covered life under an exempt governmental program as defined in paragraph (b)(2) of this section.

(2) Exempt governmental program. For purposes of this section, exempt governmental program means any—

(i) Insurance program established under title XVIII of the Social Security Act;

(ii) Medical assistance program established by title XIX or XXI of the Social Security Act;

(iii) Program established by Federal law for providing medical care (other than through insurance policies) to individuals (or their spouses and dependents) by reason of such individuals being (or having been) members of the Armed Forces of the United States; and

(iv) Program established by Federal law for providing medical care (other than through insurance policies) to members of Indian tribes (as defined in section 4(d) of the Indian Health Care Improvement Act).

(c) Effective/Applicability date. This section applies to all policy and plan years that end on or after October 1, 2012, and before October 1, 2019.

* * * * *

(b) * * *

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.

Approved November 28, 2012.

Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).

Tax under the FICA is composed of Old-Age, Survivors, and Disability Insurance (OASDI) tax, also referred to as social security tax, and Hospital Insurance (HI) tax, also referred to as Medicare tax. The Medicare portion of FICA tax is imposed separately on the employer, under section 3111(b), and the employee, under section 3101(b), in an amount equal to a percentage of wages. Under section 3102, the employer is required to collect the employee portion of FICA tax by deducting the amount of the tax from wages, as and when paid, and is liable for payment of the tax required to be collected. Until collected, the employee also is liable for the employee portion of the tax. See §31.3102-1(d).

Under the RRTA, railroad employment is subject to a separate and distinct system of taxes from those imposed under the FICA. The RRTA serves as the functional equivalent of FICA for railroad employers, employees, and employee representatives (a group unique to the railroad industry). Tax under the RRTA is divided into tiers and each tier finances different benefits. Tier 1 RRTA tax provides equivalent social security and Medicare benefits. Section 3201(a) imposes Tier 1 RRTA tax on employees and section 3211(a) imposes Tier 1 RRTA tax on employee representatives, in an amount equal to the applicable percentage of compensation. For employees, the applicable percentage under section 3201(a) is the sum of the rates of tax under section 3101(a) and (b). For employee representatives, the applicable percentage under section 3211(a) is the sum of the rates of tax under sections 3101(a) and (b) and 3111(a) and (b).

Under section 3202, the employer is required to collect the employee portions of RRTA tax by deducting the amount of the taxes from compensation as and when paid, and is liable for payment of the taxes required to be collected. Until collected, the employee also is liable for the employee portion of the tax. See §31.3202-1(e).

The Affordable Care Act added section 3101(b)(2). Section 3101(b)(2) increases the employee portion of Medicare tax for wages received in any taxable year beginning after December 31, 2012, by an additional 0.9 percent of FICA wages which are in excess of certain threshold amounts. Additional Medicare Tax differs from Medicare tax in that Additional Medicare Tax is not imposed until wages exceed a threshold amount, and the threshold amount for application of the tax is based on the filing status of the individual. Under section 3101(b)(2), the threshold amount is $250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case. Additional Medicare Tax also differs from Medicare Tax in that there is no employer portion to correspond to the amount owed by the employee.

Additional Medicare Tax applies to RRTA compensation paid to railroad employees and employee representatives. See reference to section 3101(b) in sections 3201(a) and 3211(a). Accordingly, Tier 1 RRTA tax imposed under sections 3201(a) and 3211(a) will be increased for compensation received in any taxable year beginning after December 31, 2012, by an additional 0.9 percent of RRTA compensation which is in excess of certain threshold amounts as enumerated in section 3101(b)(2). The threshold amount for Additional Medicare Tax applies separately to the FICA and the RRTA. Accordingly, an individual will not combine FICA wages and RRTA compensation in determining whether Additional Medicare Tax applies under FICA or under RRTA.

The Affordable Care Act added section 3102(f). Section 3102(f)(1) provides that an employer’s obligation under section 3102(a) to withhold Additional Medicare Tax applies only to the extent that the wages the employee receives from the employer are in excess of $200,000 in a calendar year. Section 3102(f)(1) further provides that in satisfying its obligation to withhold Additional Medicare Tax, the employer may disregard the amount of wages received by the employee’s spouse.

Calculating wages for purposes of withholding Additional Medicare Tax is no different than calculating wages for FICA generally. Thus, for example, if an employee has amounts deferred under a nonqualified deferred compensation plan and the nonqualified deferred compensation (NQDC) is taken into account as wages for FICA tax purposes under the special timing rule described in §31.3121(v)(2)-1(a)(2), the NQDC would likewise be taken into account under the special timing rule for purposes of determining an employer’s obligation to withhold Additional Medicare Tax.

Similarly, when an employee is concurrently employed by related corporations and one of the corporations disburses wages for services performed for each of the employers and the arrangement otherwise satisfies the common paymaster provisions of section 3121(s), liability for FICA tax with respect to the wages disbursed by the common paymaster is computed as if there was a single employer. In this case, the obligation to withhold Additional Medicare Tax on wages in excess of $200,000 disbursed by the common paymaster would also be determined as if there was a single employer.

Section 3102(f)(2) specifies that to the extent Additional Medicare Tax is not withheld by the employer, the employee must pay the tax. This is consistent with the general FICA rule in §31.3102-1(d), which provides that the employee is liable for the employee portion of FICA tax until collected by the employer.

Section 3102(f)(3) provides that if an employer fails to withhold Additional Medicare Tax, and the tax is subsequently paid by the employee, the IRS will not collect the tax from the employer. Section 3102(f)(3) specifies, however, that the employer would remain subject to any applicable penalties or additions to tax for failure to withhold Additional Medicare Tax as required. Section 3102(f)(3), reflecting that Additional Medicare Tax is imposed only on employees and is ultimately based on the employee’s filing status, is similar to section 3402(d), which abates the employer’s liability for ITW when the employee has paid the income tax.

Section 1401 imposes social security and Medicare taxes on the self-employment income of every individual at the same combined employer and employee rates applicable under the FICA.

The Affordable Care Act added section 1401(b)(2). Section 1401(b)(2)(A) increases the Medicare tax on self-employment income for any taxable year beginning after December 31, 2012, by an additional 0.9 percent of self-employment income which is in excess of certain threshold amounts. As with Additional Medicare Tax under the FICA, the threshold amounts for an individual to be subject to Additional Medicare Tax under the Self-Employment Contributions Act (SECA) are determined by the individual’s filing status. The threshold amounts enumerated under section 1401(b)(2)(A), are $250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case.

Section 1401(b)(2)(B) provides for coordination with Additional Medicare Tax under the FICA and specifies that the threshold amounts under section 1401(b)(2)(A) are reduced (but not below zero) by the amount of wages taken into account in determining Additional Medicare Tax under the FICA. Section 1401(b)(2)(B) does not provide for similar coordination with Additional Medicare Tax under the RRTA. Therefore, the amount of RRTA compensation taken into account in determining Additional Medicare Tax under the RRTA will not reduce the threshold amounts under section 1401(b)(2)(A) for determining Additional Medicare Tax under the SECA.

Section 6654 imposes an addition to tax in the case of an individual’s underpayment of estimated tax. Generally, the addition to tax imposed under section 6654 will not apply to individuals who have sufficient ITW on wages or who make estimated tax payments throughout the year. Employees may request additional ITW on wages on Form W-4, “Withholding Allowance Certificate,” to reduce the need to make estimated tax payments to cover the individual’s tax liability.

Under section 6654(m), which was added by the Affordable Care Act, Additional Medicare Tax is treated as a tax subject to estimated tax payment requirements. In the case of employees, Additional Medicare Tax is collected through withholding on FICA wages or RRTA compensation in excess of $200,000 in a calendar year. In addition, employees may request additional ITW on wages on Form W-4 and use this additional ITW to apply against taxes shown on their return, including any Additional Medicare Tax liability. To the extent not withheld, Additional Medicare Tax must be included when making estimated tax payments.

The current regulations under section 6205 set forth the procedures for making interest-free adjustments for underpayments of employment taxes. Generally, under the regulations, if an employer ascertains an underpayment of FICA or RRTA tax, the employer can make an underpayment adjustment, within the period of limitations for assessment, by reporting the additional amount due on an adjusted return for the return period in which the wages or compensation was paid. For underpayments of ITW, subject to limited exceptions for correcting worker misclassification errors or for administrative errors (that is, errors involving the inaccurate reporting of the amount actually withheld) and for audit adjustments, an adjustment may be made only for errors ascertained during the calendar year in which the wages were paid.

The current regulations under section 6413(a) set forth the procedures for making interest-free adjustments for overpayments of employment taxes. Under the regulations, if an employer ascertains within the applicable period of limitations on credit or refund that an overpayment error was made, the employer is generally required to repay or reimburse its employees the amount of overcollected employee FICA tax or employee RRTA tax prior to the expiration of the applicable period of limitations on credit or refund. The regulations further provide that once an employer repays or reimburses an employee, the employer may report both the employee and employer portions of FICA or RRTA tax as an overpayment on an adjusted return within the period of limitations on credit or refund. The employer must generally certify on the adjusted return that it has repaid or reimbursed its employees.

Similar rules apply for making interest-free adjustments for overpayments of ITW, except that an interest-free adjustment may only be made if the employer ascertains the error and repays or reimburses its employees within the same calendar year that the wages were paid, unless the employer is correcting an administrative error.

In lieu of making an interest-free adjustment under section 6413(a) for an overpayment, employers may file a claim for refund pursuant to section 6402. Under section 6402(a), the IRS may credit the amount of an overpayment, including any interest, against any tax liability of the person who made the overpayment and shall, subject to certain offsets, refund any balance to such person. A claim for refund under section 6402(a) must be filed within the period of limitations on credit or refund. Section 6414 permits refunds of ITW only to the extent the amount of the ITW overpayment was not actually deducted and withheld from an employee.

The current regulations under section 6402(a) set out the procedures for filing a claim for refund of overpaid FICA and RRTA taxes. The regulations permit an employer to file a claim for refund of an overpayment of FICA or RRTA tax, but generally require the employer to certify as part of the claim process that the employer has repaid or reimbursed the employee’s share of the overpayment of FICA or RRTA tax to the employee or has secured the written consent of the employee to allowance of the refund or credit.

Generally, under the current section 6402 regulations, an employee may file a claim for refund of overpaid FICA or RRTA tax as long as the employee has not been repaid or reimbursed by the employer and does not give the employer consent to file a claim on his or her behalf, and the employee has not taken the overcollection into account in claiming a credit against, or refund of, his or her income tax, in the case of a claim under section 6413(c) for overpaid employee social security tax.

The current regulations under section 6414 set out the procedures for filing a claim for refund of overpaid ITW and provide that an employer may not file a claim for refund of an overpayment of ITW to the extent the amount was deducted or withheld from an employee.

The proposed regulations under section 3101(b) update the rates of tax for the social security and Medicare tax on employees, and add a paragraph describing the rate of Additional Medicare Tax. The proposed regulations also provide an updated example illustrating that the social security and Medicare rates applicable to the calendar year in which wages are received apply to compute the tax liability.

The proposed regulations under sections 3102 and 3202(a) describe the extent to which an employer is required to withhold Additional Medicare Tax. The proposed regulations under section 3102(f) provide that an employer must withhold Additional Medicare Tax from an employee’s wages only to the extent that the employee receives wages from the employer in excess of $200,000 in a calendar year. In determining whether wages exceed $200,000, an employer does not take into account the employee’s filing status or other wages or compensation which may impact the employee’s liability for the tax. An employee may not request that the employer deduct and withhold Additional Medicare Tax on wages of $200,000 or less. However, an employee who anticipates liability for Additional Medicare Tax may request that the employer deduct and withhold an additional amount of ITW under §31.3402(i)-2 on Form W-4. This additional ITW can apply against taxes shown on Form 1040, “U.S. Individual Tax Return,” including any Additional Medicare Tax liability. An employee might request that the employer deduct and withhold an additional amount of ITW on wages that are not in excess of $200,000 if, for example, the employee is married and files a joint return, and anticipates liability for Additional Medicare Tax because the combined wages of the employee and the employee’s spouse will exceed $250,000. The proposed regulations under sections 3102(f) and 3202(a) include examples illustrating the extent of the employer’s obligation to withhold Additional Medicare Tax.

Further, the proposed regulations under section 3102(f) provide that to the extent Additional Medicare Tax is not withheld by the employer, the employee is liable for the tax. The proposed regulations also provide that the IRS will not collect from an employer the amount of Additional Medicare Tax it failed to withhold from wages paid to an employee if the employee subsequently pays the Additional Medicare Tax. However, the proposed regulations also specify that the employer would remain subject to any applicable penalties or additions to tax for failure to withhold Additional Medicare Tax as required.

Although Additional Medicare Tax applies to RRTA compensation, the Affordable Care Act did not add provisions similar to section 3102(f) to the RRTA, nor does the RRTA cross-reference section 3102(f). However, in light of the general similarities between the FICA and the RRTA and the principles discussed above, and in order to provide guidance to railroad employers regarding their liability to withhold Additional Medicare Tax, the proposed regulations under section 3202(a) incorporate the same rules as provided in section 3102(f). Therefore, the proposed regulations under section 3202(a) provide that railroad employers must withhold Additional Medicare Tax from an employee’s compensation only to the extent the employee receives compensation from the employer in excess of $200,000 in a calendar year. Similar to the FICA rule, an employee may not request that the employer deduct and withhold Additional Medicare Tax on compensation of $200,000 or less. Instead, an employee who anticipates liability for Additional Medicare Tax may request that the employer deduct and withhold an additional amount of ITW under §31.3402(i)-2 on Form W-4 to apply against taxes shown on Form 1040, including any Additional Medicare Tax liability. The regulations under section 3202 further provide that: (1) to the extent Additional Medicare Tax is not withheld by the employer, the employee is liable for the tax; (2) the IRS will not collect Additional Medicare Tax from an employer who fails to withhold Additional Medicare Tax on compensation paid by the employer, if the tax is subsequently paid by the employee; and (3) the employer will remain subject to any applicable penalties or additions to tax for failure to withhold Additional Medicare Tax as required.

The proposed regulations under sections 3102(f) and 3202(a) provide that an employee is liable for Additional Medicare Tax on wages or compensation to the extent that the tax is not withheld by the employee’s employer. This is consistent with the general rule in §§31.3102-1(d) and 31.3202-1(e) for FICA and RRTA purposes, respectively, that provides that the employee is liable for the tax until collected by the employer. Under the proposed regulations under section 6011, an individual must report Additional Medicare Tax on Form 1040. An individual will claim credit for any withheld Additional Medicare Tax on Form 1040 and pay any such tax due that was not previously paid through withholding or estimated tax. For example, if an employee and his or her spouse each had wages of $200,000 or less, such that their employers did not withhold Additional Medicare Tax from the employee’s or the spouse’s wages, but the combined wages of the employee and the employee’s spouse exceed the threshold for a joint return under section 3101(b)(2) (that is, exceed $250,000), the proposed regulations indicate that the employee and the employee’s spouse are liable to pay Additional Medicare Tax. The proposed regulations under sections 3102(f) and 3202(a) include examples illustrating this principle for FICA wages and RRTA compensation, respectively.

The proposed regulations under section 1401(b) describe the extent to which an individual who has self-employment income is liable for Additional Medicare Tax. Specifically, the proposed regulations describe how the applicable threshold amounts under section 1401(b)(2)(A) are reduced (but not below zero) by the amount of FICA wages taken into account in determining Additional Medicare Tax liability. Thus, the proposed regulations under section 1401(b)(2) illustrate the application of the reduced threshold amounts for purposes of determining liability for Additional Medicare Tax attributable to the individual’s self-employment income.

The Affordable Care Act did not provide for a reduction in the self-employment income threshold amounts by the amount of any RRTA compensation taken into account in determining liability for Additional Medicare Tax. Accordingly, an individual who receives both RRTA compensation and self-employment income would not reduce the self-employment income threshold amounts under section 1401(b)(2)(A) by the amount of RRTA compensation taken into account in determining Additional Medicare Tax liability.

The proposed regulations under sections 6205 provide that adjustments of underpayments of Additional Medicare Tax may be made only if the error is ascertained in the same year the wages or compensation was paid, unless: (1) the underpayment is attributable to an administrative error, (2) section 3509 applies to determine the amount of the underpayment, due to the employer’s failure to treat the individual as an employee, or (3) the adjustment is the result of an IRS examination.

Similarly, the proposed regulations under section 6413 provide that an adjustment of overpaid Additional Medicare Tax may only be made if the employer ascertains the error in the year the wages or compensation was paid and repays or reimburses the employee the amount of the overcollection prior to the end of the calendar year. As in the case of all overpayment adjustments, the requirement to repay or reimburse does not apply to the extent that, after reasonable efforts, the employer cannot locate the employee. However, if an employer has not repaid or reimbursed the amount of the overcollection to the employee, an adjustment cannot be made.

The proposed regulations under section 6402 provide a process by which employers and employees claim refunds of overpaid Additional Medicare Tax. Under the proposed regulations, employers may claim refunds of overpaid Additional Medicare Tax only if the employer did not deduct or withhold the overpaid Additional Medicare Tax from the employee’s wages or compensation.

For employees, the proposed regulations eliminate the requirements that the employee first seek a refund from the employer and provide a statement in support of the employee’s claim. Further, the proposed regulations direct the employee to claim the refund or credit of overpaid Additional Medicare Tax by taking the overpayment into account in claiming a credit against, or refund of, tax on an individual tax return (for example, Form 1040) for the year in which the overpayment was made, or for a taxable year for which a tax return has been filed, by filing Form 1040X, “Amended U.S. Individual Income Tax Return.” This process is in lieu of filing a claim for refund for overpaid Additional Medicare Tax on Form 843, “Claim for Refund and Request for Abatement.” Employees may only claim a refund of Additional Medicare Tax if they have not received repayment or reimbursement from their employer in the context of an interest-free adjustment.

* * * * *

(b) The rates of tax on self-employment income are as follows (these regulations do not reflect off-Code revisions to the below rates):

(1) For Old-age, Survivors, and Disability Insurance:

(2)(i) For Hospital Insurance:

(ii) For Additional Medicare Tax:

* * * * *

(d) Special rules regarding Additional Medicare Tax. (1) General rule. An individual is liable for Additional Medicare Tax to the extent that his or her self-employment income exceeds the following threshold amounts.

(2) Coordination with Federal Insurance Contributions Act. (i) General rule. Under section 1401(b)(2)(B), the applicable threshold specified under section 1401(b)(2)(A) is reduced (but not below zero) by the amount of wages (as defined in section 3121(a)) taken into account in determining Additional Medicare Tax under section 3101(b)(2) with respect to the taxpayer. This rule does not apply to Railroad Retirement Tax Act (RRTA) compensation (as defined in section 3231(e)).

(ii) Examples. The rules provided in paragraph (d)(2)(i) of this section are illustrated by the following examples:

Example 1. A, a single filer, has $130,000 in self-employment income and $0 in wages. A is not liable to pay Additional Medicare Tax.

Example 2. B, a single filer, has $220,000 in self-employment income and $0 in wages. B is liable to pay Additional Medicare Tax on $20,000 ($220,000 in self-employment income minus the threshold of $200,000).

Example 3. C, a single filer, has $145,000 in self-employment income and $130,000 in wages. C’s wages are not in excess of $200,000 so C’s employer did not withhold Additional Medicare Tax. However, the $130,000 of wages reduces the self-employment income threshold to $70,000 ($200,000 threshold minus the $130,000 of wages). C is liable to pay Additional Medicare Tax on $75,000 of self-employment income ($145,000 in self-employment income minus the reduced threshold of $70,000).

Example 4. E, who is married and files a joint return, has $140,000 in self-employment income. F, E’s spouse, has $130,000 in wages. F’s wages are not in excess of $200,000 so F’s employer did not withhold Additional Medicare Tax. However, the $130,000 of F’s wages reduces E’s self-employment income threshold to $120,000 ($250,000 threshold minus the $130,000 of wages). E and F are liable to pay Additional Medicare Tax on $20,000 of E’s self-employment income ($140,000 in self-employment income minus the reduced threshold of $120,000).

Example 5. D, who is married and files married filing separately, has $150,000 in self-employment income and $200,000 in wages. D’s wages are not in excess of $200,000 so D’s employer did not withhold Additional Medicare Tax. However, the $200,000 of wages reduces the self-employment income threshold to $0 ($125,000 threshold minus the $200,000 of wages). D is liable to pay Additional Medicare Tax on $75,000 of wages ($200,000 in wages minus the $125,000 threshold for a married filing separately return) and on $150,000 of self-employment income ($150,000 in self-employment income minus the reduced threshold of $0).

(e) Effective/applicability date. Paragraphs (b) and (d) of this section apply to quarters beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

(a) Old-Age, Survivors, and Disability Insurance. The rates of employee tax for Old-Age, Survivors, and Disability Insurance (OASDI) with respect to wages received in calendar years after 1983 are as follows (these regulations do not reflect off-Code revisions to the below rates):

(b)(1) Hospital Insurance. The rates of employee tax for Hospital Insurance (HI) with respect to wages received in calendar years after 1973 are as follows:

(2) Additional Medicare Tax. (i) The rate of Additional Medicare Tax with respect to wages received in taxable years beginning after December 31, 2012, is as follows:

(ii) Individuals are liable for Additional Medicare Tax with respect to wages received in taxable years beginning after December 31, 2012, which are in excess of:

(c) Computation of employee tax. The employee tax is computed by applying to the wages received by the employee the rates in effect at the time such wages are received.

Example. In 1989, A performed services for X which constituted employment (see §31.3121(b)-2). In 1990, A receives from X $1,000 as remuneration for such services. The tax is payable at the 6.2 percent OASDI rate and the 1.45 percent HI rate in effect for the calendar year 1990 (the year in which the wages are received) and not at the 6.06 percent OASDI rate and the 1.45 percent HI rate which were in effect for the calendar year 1989 (the year in which the services were performed).

(d) Effective/applicability date. Paragraphs (a) (b), and (c) of this section apply to quarters beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 5. Section 31.3102-1 is amended by adding a new sentence at the end of paragraph (a) and a new paragraph (f) to read as follows:

(a) *** For special rules relating to Additional Medicare Tax imposed under section 3101(b)(2), see §31.3102-4.

* * * * *

(f) Effective/applicability date. Paragraph (a) of this section applies to quarters beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 6. Section 31.3102-4 is added to read as follows:

(a) Collection of tax from employee. An employer is required to collect from each of its employees the tax imposed by section 3101(b)(2) (Additional Medicare Tax) with respect to wages for employment performed for the employer by the employee only to the extent the employer pays wages to the employee in excess of $200,000 in a calendar year. This rule applies regardless of the employee’s filing status or other income. Thus, the employer disregards any amount of wages or Railroad Retirement Tax Act (RRTA) compensation paid to the employee’s spouse. The employer also disregards any RRTA compensation paid by the employer to the employee or any wages or RRTA compensation paid to the employee by another employer.

Example. H, who is married and files a joint return, receives $100,000 in wages from his employer for the calendar year. I, H’s spouse, receives $300,000 in wages from her employer for the same calendar year. H’s wages are not in excess of $200,000, so H’s employer does not withhold Additional Medicare Tax. I’s employer is required to collect Additional Medicare Tax only with respect to wages it pays which are in excess of the $200,000 threshold (that is, $100,000) for the calendar year.

(b) Collection of amounts not withheld. To the extent the employer does not collect Additional Medicare Tax imposed on the employee by section 3101(b)(2), the employee is liable to pay the tax.

Example. J, who is married and files a joint return, receives $190,000 in wages from his employer for the calendar year. K, J’s spouse, receives $150,000 in wages from her employer for the same calendar year. Neither J’s nor K’s wages are in excess of $200,000, so neither J’s nor K’s employers are required to withhold Additional Medicare Tax. J and K are liable to pay Additional Medicare Tax on $90,000 ($340,000 minus the $250,000 threshold for a joint return).

(c) Employer’s liability for tax. If the employer deducts less than the correct amount of Additional Medicare Tax, or if it fails to deduct any part of Additional Medicare Tax, it is nevertheless liable for the correct amount of tax that it was required to withhold, until the employee pays the tax. If an employee subsequently pays the tax that the employer failed to deduct, the tax will not be collected from the employer. The employer, however, will remain subject to any applicable penalties or additions to tax resulting from the failure to withhold as required.

(d) Effective/applicability date. This section applies to quarters beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 7. Section 31.3202-1 is amended by adding new paragraphs (g) and (h) to read as follows:

* * * * *

(g) Special rules regarding Additional Medicare Tax. (1) An employer is required to collect from each of its employees the portion of the tax imposed by section 3201(a) (as calculated under section 3101(b)(2)) (Additional Medicare Tax) with respect to compensation for employment performed for the employer by the employee only to the extent the employer pays compensation to the employee in excess of $200,000 in a calendar year. This rule applies regardless of the employee’s filing status or other income. Thus, the employer disregards any amount of compensation or Federal Insurance Contributions Act (FICA) wages paid to the employee’s spouse. The employer also disregards any FICA wages paid by the employer to the employee or any compensation or FICA wages paid to the employee by another employer.

Example. A, who is married and files a joint return, receives $100,000 in compensation from her employer for the calendar year. B, A’s spouse, receives $300,000 in compensation from his employer for the same calendar year. A’s compensation is not in excess of $200,000, so A’s employer does not withhold Additional Medicare Tax. B’s employer is required to collect Additional Medicare Tax only with respect to compensation it pays to B that is in excess of the $200,000 threshold (that is, $100,000) for the calendar year.

(2) To the extent the employer does not collect Additional Medicare Tax imposed on the employee by section 3201(a) (as calculated under section 3101(b)(2)), the employee is liable to pay the tax.

Example. C, who is married and files a joint return, receives $190,000 in compensation from her employer for the calendar year. D, C’s spouse, receives $150,000 in compensation from his employer for the same calendar year. Neither C’s nor D’s compensation is in excess of $200,000, so neither C’s nor D’s employers are required to withhold Additional Medicare Tax. C and D are liable to pay Additional Medicare Tax on $90,000 ($340,000 minus the $250,000 threshold for a joint return).

(3) If the employer deducts less than the correct amount of Additional Medicare Tax, or if it fails to deduct any part of Additional Medicare Tax, it is nevertheless liable for the correct amount of tax that it was required to withhold, until the employee pays the tax. If an employee subsequently pays the tax that the employer failed to deduct, the tax will not be collected from the employer. The employer, however, will remain subject to any applicable penalties or additions to tax resulting from the failure to withhold as required.

(h) Effective/applicability date. Paragraph (g) of this section applies to quarters beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 8. Section 31.6011(a)-1 is amended by adding new paragraphs (h) and (i) to read as follows:

* * * * *

(h) Returns by employees in respect of Additional Medicare Tax. An employee who is paid wages, as defined in sections 3121(a), subject to the tax under section 3101(b)(2) (Additional Medicare Tax), must make a return for the taxable year in respect of such tax. The return shall be made on Form 1040. The form to be used by residents of the U.S. Virgin Islands, Guam, American Samoa, or the Northern Mariana Islands is Form 1040-SS, “U.S. Self-Employment Tax Return (Including Additional Child Tax Credit for Bona Fide Residents of Puerto Rico).” The form to be used by residents of Puerto Rico is either Form 1040-SS or Form 1040-PR, “Planilla para la Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia (Incluyendo el Crédito Tributario Adicional por Hijos para Residentes Bona Fide de Puerto Rico).”

(i) Effective/applicability date. Paragraph (h) of this section applies to taxable years beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 9. Section 31.6011(a)-2 is amended by adding new paragraphs (d) and (e) to read as follows:

* * * * *

(d) Returns by employees and employee representatives in respect of Additional Medicare Tax. An employee or employee representative who is paid compensation, as defined in section 3231(e), subject to the tax under sections 3201(a) (as calculated under section 3101(b)(2)) or section 3211(a) (as calculated under section 3101(b)(2)) (Additional Medicare Tax), must make a return for the taxable year in respect of such tax. The return shall be made on Form 1040. The form to be used by residents of the U.S. Virgin Islands, Guam, American Samoa, or the Northern Mariana Islands is Form 1040-SS, “U.S. Self-Employment Tax Return (Including Additional Child Tax Credit for Bona Fide Residents of Puerto Rico).” The form to be used by residents of Puerto Rico is either Form 1040-SS or Form 1040-PR, “Planilla para la Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia (Incluyendo el Crédito Tributario Adicional por Hijos para Residentes Bona Fide de Puerto Rico).”

(e) Effective/applicability date. Paragraph (d) of this section applies to taxable years beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 10. Section 31.6205-1 is amended by:

1. Revising the first sentence in paragraph (b)(2)(i).

2. Adding a new second sentence to paragraphs (b)(2)(ii) and (b)(2)(iii).

3. Adding two new sentences after the sixth sentence in paragraph (b)(3).

4. Adding a new paragraph (b)(4).

5. Revising paragraph (d)(1).

6. Adding a new paragraph (e).

The revisions and additions read as follows:

* * * * *

(b) * * *

(2) * * * (i) If an employer files a return on which FICA tax or RRTA tax is required to be reported, and reports on the return less than the correct amount of employee or employer FICA or RRTA tax with respect to a payment of wages or compensation, and if the employer ascertains the error after filing the return, the employer shall correct the error through an interest-free adjustment as provided in this section, except as provided in paragraph (b)(4) of this section for Additional Medicare Tax. * * *

(ii) * * * However, if the employer also reported less than the correct amount of Additional Medicare Tax, the employer shall correct the underwithheld and underpaid Additional Medicare Tax in accordance with paragraph (b)(4) of this section. * * *

(iii) * * * However, if the employer also reported less than the correct amount of Additional Medicare Tax, the employer shall correct the underwithheld and underpaid Additional Medicare Tax in accordance with paragraph (b)(4) of this section. * * *

(3) * * * However, an adjustment of Additional Medicare Tax required to be withheld under section 3101(b)(2) or section 3201(a) may only be reported pursuant to this section if the error is ascertained within the same calendar year that the wages were paid to the employee, or if section 3509 applies to determine the amount of the underpayment, or if the adjustment is reported on a Form 2504 or Form 2504-WC. See paragraph (b)(4) of this section. * * *

(4) Additional Medicare Tax. If an employer files a return on which FICA tax or RRTA tax is required to be reported, and reports on the return less than the correct amount of Additional Medicare Tax required to be withheld with respect to a payment of wages or compensation, and if the employer ascertains the error after filing the return, the employer shall correct the error through an interest-free adjustment as provided in this section. An adjustment of Additional Medicare Tax may only be reported pursuant to this paragraph (b)(4) if the error is ascertained within the same calendar year that the wages or compensation were paid to the employee, unless the underpayment is attributable to an administrative error (that is, an error involving the inaccurate reporting of the amount actually withheld), section 3509 applies to determine the amount of the underpayment, or the adjustment is reported on a Form 2504 or Form 2504-WC. The employer shall adjust the underpayment of Additional Medicare Tax by reporting the additional amount due on an adjusted return for the return period in which the wages or compensation were paid, accompanied by a detailed explanation of the amount being reported on the adjusted return and any other information as may be required by this section and by the instructions relating to the adjusted return. The reporting of the underpayment on an adjusted return constitutes an adjustment within the meaning of this section only if the adjusted return is filed within the period of limitations for assessment for the return period being corrected, and by the due date for filing the return for the return period in which the error is ascertained. For purposes of the preceding sentence, the due date for filing the adjusted return is determined by reference to the return being corrected, without regard to the employer’s current filing requirements. For example, an employer with a current annual filing requirement who is correcting an error on a previously filed quarterly return must file the adjusted return by the due date for filing a quarterly return for the quarter in which the error is ascertained. The amount of the underpayment adjusted in accordance with this section must be paid to the IRS by the time the adjusted return is filed. If an adjustment is reported pursuant to this section, but the amount of the adjustment is not paid when due, interest accrues from that date (see section 6601).

* * * * *

(d) * * * (1) Federal Insurance Contributions Tax Act and Railroad Retirement Tax Act. If an employer collects less than the correct amount of employee FICA or RRTA tax from an employee with respect to a payment of wages or compensation, the employer must collect the amount of the undercollection by deducting the amount from remuneration of the employee, if any, paid after the employer ascertains the error. If an employer collects less than the correct amount of Additional Medicare Tax required to be withheld under section 3101(b)(2) or section 3201(a), the employer must collect the amount of the undercollection on or before the last day of the calendar year by deducting the amount from remuneration of the employee, if any, paid after the employer ascertains the error. Such deductions may be made even though the remuneration, for any reason, does not constitute wages or compensation. The correct amount of employee tax must be reported and paid, as provided in paragraph (b) of this section, whether or not the undercollection is corrected by a deduction made as prescribed in this paragraph (d)(1), and even if the deduction is made after the return on which the employee tax must be reported is due. If such a deduction is not made, the obligation of the employee to the employer with respect to the undercollection is a matter for settlement between the employee and the employer. If an employer makes an erroneous collection of employee tax from two or more of its employees, a separate settlement must be made with respect to each employee. An overcollection of employee tax from one employee may not be used to offset an undercollection of such tax from another employee. For provisions relating to the employer’s liability for the tax, whether or not it collects the tax from the employee, see §§31.3102-1(d), 31.3102-4(c), and 31.3202-1. This paragraph (d)(1) does not apply if section 3509 applies to determine the employer’s liability.

* * * * *

(e) Effective/applicability date. Paragraphs (b) and (d) of this section apply to adjustments made after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 11. Section 31.6402(a)-2 is amended by:

1. Revising paragraph (a)(1)(i) and the first sentence in paragraph (a)(1)(ii).

2. Re-designating paragraphs (a)(1)(iii), (a)(1)(iv), (a)(1)(v), and (a)(1)(vi), as new paragraphs (a)(1)(iv), (a)(1)(v), (a)(1)(vi), and (a)(1)(vii), respectively.

3. Adding a new paragraph (a)(1)(iii).

4. Revising newly-designated paragraphs (a)(1)(iv) and (a)(1)(v).

5. Revising paragraph (b).

6. Adding a new paragraph (c).

The revisions and additions read as follows: