The collections of information contained in these final regulations were previously reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2155. The collections of information in this final regulation are in §1.108-7(d)(4). This information must be provided by S corporations that exclude discharge of indebtedness income from gross income under section 108(a) and shareholders of those S corporations. The information provided by shareholders will be used by S corporations to properly reduce their tax attributes under section 108(b). The information provided by S corporations will be used by shareholders of those S corporations to calculate their taxable income in succeeding taxable years.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and return information are confidential, as required by 26 U.S.C. 6103.

This document contains amendments to the Income Tax Regulations (26 CFR Part 1) under section 108 of the Internal Revenue Code (Code).

Section 61(a) provides that gross income means all income from whatever source derived, including (but not limited to) income from discharge of indebtedness, also known as cancellation of debt income (COD income). Section 108(a) provides an exclusion from gross income for COD income if the discharge occurs while the taxpayer is bankrupt or insolvent, or if the indebtedness discharged is qualified farm indebtedness, certain qualified real property business indebtedness, or certain qualified principal residence indebtedness. In the case of a discharge of indebtedness during insolvency, the exclusion from income is limited to the amount by which the taxpayer is insolvent. Section 108(b) provides that the taxpayer must reduce certain specified tax attributes to the extent COD income is excluded from gross income under section 108(a)(1)(A), (B), or (C). Section 108(b) also provides the order in which these tax attributes must be reduced. Unless the taxpayer makes an election under section 108(b)(5) to first reduce the basis of depreciable property, section 108(b)(2)(A) provides that the first tax attribute to be reduced is any net operating loss for the taxable year of the discharge, and any net operating loss carryover to such taxable year.

A notice of proposed rulemaking and a notice of public hearing (REG-102822-08, 2008-38 I.R.B. 744) were published in the Federal Register (73 FR 45656) on August 6, 2008, proposing amendments to the regulations regarding the manner in which an S corporation reduces its tax attributes under section 108(b) for taxable years in which the S corporation has discharge of indebtedness income that is excluded from gross income under section 108(a). A public hearing on the proposed regulations was scheduled for December 8, 2008, but was cancelled because no one requested to speak. However, comments responding to the proposed regulations were received. After consideration of these comments, the proposed regulations are adopted as revised by this Treasury decision. These final regulations generally retain the provisions of the proposed regulations, with the modifications discussed in this preamble.

Section 108 provides special rules for an S corporation that has COD income. Section 108(d)(7)(A), as amended by the Job Creation and Worker Assistance Act of 2002, Public Law 107-147, provides, in part, that the rules under section 108(a) for the exclusion of COD income and under section 108(b) for the reduction of tax attributes are applied at the corporate level, including by not taking into account under section 1366(a) any amount excluded under section 108(a). Therefore, if an S corporation excludes COD income from its gross income under section 108(a), the amount excluded is applied to reduce the S corporation’s tax attributes under section 108(b)(2). Under section 108(b)(4)(A), the reduction of tax attributes occurs after the S corporation’s items of income, loss, deduction and credit for the taxable year of the discharge pass through to its shareholders under section 1366(a). Under section 1366(d)(1), the aggregate amount of losses and deductions a shareholder can take into account under section 1366(a) cannot exceed the shareholder’s adjusted basis in the shareholder’s stock in the S corporation and the shareholder’s adjusted basis of any indebtedness of the S corporation to the shareholder. For purposes of the tax attribute reduction rule under section 108(b)(2), section 108(d)(7)(B) provides that any loss or deduction that is disallowed for the taxable year of the discharge under section 1366(d)(1) is treated as a net operating loss of the S corporation (deemed NOL).

Several commentators recommended that net operating losses of an S corporation carried forward from one or more C corporation taxable years (C Year NOLs) should be considered S corporation tax attributes for purposes of section 108(b)(2). The proposed regulations are silent on whether attributes such as net operating losses, capital losses, and business credits arising in a C corporation taxable year should be considered tax attributes of the S corporation for purposes of section 108(b)(2). Section 1371(b)(1) states that no carryforward, and no carryback, arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation. This prohibition applies to tax attribute carryovers described in section 108(b)(2). For example, section 108(b)(2)(A) describes a net operating loss tax attribute as “any net operating loss for the taxable year of discharge and any net operating loss carryover to such taxable year.” Accordingly, section 1371(b)(1) prohibits an S corporation from using a C Year NOL as an S corporation tax attribute for purposes of section 108(b)(2). The same analysis applies to capital losses and business credits that arose in a C corporation taxable year. Therefore, the final regulations do not adopt this recommendation.

One commentator suggested that the final regulations clarify how the allocation rules in §1.108-7(d)(2) of the proposed regulations apply when an S corporation, with the consent of all affected shareholders, makes an election under section 1377(a)(2) (a terminating election). Regardless of whether a terminating election is made, all disallowed losses and deductions of a shareholder under section 1366(d)(1), including disallowed losses and deductions of a terminating shareholder, are treated as an S corporation’s deemed NOL. The impact of a terminating election on the allocation of the COD income, however, may result in a different allocation of the S corporation’s excess deemed NOL among the shareholders. Therefore, the final regulations add an example to clarify how the allocation rules apply when a terminating election is made.

Commentators asked whether a deemed NOL described in section 108(d)(7)(B) includes any losses that are suspended under section 465 or section 469. Section 108(d)(7)(B) provides that a deemed NOL is any loss or deduction which is disallowed for the taxable year of the discharge under section 1366(d)(1). Section 1366(d)(1) specifically provides for the disallowance of losses due only to lack of basis. Therefore, a deemed NOL does not include losses suspended under section 465 or section 469.

One commentator requested that the final regulations clarify whether disallowed losses and deductions under section 1366(d)(1) of a shareholder that is an employee stock ownership plan (ESOP) are included in the S corporation’s deemed NOL. Section 108(d)(7)(B) provides that any loss or deduction that is disallowed for the taxable year of the discharge under section 1366(d)(1) is treated as a deemed NOL of the S corporation. Accordingly, section 108(d)(7)(B) applies to any shareholder, including an ESOP shareholder, that has disallowed losses and deductions for the taxable year of the discharge under section 1366(d)(1).

One commentator asked whether nondeductible, noncapital expenses that reduce basis under section 1367(a)(2)(D) are treated as disallowed losses and deductions under section 1366(d)(1) for purposes of section 108(d)(7)(B). These expenses, including any that are carried over as a result of the elective ordering rule in §1.1367-1(g) of the Income Tax Regulations, are not losses and deductions that can be taken into account by a shareholder under section 1366(a) and therefore are not included as disallowed losses and deductions under section 1366(d)(1) for purposes of section 108(d)(7)(B).

One commentator noted that in some situations, an S corporation shareholder may have a different taxable year than the S corporation. The commentator asked whether, in these situations, a shareholder determines its disallowed losses and deductions under section 1366(d)(1) for purposes of section 108(d)(7) as of the close of the S corporation’s taxable year. The basis adjustments under section 1367 are determined as of the close of the S corporation’s taxable year. See §1.1367-1(d)(1) and §1.1367-2(d)(1). Therefore, a shareholder’s disallowed losses and deductions under section 1366(d)(1) are determined for purposes of section 108(d)(7) as of the close of the S corporation’s taxable year.

Finally, one commentator recommended that the final regulations provide that all shareholders share tax attribute reductions in proportion to their ownership interests in the S corporation in all situations. The preamble to the proposed regulations noted that shareholders may be disproportionately impacted where the shareholders’ respective disallowed losses or deductions are disproportionate to their respective interests. However, the disproportionate impact that occurs in certain situations is a result of the statutory provisions of section 108. Therefore, the final regulations do not adopt this recommendation. In certain situations, an S corporation may eliminate or mitigate inequitable results by making an election under section 108(b)(5) to reduce the basis of its depreciable property before reducing its net operating loss.

The proposed regulations provide an ordering approach for determining the character of the amount of the S corporation’s excess deemed NOL that is allocated to a shareholder. The approach in the proposed regulations is generally consistent with the ordering rules of section 108(b)(2) in that ordinary losses are reduced before capital losses. One commentator recommended that the final regulations adopt an approach that is consistent with the method for determining the character of a shareholder’s losses and deductions under section 1366(d). Under this approach, the S corporation’s excess deemed NOL that is allocated to a shareholder consists of a proportionate amount of each item of the shareholder’s loss or deduction that is disallowed for the taxable year of the discharge under section 1366(d)(1). After considering this comment, the IRS and Treasury have decided to adopt this approach in the final regulations.

The proposed regulations require a shareholder of an S corporation that excludes COD income from its gross income in a taxable year to report to the S corporation the amount of the shareholder’s losses and deductions that are disallowed for the taxable year of the discharge under section 1366(d)(1) (shareholder-information reporting requirement). The proposed regulations also require the S corporation to report to its shareholders the amount of any excess deemed NOL that is allocated to a shareholder (S corporation-information reporting requirement). Commentators recommended changes to the shareholder-information reporting requirement to minimize dependence on information furnished by shareholders who provide (intentionally or unintentionally) incorrect information or on shareholders who fail to furnish this information. One commentator explained that as a practical matter, an S corporation often maintains records for its shareholders and may possess all the requisite information to determine the amount of a shareholder’s suspended loss under section 1366(d). Another commentator requested that the final regulations provide consequences for shareholders who do not comply with the shareholder-information reporting requirement or who provide incorrect information.

After considering these comments, the final regulations modify the shareholder-information reporting requirement to alleviate the dependence on shareholders who fail to furnish information or who provide incorrect information. The final regulations provide that in certain situations, the S corporation may rely on its own books and records as well as other information available to the S corporation to determine a shareholder’s disallowed losses or deductions under section 1366(d)(1), provided that the S corporation knows that the amount reported by the shareholder is inaccurate, or the information, as provided, appears to be incomplete or incorrect. The final regulations do not adopt any special rules to provide for consequences to shareholders who either fail to report this information to the S corporation or report incorrect information to the S corporation. However, the IRS and Treasury note that section 6037(c) requires that a shareholder of an S corporation, on the shareholder’s return, treat a “subchapter S item” in a manner consistent with the S corporation return. The IRS and Treasury believe that the S corporation’s excess deemed NOL that is allocated to a shareholder is a “subchapter S item” for purposes of section 6037(c) and that the consequences of failure to comply with section 6037(c) are sufficient to encourage shareholders to cooperate with the S corporation in order to avoid inconsistencies between the S corporation’s return and the shareholder’s return.

The final regulations apply to discharges of indebtedness occurring on or after October 30, 2009.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that the collection of information contained in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the collection burden imposed on S corporations and their shareholders is minimal in that it requires S corporations and their shareholder(s) to share information that shareholders already maintain to determine their respective tax liabilities. Moreover, it should take an S corporation or a shareholder no more than one hour to satisfy the information sharing requirements in these regulations. Finally, the collection burden imposed applies only to S corporations that are required to reduce their tax attributes under section 108(b) of the Code — a group estimated to be less than 1 percent of all existing S corporations. Therefore, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking that preceded these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

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

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.108-7 is amended by:

1. Redesignating paragraphs (d) and (e) as paragraphs (e) and (f), respectively.

2. Adding new paragraph (d).

3. Adding paragraph (e) Example 5, Example 6, and Example 7 to newly-redesignated paragraph (e).

4. Revising newly-redesignated paragraph (f).

The additions and revision read as follows:

The Genetic Information Nondiscrimination Act of 2008 (GINA), Public Law 110-233, was enacted on May 21, 2008. Title I of GINA amended the Employee Retirement Income Security Act of 1974 (ERISA), the Public Health Service Act (PHS Act), the Internal Revenue Code of 1986 (Code), and the Social Security Act (SSA) to prohibit discrimination in health coverage based on genetic information. GINA builds on existing protections added by titles I and IV of the Health Insurance Portability and Accountability Act of 1996 (HIPAA).^[1] Specifically, the HIPAA portability provisions already prohibit a group health plan or group health insurance issuer from imposing a preexisting condition exclusion based solely on genetic information. See the 2004 final HIPAA portability regulations, published in the Federal Register on December 30, 2004 (T.D. 9166, 2005-1 C.B. 558 [69 FR 78720]). In addition, the HIPAA nondiscrimination provisions already prohibit a group health plan or group health insurance issuer from discriminating against an individual in eligibility, benefits, or premiums based on genetic information (and other health factors) of the individual or a dependent of the individual. See the 2006 final HIPAA nondiscrimination regulations, published in the Federal Register on December 13, 2006 (T.D. 9298, 2007-1 C.B. 434 [71 FR 75014]).

Sections 101 through 104 of Title I of GINA prohibit group health plans, health insurance issuers in the group and individual markets,^[2] and issuers of Medicare supplemental (Medigap) policies from discriminating based on genetic information, and from collecting such information.^[3] Section 105 of Title I adds section 1180 of the SSA to require HHS to revise the HIPAA privacy regulations to clarify that genetic information is health information under the rule and to prohibit the use or disclosure of genetic information for underwriting purposes.^[4] Title II of GINA prohibits discrimination in employment based on genetic information, and limits the acquisition and disclosure by employers and other entities covered by GINA Title II of such information.^[5] These interim final regulations (REG-123829-08) only interpret Sections 101 through 103 of Title I of GINA, which added provisions to Subtitle K of the Code, Part 7 of Subtitle B of Title I of ERISA, and Title XXVII of the PHS Act.^[6] References to GINA in the remainder of this preamble refer to the group market provisions of sections 101 through 103 of GINA, unless the context clearly indicates otherwise.

On October 10, 2008, the Departments published in the Federal Register (Announcement 2008-107, 2008-46 I.R.B. 1162 [73 FR 60208]) a request for information (RFI) soliciting comments on the requirements of sections 101 through 104 of GINA. In addition, the Departments consulted with and obtained technical guidance from the scientific community, including the National Human Genome Research Institute within the National Institutes of Health and the Office for Human Research Protections, both within HHS. The Departments also coordinated with the Equal Employment Opportunity Commission (EEOC), which has responsibility for Title II of GINA, and the Office for Civil Rights within HHS, which has responsibility for section 105 of GINA.

After consideration of the comments received in response to the RFI and based on the consultations with other government agencies, the Departments are publishing these interim final regulations. For the group market, these regulations become applicable to plans and issuers on the first day of the plan year beginning on or after December 7, 2009. For the individual market, these regulations become applicable with respect to health insurance coverage offered, sold, issued, renewed, in effect, or operated in the individual market on or after December 7, 2009.

While GINA does not mandate any specific benefits for health care services related to genetic tests, diseases, conditions, or genetic services, GINA establishes rules that generally prohibit a group health plan and a health insurance issuer in the group market from:

These three general prohibitions are subject to rules of construction or exceptions included in the statute which are discussed in further detail later in this preamble.

Sections 9801 and 9802 of the Code, 701 and 702 of ERISA, and 2701 and 2702 of the PHS Act, as originally added by HIPAA, included requirements pertaining to genetic information but did not define the term. The 2004 final HIPAA portability regulations included a definition of genetic information.

GINA contains a statutory definition of genetic information that differs from the definition in the 2004 final HIPAA portability regulations. These interim final regulations revise the existing regulations’ definition of genetic information at 26 CFR 54.9801-2, 29 CFR 2590.701-2, and 45 CFR 144.103, to conform to the new statutory definition.

Sections 9802 of the Code, 702 of ERISA, and 2702 of the PHS Act, and the 2006 final HIPAA nondiscrimination regulations prohibit discrimination based on a health factor. GINA retained the prohibition against increasing an individual’s premium or contribution amounts based on genetic information, and added a new provision to prevent plans and issuers from adjusting premium or contribution rates at the group level based on genetic information of one or more individuals in the group. Therefore, these interim final regulations amend the 2006 regulations to add clarifying cross-references. See 26 CFR 54.9802-1(c)(2)(i) and (iii), 29 CFR 2590.702(c)(2)(i) and (iii), and 45 CFR 146.121(c)(2)(i) and (iii).

Paragraph (a) of these interim final regulations^[7] provides most of the definitions used in GINA.^[8] Some of these definitions repeat the statutory language, while others include regulatory clarifications.

The interim final regulations add the defined term “collect.” While “collect” was not defined in the statute, this term was added to paraphrase the longer phrase “request, require or purchase.” Thus, under the interim final regulations, “collect” means, with respect to information, to request, require, or purchase such information.

GINA adds a definition of family member to sections 9832 of the Code, 733 of ERISA, and 2791 of the PHS Act. The definition of family member determines the application of GINA in two ways. First, the definition of genetic information for an individual includes information about the manifestation of a disease or disorder in family members of the individual. Also, a plan or issuer generally may not request or require an individual or family member of the individual to undergo a genetic test.

The statute defines a family member with respect to any individual as a dependent of such individual (as such term is used for purposes of sections 9801(f)(2) of the Code, 701(f)(2) of ERISA, and 2701(f)(2) of the PHS Act (the dependent special enrollment rules))^[9], and any other individual that is a first-, second-, third-, or fourth-degree relative of the individual or of the dependent of the individual. The legislative history suggests that the term “family member” be broadly construed: “In general, it is intended that the term ‘family member’ be interpreted broadly so as to provide the maximum protection against discrimination.” House Report 110-28, Part 2 at 27.

Sections 9801(f)(2) of the Code, 701(f)(2) of ERISA, and 2701(f)(2) of the PHS Act provide special enrollment rights to certain dependents that are eligible for coverage under a group health plan due to such family events as birth, adoption, or marriage. The statutory provisions of neither HIPAA nor GINA define dependent, but the term is defined in the 2004 final HIPAA portability regulations as any individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to a participant. This makes clear that it is necessary to consult the plan document and other applicable law to determine dependent status for purposes of GINA.

In determining who is a first-, second-, third-, or fourth-degree relation of an individual, the interim final regulations treat relatives by affinity (such as by marriage or adoption) the same as relatives by consanguinity (relatives who share a common biological ancestor, or blood relatives). The definition also treats relatives who are not full blood relatives (such as half siblings) the same as full blood relatives. In addition, the interim final regulations provide non-exhaustive lists of individuals who are first-, second-, third-, or fourth-degree relatives. The Departments invite public comments on this definition.

The interim final regulations contain a definition of genetic information that restates and reorganizes the statutory provisions. Genetic information is defined, with respect to an individual, as information about the individual’s genetic tests or the genetic tests of family members, the manifestation of a disease or disorder in family members of such individual (that is, family medical history), or any request of or receipt by the individual or family members of genetic services. The definition further clarifies that genetic information does not include information about the sex or age of any individual. It also clarifies how GINA applies to genetic information about a fetus or embryo. As previously noted, this definition is a change from the definition of genetic information that applied under the 2004 final HIPAA portability regulations.

An individual’s genetic information includes any request for or receipt of genetic services by such individual, or a family member. These interim final regulations follow the statutory definition. “Genetic services” means a genetic test, genetic counseling, or genetic education.

GINA adds a definition of genetic test to sections 9832 of the Code, 733 of ERISA, and 2791 of the PHS Act.^[10] These interim final regulations repeat the statutory language, which provides that a genetic test means an analysis of human DNA, RNA, chromosomes, proteins, or metabolites, if it detects genotypes, mutations, or chromosomal changes.

The interim final regulations also follow the statutory language providing that a genetic test does not include an analysis of proteins or metabolites that does not detect genotypes, mutations, or chromosomal changes, or an analysis of proteins or metabolites that is directly related to a manifested disease, disorder, or pathological condition that could be reasonably detected by a health care professional with appropriate training and expertise in the field of medicine involved.

The interim final regulations include examples of certain tests that currently are regarded as genetic or non-genetic tests, as the case may be, based on research including consultations with representatives from the scientific community. However, due to rapidly evolving scientific knowledge, it is not an exhaustive list.

The concept of manifestation of a disease arises in three contexts. First, a plan or issuer may increase the premium or contribution amount for a group health plan based on the manifestation of a disease or disorder of an individual who is enrolled in the plan. Second, the definition of genetic information for an individual includes information about the manifestation of a disease or disorder in family members of such individual. Finally, the definition of genetic test excludes an analysis of proteins or metabolites that is directly related to a manifested disease, disorder, or pathological condition that could be reasonably detected by a health care professional with appropriate training and expertise in the field of medicine involved.

The interim final regulations add a definition of manifestation or manifested. A disease, disorder, or pathological condition is manifested when an individual has been or could reasonably be diagnosed by a health care professional with appropriate training and expertise in the field of medicine involved. However, the definition further provides that a disease, disorder, or pathological condition is not manifested if a diagnosis is based principally on genetic information.

GINA includes a definition of underwriting purposes. This term is discussed later in this preamble, in connection with the discussion of the prohibition on collecting genetic information.

GINA and these interim final regulations expand the HIPAA prohibitions against discrimination based on health factors, by prohibiting group health plans and health insurance issuers offering health coverage in connection with a group health plan from adjusting premium or contribution amounts for a group health plan or group of similarly situated individuals on the basis of genetic information. This is a change from prior law, which allowed plans and issuers to adjust premium or contribution amounts for the group health plan or a group of similarly situated individuals (but not for individuals within the group) based on genetic information, as well as other health factors. This prohibition against discrimination is distinct from the prohibition on requesting or requiring an individual to undergo a genetic test and the prohibition on collecting genetic information. Therefore, even when a plan or issuer has lawfully obtained genetic test results or other genetic information (for example, an acquisition that took place prior to GINA’s effective date), the plan or issuer is still prohibited — under GINA and paragraph (b) of these interim final regulations — from using that information to discriminate.

GINA and these interim final regulations also provide that the prohibition on adjusting premiums or contributions based on genetic information does not limit the ability of a plan or issuer to increase the premium or contribution amount for a group health plan based on the manifestation of a disease or disorder of an individual enrolled in the plan. However, a plan or issuer may not use the manifested disease or disorder of one individual as genetic information about other group members to further increase the premium or contribution amount. Moreover, the prohibitions on adjusting premium or contribution amounts based on genetic information do not prohibit a plan or issuer from including costs associated with providing benefits for covered genetic tests or genetic services within the costs of providing other benefits in determining premiums or contribution amounts. In particular, a plan or issuer is not required to reduce the aggregate costs of providing health benefits for the year by those costs relating to benefits for genetic tests and services when adjusting group rates. These interim final regulations also make conforming changes to the existing HIPAA nondiscrimination regulations regarding the ability to adjust premium or contribution amounts based on a health factor.

GINA generally prohibits plans and issuers from requesting or requiring individuals or their family members to undergo a genetic test. There are three exceptions to this prohibition, for certain health care professionals, for determinations regarding payment, and for research.

The first exception allows a health care professional who is providing health care services to an individual to request that the individual undergo a genetic test. The health care professional must actually be providing health care services to the individual for the exception to apply. Thus, for example, the performance of claims review by a health care professional would never be considered providing health care services to an individual. The term “health care professional” is not limited to physicians.

The second exception allows a plan or issuer to obtain and use the results of a genetic test to make a determination regarding payment. For this purpose, payment is defined by reference to 45 CFR 164.501 of the HIPAA privacy regulations. However, plans and issuers are only permitted to request the minimum amount of information necessary to make this determination. These interim final regulations incorporate the standard set forth at 45 CFR 164.502(b) of the HIPAA privacy regulations to determine the minimum amount of information necessary.

In some cases, the appropriateness of certain courses of treatment for a patient depends on the patient’s genetic makeup. A plan or issuer is permitted to condition payment for an item or service based on medical appropriateness that depends on an individual’s genetic makeup. Under these narrow circumstances, a plan or issuer may condition payment on the outcome of a genetic test, and may refuse payment for the item or service if the individual does not undergo the genetic test. Any information received by the plan to make a determination regarding payment, including the results of a genetic test, must be used in accordance with these interim final regulations and the 2006 final HIPAA nondiscrimination regulations.

Under the third exception relating to the limitation on requesting or requiring genetic testing, a group health plan or group health insurance issuer is permitted to request, but not require, that a participant or beneficiary undergo a genetic test^[11] if all of the following conditions of the research exception are satisfied:

Paragraph (d) of these interim final regulations describes the statutory prohibitions against plans or issuers collecting genetic information, either for underwriting purposes or prior to or in connection with enrollment; sets forth the statutory definition of underwriting purposes; and clarifies that, if an individual seeks a benefit under a plan or coverage, the plan or coverage may limit or exclude the benefit based on whether the benefit is medically appropriate (and a determination of whether the benefit is medically appropriate is not within the meaning of underwriting purposes).

Underwriting purposes is defined under GINA and in these interim final regulations as including, with respect to group health plan coverage, rules for and determinations of eligibility (including enrollment and continued eligibility), computation of premium or contribution amounts, and application of preexisting condition exclusions. Under GINA, the definition of underwriting is broader than merely activities relating to rating and pricing a group policy. These interim final regulations clarify that underwriting purposes includes changing deductibles or other cost-sharing mechanisms, or providing discounts, rebates, payments in kind, or other premium differential mechanisms in return for activities such as completing a health risk assessment (HRA) or participating in a wellness program.

GINA and paragraph (d) of the interim final regulations provide that plans and issuers are only prohibited from collecting genetic information for underwriting purposes or prior to or in connection with enrollment. Where an individual seeks a benefit under the plan, requesting family medical history or other genetic information to make a determination whether the benefit is medically appropriate for purposes of payment is neither for underwriting purposes nor prior to or in connection with enrollment. Therefore, although the statutory payment exception only applies to requests for individuals to undergo genetic tests, these interim final regulations provide it is permissible for a plan or issuer to request the minimum amount of genetic information necessary to make determinations regarding payment. Specifically, these interim final regulations provide that, if an individual seeks a benefit under a plan or coverage, the plan or coverage may limit or exclude the benefit based on whether the benefit is medically appropriate, and the determination of whether the benefit is medically appropriate is not within the meaning of underwriting purposes. However, a plan or issuer is permitted to request only the minimum amount of information necessary to determine medical appropriateness.

These interim final regulations provide clarifications of the statutory prohibition against a plan or issuer collecting genetic information prior to or in connection with enrollment. Under the interim final regulations, a collection of genetic information with respect to an individual is considered prior to enrollment if it is before the individual’s effective date of coverage under the plan or health insurance coverage. The determination of whether a plan or issuer is collecting information before the individual’s effective date of coverage is made at the time of collection. Providing that the determination is made at the time of collection means that if a plan or issuer collects genetic information with respect to an individual in circumstances that otherwise would not render the collection impermissible and at that time it is not being collected in connection with a future enrollment, the fact that a future enrollment may occur does not mean, for purposes of this rule, that the genetic information was collected before the enrollment. Thus, for example, if a plan collected genetic information with respect to an individual after initial enrollment (and not for underwriting purposes), and the individual later dropped coverage but then still later reenrolled in the plan, the collection of genetic information after the initial enrollment would not be considered prior to the reenrollment.

Similarly, if a plan affirmatively requires individuals to reenroll on an annual basis or allows individuals to change their enrollment, a collection of genetic information made after a current enrollment will not be considered made prior to a subsequent enrollment unless the collection of information is or will be used to affect that subsequent enrollment. Moreover, if genetic information is collected permissibly under one plan, the information is transferred to a second plan in connection with a merger or acquisition after this collection, and individuals covered under the first plan are enrolling for the first time in the second plan, the transfer of information to the second plan will not be considered a collection prior to the effective date of coverage under the second plan if the collection of information does not affect the enrollment status of individuals enrolling in the second plan.

These interim final regulations include the statutory exception (to the prohibition against collections of genetic information prior to or in connection with enrollment) for genetic information that is collected incidental to the collection of other information and is not used for underwriting purposes. Some commenters suggested that some questions that are typically included in some HRAs and similar documents could easily result in an individual providing genetic information, even if the question does not mention genetic tests or family medical history explicitly. An example given was, “Have you had any laboratory tests in the past 2 years?” These commenters suggested plans and issuers should be required to inform individuals that they should not reveal genetic information.

The interim final regulations clarify that if it is reasonable to anticipate that health information will be received as part of the collection of information, the incidental collection exception does not apply unless the collection explicitly states that genetic information should not be provided. If, in connection with a collection of information, it is reasonable to anticipate that health information will be received and the collection explicitly states that genetic information should not be provided, any genetic information provided will be considered within the incidental exception, as long as it is not used for underwriting purposes.

In response to the RFI, a number of comments were received concerning the application of the prohibition on requesting genetic information for underwriting purposes to plans and issuers that reward individuals for completing HRAs. Of particular concern are wellness programs including HRAs that request information about an individual’s family medical history. Another concern is the application of the prohibition on requesting genetic information for underwriting purposes to screening processes for disease management programs that use genetic tests or family medical histories to identify individuals that can benefit from the program.

GINA prohibits collecting genetic information for underwriting purposes. As described earlier, underwriting purposes is defined broadly to include rules for eligibility for benefits and the computation of premium or contributions amounts, and not merely activities relating to rating and pricing a group policy. Moreover, GINA defines genetic information as including family medical history. Consequently, wellness programs that provide rewards for completing HRAs that request genetic information, including family medical history, violate the prohibition against requesting genetic information for underwriting purposes. This is the result even if rewards are not based on the outcome of the assessment, which otherwise would not violate the 2006 final HIPAA nondiscrimination rules regarding wellness programs.

Some comments received in response to the RFI urged strongly that a regulatory exception should allow wellness programs to provide rewards for completing HRAs that request such information, notwithstanding the statutory prohibition on collecting genetic information.^[12] Other comments suggested equally strongly that the regulations clarify that wellness programs may not collect such information as a condition for rewards. These interim final regulations do not provide an exception from underwriting for rewards provided by wellness programs, regardless of the amount of the reward. Examples generally illustrate that any reward given for the completion of an HRA that solicits information about the individual’s family medical history violates the requirements of paragraph (d).

However, plans and issuers can collect genetic information through HRAs under GINA in certain circumstances. A plan or issuer can collect genetic information through an HRA as long as no rewards are provided (and if the request is not made prior to or in connection with enrollment). A plan or issuer can also provide rewards for completing an HRA as long as the HRA does not collect genetic information. Several examples are provided in these interim final regulations to illustrate these points. In one example, a plan administers two distinct HRAs, one that does not request genetic information and one that does. A reward is provided for completing the HRA that does not solicit genetic information; the instructions for the other HRA make clear that completion of the HRA is wholly voluntary and will not affect the reward given for completion of the first HRA. The example concludes that neither HRA violates the rules against collecting information for underwriting purposes or prior to or in connection with enrollment. Finally, another example illustrates the application of the exception for information obtained incidentally in the context of the acquisition of one issuer by another. The Departments invite comment on ways in which participation in HRAs can be encouraged while complying with the statutory prohibition on using genetic information for underwriting purposes.

Paragraph (e) of these interim final regulations provides examples illustrating how medical appropriateness is determined, in connection with both the payment exception under paragraph (c) and the prohibition against collecting genetic information for underwriting purposes under paragraph (d). Examples illustrate the minimum amount of genetic information necessary to determine payment, the restriction of benefits to medically appropriate treatment, and the application of the medical appropriateness rules to the use of genetic information to determine eligibility for a disease management program.

Generally, the provisions of HIPAA titles I and IV, as amended, do not apply to a group health plan for a plan year if the plan is a very small group health plan; that is, on the first day of the plan year, the group health plan has fewer than 2 participants who are current employees. GINA and these interim final regulations provide that this exception for very small group health plans is not available for the genetic information provisions in Subtitle K of the Code, Part 7 of Subtitle B of Title I of ERISA, and Title XXVII of the PHS Act.

Section 2721(b)(2) of the PHS Act permits the sponsor of a self-funded non-Federal governmental plan as defined in 45 CFR 144.103 to elect to exempt the plan from most of the requirements of Title XXVII of the PHS Act. This is referred to herein as the “opt-out election.” However, section 2721(b)(2)(C)(ii) states that no opt-out election is available with respect to the requirements for certification and disclosure of creditable coverage. The PHS Act regulations at 45 CFR 146.180 implement the foregoing opt-out rules under section 2721.

Section 102(c) of GINA added a second limitation on the opt-out rights of a self-funded non-Federal governmental plan sponsor. Section 2721(b)(2)(D) of the PHS Act precludes any exemption election by a self-funded non-Federal governmental plan sponsor from GINA’s requirements. The Centers for Medicare & Medicaid Services (CMS) amended 45 CFR 146.180(h) accordingly.

CMS made certain additional conforming changes to other provisions of 45 CFR 146.180. In particular, CMS deleted the reference in 45 CFR 146.180(h) to CMS enforcement under 45 CFR 146.180(k) because paragraph (k) makes clear that CMS enforces all requirements of part 146 that apply to non-Federal governmental plans. CMS also revised the last sentence of 45 CFR 146.180(k), which refers to the imposition of a civil money penalty, by replacing “under § 150.305” with “under subpart C of part 150” because subpart C includes multiple sections that govern imposition of a civil money penalty, while 45 CFR 150.305 only applies to a determination of which entity is liable for a civil money penalty.

The regulations at 45 CFR Part 148 implement the individual market requirements of Title XXVII of the PHS Act. Section 102(b) of GINA added a new section 2753 (42 U.S.C. 300gg-53) to Title XXVII to prohibit discrimination on the basis of genetic information in the individual health insurance market. Section 2753 of the PHS Act generally parallels the group market genetic nondiscrimination provisions GINA added to the Code, ERISA and the PHS Act. Section 2753 and the interim final regulations prohibit issuers in the individual market from collecting genetic information prior to or in connection with such enrollment, and at any time for underwriting purposes. Section 2753 and the interim final regulations also prohibit issuers from requesting or requiring genetic tests. The exceptions and rules of construction that apply to the foregoing requirements in the group market (for example, the rule for incidental collections of genetic information and the research exception to the rule against requiring genetic tests) also apply in the individual market.

Since individual market issuers were not subject to the federal HIPAA nondiscrimination requirements applicable to issuers in the group market, it was necessary for GINA to amend the PHS Act in order to have similar protections against genetic discrimination applicable in both markets. Thus, new section 2753 of the PHS Act prohibits issuers of individual health insurance policies from using genetic information as a basis for making eligibility or premium determinations, or for imposing preexisting condition exclusions. Issuers in the individual market may continue to establish rules for eligibility, increase premiums, and impose preexisting condition exclusions based on the manifestation of a disease or disorder in an individual, or in a family member covered under the policy that covers the individual. However, they cannot use a manifestation of a disease or disorder in one individual as genetic information about family members covered under the same policy or another policy in order to further increase premiums.

These interim final regulations add a new § 148.180 to subpart C of part 148 to implement section 2753 of the PHS Act. To the extent that the provisions of section 2753 parallel the GINA amendments to section 2702 of the PHS Act which govern the group market, § 148.180 restates the corresponding group market provisions (with conforming changes and technical corrections appropriate to the individual market) rather than incorporating the group market provisions by reference.

As discussed above, GINA amended the Social Security Act to include genetic nondiscrimination provisions that apply to issuers of Medigap policies. The PHS Act regulations at 45 CFR 148.220 state that Medigap policies are excepted benefits. Nevertheless, because Medigap policies are subject to GINA under the Social Security Act and NAIC model regulation, CMS made clarifying changes to § 148.220 to emphasize the foregoing.

Section 9833 of the Code, section 734 of ERISA, and section 2792 of the PHS Act authorize the Secretaries of the Treasury, Labor, and HHS to promulgate any interim final rules that they determine are appropriate to carry out the provisions of Chapter 100 of Subtitle K of the Code, Part 7 of Subtitle B of Title I of ERISA, and Part A of Title XXVII of the PHS Act, which include the provisions of GINA.

Under Section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) a general notice of proposed rulemaking is not required when an agency, for good cause, finds that notice and public comment thereon are impracticable, unnecessary, or contrary to the public interest.

These rules are being adopted on an interim final basis because the Secretaries have determined that without prompt guidance some members of the regulated community may not know what steps to take to comply with the requirements of GINA, which may result in an adverse impact on participants and beneficiaries with regard to their health benefits under group health plans and the protections provided under GINA. Moreover, GINA’s requirements will affect the regulated community in the immediate future.

The requirements of sections 101 through 103 of GINA are effective for all group health plans and for health insurance issuers offering coverage in connection with such plans for plan years beginning after May 21, 2009. Plan administrators and sponsors, issuers, and participants and beneficiaries will need guidance on how to comply with the new statutory provisions. As noted earlier, these interim rules take into account comments received by the Departments in response to the request for information on GINA published in the Federal Register on October 10, 2008 (73 FR 60208). For the foregoing reasons, the Departments find that the publication of a proposed regulation, for the purpose of notice and public comment thereon, would be impracticable, unnecessary, and contrary to the public interest.

As discussed above, Title I of GINA generally prohibits group health plans and health insurance issuers in both the group and individual markets from discriminating based on genetic information, requesting or requiring an individual to undergo a genetic test, and collecting genetic information prior to or in connection with enrollment or for underwriting purposes. The Departments have crafted these interim final regulations to secure the protections from discrimination intended by Congress in as economically efficient a manner as possible. Although the Departments are unable to quantify the regulations’ economic benefits, they have quantified their costs and have provided a qualitative discussion of some of the benefits that may stem from this rule.

One potential benefit associated with GINA and these interim final regulations is that genetic testing and research may expand when discrimination based on genetic information and the collection of such information is prohibited, if these protections allay individuals’ fears of adverse health coverage-related consequences from undergoing genetic testing and participating in research studies examining genetic information. An increase in genetic testing and research, in turn, could provide greater knowledge regarding the genetic basis of disease, which could facilitate the early diagnosis and treatment of individuals with a genetic predisposition toward developing certain diseases and disorders and may allow scientists to develop new medicines, treatments, and therapies that could enhance the health and welfare of Americans.

Congress directed the Departments to issue regulations implementing the GINA provisions not later than 12 months after the date of enactment. In response to this Congressional directive, these interim final regulations clarify and interpret the GINA nondiscrimination provisions under section 702 of ERISA, sections 2702 and 2753 of the PHS Act, and section 9802 of the Code. These regulations are needed to secure and implement GINA’s nondiscrimination provisions and ensure that the rights provided to participants, beneficiaries, and other individuals under GINA are fully realized. The Departments’ assessment of the expected economic effects of these interim final regulations is discussed in detail below.

Under Executive Order 12866 (58 FR 51735, Oct. 4, 1993), the Departments must determine whether a regulatory action is “significant” and therefore subject to the requirements of the Executive Order and review by the Office of Management and Budget (OMB). Under section 3(f), the order defines a “significant regulatory action” as an action that is likely to result in a rule: (1) having an annual effect on the economy of $100 million or more, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities (also referred to as “economically significant”); (2) creating serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order.

Pursuant to the terms of the Executive Order, the Departments have determined that this action raises novel policy issues arising out of legal mandates. Therefore, the interim final regulations are “significant” and subject to OMB review under Section 3(f)(4) of the Executive Order. Accordingly, the Departments have undertaken, as described below, an assessment of the costs and benefits of the regulation. Over the 10-year period of 2010 to 2019, the present value of the costs, using a discount rate of 7 percent, is estimated to be $294.8 million in 2009 Dollars, as is shown in Table 1.

All other numbers included in the text are not discounted.

The Departments performed a comprehensive, unified analysis to estimate the costs and, to the extent feasible, provide a qualitative assessment of benefits attributable to the statute and regulations for purposes of compliance with Executive Order 12866, the Regulatory Flexibility Act, and the Paperwork Reduction Act. The Departments’ assessment and underlying analysis is set forth below.

The Departments estimate that 137.1 million participants and beneficiaries^[13] are covered by nearly 2.5 million private sector group health plans and 31.7 million individuals are covered by individual health insurance policies.^[14] The Departments also estimate that approximately 630 insurers will be are affected by GINA, consisting of approximately 460 insurers offering coverage in connection with insured group health plans and approximately 490 health insurance issuers offering policies in the individual health insurance market.^[15]

One potential benefit associated with GINA and these interim final regulations is that genetic testing and research may increase if the protections provided under GINA allay the public’s concerns that health plans and insurers will use genetic information to discriminate based on the collection and disclosure of such information. Comments received in response to the RFI indicate that genetic testing and research currently are being underutilized. A major reason cited for the lack of genetic testing is the public’s fear of adverse employment-related or health coverage-related consequences associated with having genetic testing or participating in research studies that examine genetic information. Removing barriers that impede the growth of genetic testing and research has the potential to improve health and save lives by providing patients and physicians with critical knowledge to facilitate early intervention often before disease symptoms are manifested. It also could expand the development of scientific research, which could result in the development of new medicines, therapies, and treatments for diseases and disorders.

Additional economic benefits may derive directly from the improved clarity provided by the interim final regulations, which will reduce uncertainty and help group health plan sponsors and health insurers comply with GINA’s requirements in a cost effective manner. Moreover, the prohibitions enacted in GINA and these interim final regulations should provide a benefit to individuals with genetic predispositions for diseases by decreasing the number of individuals that are denied coverage under a group health plan or priced out of the individual health insurance market.^[16]

Currently, the Departments are unable to quantify these benefits, because relatively few genetic tests and research studies are performed in the private sector^[17] and a limited number of genetic tests are available. As stated above, the Departments expect the number of genetic tests and research studies to increase in the near future. The Departments, however, lack sufficient information to project the trajectory of this increase.

As discussed above, GINA and these interim final regulations prohibit group health plans and health insurance issuers offering coverage in the group and individual health insurance markets from collecting genetic information in connection with or prior to enrollment and for underwriting purposes. Comments received in response to the RFI indicate that the immediate impact of GINA and these interim final regulations on group health plans and health insurance issuers providing group health coverage should be minimal. Plans and issuers commented that they do not collect or use genetic information for underwriting purposes because pre-GINA laws and regulations prohibit them from discriminating against individuals based on any health status-related factors, including genetic information.^[18]

Currently, many group health plans request family medical history information to be provided in response to questions on HRAs that are completed by new employees before enrollment in the plan and as part of open enrollment for current employees. HRAs are used in connection with wellness and disease management programs to identify individuals at risk for certain conditions and provide an opportunity for preventive treatment service referrals, disease management, and other behavioral change initiatives that are focused on creating higher quality medical outcomes. Some group health plans provide rewards and incentives to employees who complete HRAs, such as premium reductions, lower deductibles, and cash bonus payments.

The Departments expect that most of the cost of complying with GINA and these interim final regulations will be concentrated among the approximately 30,000 group health plans^[19] that are associated with wellness and disease management programs that provide rewards and incentives to employees that complete HRAs. These plans will have to conduct a compliance review to ensure that their HRAs and any associated policies and procedures comply with GINA’s prohibition on using genetic information prior to or in connection with enrollment or for underwriting purposes and to make any necessary changes to their HRAs and policies and procedures.

The Departments assume that insured plans will rely on the health insurance issuer providing coverage to ensure compliance and that self-insured plans will rely on wellness vendors and other service providers to ensure compliance. These interim final regulations provide several examples illustrating the application of the regulations to HRAs, which are intended to reduce the compliance burden. Moreover, the per plan compliance cost is expected to be low, because vendors and insurers will be able to spread these costs across multiple client plans.^[20]

The Departments assume that the average burden per plan will be one-half hour of a legal professional’s time at an hourly labor rate of $116,^[21] and one-half hour of a clerical staff’s time at an hourly labor rate of $26 to conduct the compliance review and make the needed changes to the HRAs. This results in a total cost of $2.1 million ($1.7 for legal services, and $0.4 million for clerical services) in the first year. The Departments invite public comments on this estimate.

To the extent that GINA and these interim final regulations prohibit group health plans and issuers from incentivizing employees to complete HRAs requesting genetic information, including family medical history, and response rates for HRAs drop as a consequence, a cost may be incurred that is associated with the forgone benefits of identifying disease risks early and preventing their onset. The Departments do not have adequate data to determine whether these forgone benefits would materialize, and, if so, what their extent may be. However, the Departments invite public comments on this issue, including evidence-based estimates of what the extent of these forgone benefits may be, if any, and ways in which these public health benefits may be realized while complying with the statutory prohibition on using genetic information for underwriting purposes.

The Department of Health and Human Services expects that the individual health insurance market will incur higher costs of complying with these interim final regulations than group health plans. The Departments assume that health insurance issuers in the individual market will have to review their applications and underwriting policies and procedures to ensure that genetic information is not collected or used for underwriting purposes. Issuers also will need to train underwriters to avoid using genetic information in underwriting. The Departments estimate that the approximately 490 issuers in the individual health insurance market will spend approximately 100 hours in-house each conducting a compliance review, modifying their applications and policies and procedures, and drafting training materials and providing training sessions for underwriters to ensure compliance with GINA and these interim final regulations at a labor rate of $116. This results in a total cost of about $5.6 million. The Departments invite public comments on this estimate.

One comment received in response to the RFI indicated that underwriters in the individual health insurance market request medical records from medical service providers for approximately 20 percent of applicants.^[22] It is likely that most of these medical records contain information relating to family medical history. In a survey, 16 of 23 senior medical underwriters reported that while investigating an applicant’s medical history they had encountered genetic information about an applicant at least once in the applicant’s history.^[23] As explained earlier, these interim final regulations would require health insurance issuers in the individual market to explicitly state that genetic information — including family medical history — should not be provided when an issuer requests medical records from medical services providers for underwriting purposes. In turn, issuers may request that medical services providers redact any family medical history information regarding an applicant that is contained in medical records requested by an issuer to ensure that the provisions of GINA and these interim final regulations are not violated. However, as explained earlier under the discussion of the incidental collection exception, if medical services providers do not comply with the issuers’ requests to redact such information, the collection of genetic information would count as an “incidental collection” of genetic information on the part of issuers, and these interim final regulations would not be violated so long as the issuers do not use the genetic information for underwriting purposes.

The Departments assume that medical service providers will be responsible for redacting genetic information from medical records before submitting the records to insurers, and that trained medical staff will be used for this purpose. The Departments estimate that, on average, health insurance issuers will request 3 million medical records per year, and that medical records staff will spend one-half hour per request redacting genetic information from requested medical records, at a labor rate of $26 per hour. This results in a total annual cost of nearly $41 million. The Departments invite public comments on this estimate.

As discussed above, GINA and these interim final regulations provide an exception to the limitations on requesting or requiring genetic testing, which allows a group health plan or group health insurance issuer to request, but not require, a participant or beneficiary to undergo a genetic test^[24] if all of the following conditions of the research exception are satisfied:

The Departments estimate that up to five entities (consisting of group health plans and health insurance issuers in the group and individual markets) will use the genetic research exception and assume that the requirements of 45 CFR Part 46 will be satisfied. Based on the foregoing, the Departments assume that all group health plans and group health insurance issuers using the exemption will not have to send a disclosure to participants in the genetic research, because they will comply with the requirements of 45 CFR Part 46.116(a)(8). Therefore, the only incremental cost imposed by these interim final regulations will be for the group health plans and group health issuers to send the Notice to the appropriate Department.^[26] Because this cost is de minimis, it has not been included in this Regulatory Impact Analysis.

GINA’s prohibition on the use and collection of genetic information could increase the potential for adverse selection in the individual health insurance market. Adverse selection arises when individuals seeking coverage have information about their health risks that issuers do not know.^[27]

Such information asymmetry can prevent the insurer from assessing the individual’s risk accurately enough to determine the appropriate premium to charge. On average, if issuers do not accurately assess the risks they assume, they will pay more in claims than they receive in premiums. To eliminate this shortfall, issuers may be forced to raise premiums for all insureds. If issuers raise premiums for all insureds, those with a perceived low risk of needing medical care might drop their coverage. This outcome in serious cases may lead to a continued cycle of across-the-board premium increases.

The Departments are not able to measure the extent to which GINA might lead to adverse selection and thereby raise premiums in the individual health insurance market, or whether GINA protections of genetic information will increase the total number of persons insured under individual health insurance policies relative to the number that might leave the market due to increased premiums. Currently, with few tests being performed, the Departments expect the impact to be minimal; however, as the number of tests increases, the effects of adverse selection on the individual health insurance market also could increase and the impact of adverse selection could grow.

Another uncertainty associated with GINA and these interim final regulations is whether total health care expenditures will increase or decrease. Whether expenditures will increase or decrease is dependent on a number of factors such as the following: the cost and predictive power of tests, how widely the tests are performed among the population, whether detected gene abnormalities are based on a single gene or also involve environmental and other confounding factors which lower the predictive value of the test and treatment, and whether treatments for detected gene abnormalities are less costly than treatments for the manifested disease.

Genetic testing typically is not covered under individual health insurance policies; group health plans are far more likely to cover both the tests and associated treatments.^[28] As the number of genetic tests performed increases, the Departments expect group health care premiums will rise to offset the increased costs to insurers, and any increase or decrease in overall expenditures is expected to result in increased or decreased premiums for the group market.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely to have a significant economic impact on a substantial number of small entities. Because these rules are being issued as interim final regulations, the RFA does not apply and the Departments are not required to either certify that the rule would not have a significant economic impact on a substantial number of small entities or conduct a regulatory flexibility analysis.

Nevertheless, the Departments carefully considered the likely impact of the rule on small entities in connection with their assessment under Executive Order 12866. The Departments expect the rules to reduce the compliance burden imposed on plans and insurers by clarifying definitions and terms contained in the statute and providing examples of acceptable methods to comply with specific provisions. Based on the foregoing, and as further discussed below, the Departments hereby certify that the rule will not have a significant economic impact on a substantial number of small entities.^[29]

The Departments expect most of the cost of complying with GINA and the rules to be concentrated among group health plans associated with wellness and disease management programs providing rewards and incentives to employees who complete Health Risk Assessments (HRAs). The Departments estimate that approximately 15,000 (out of 2.4 million) small plans (or 0.00625 of all group health plans) will need to review their HRAs to ensure that genetic information is not used prior to or in connection with enrollment or for underwriting purposes and to make any necessary changes to forms and policies and procedures. This process is estimated to require one-half hour of a legal professional’s time at an hourly labor rate of $116 and one-half hour of a clerical staff member’s time at an hourly labor rate of $26 resulting in an average cost to the plans of $71 ($58 + $13).

Health insurers in both the group and individual health insurance markets will have to ensure compliance with the GINA and the rules. For this purpose, using the Small Business Administration’s definition of a small business as a business with less than $7 million in revenues, premiums earned as a measure of revenue, and data obtained from the National Association of Insurance Commissioners, the Departments estimate that approximately 75 out of 630 insurers had revenues of less that $7 million, and, of these, about 25 had revenues of less than $1 million.

The Departments estimate that each insurer on average would spend 100 hours of professional time at an hourly labor rate of $116 to revise policies and procedures and train underwriters about GINA. This would result in an estimated one time average cost of $11,600 per insurer. For the approximately 25 insurers with revenues of less than $1 million, this burden could be more than one percent of premiums. However, the estimated costs are an average cost for plans of all sizes, and the Departments expect small insurers to have lower implementation costs, because they have fewer underwriters and other staff members to train.

The Departments invite public comments on this certification.

Notwithstanding the determinations of the Department of Labor and Department of Health and Human Services, for purposes of the Department of the Treasury, it has been determined that this Treasury decision is not a significant regulatory action for purposes of Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For the applicability of the RFA, refer to the Special Analyses section in the preamble to the cross-referencing notice of proposed rulemaking published elsewhere in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these interim final regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

As part of their continuing efforts to reduce paperwork and respondent burden, the Departments conduct a preclearance consultation program to provide the general public and federal agencies with an opportunity to comment on proposed and continuing collections of information in accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data can be provided in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed.

As discussed above, GINA and these interim final regulations provide an exception to the limitations on requesting or requiring genetic testing that allow a group health plan or group health insurance issuer to request, but not require, a participant or beneficiary to undergo a genetic test^[30] if all of the following conditions of the research exception set forth in 29 CFR 2590.702A(c)(5) are satisfied:

Two information collection requests (ICRs) are associated with the genetic research exception — the participant disclosure and the notice. The Departments estimate that up to three entities will take advantage of the research exception, and that all of the entities will comply with the requirements of 45 CFR Part 46, including providing the participant disclosure.

The Departments are not soliciting comments concerning an ICR pertaining to the participant disclosure, because these interim final regulations provide that group health plans and group health insurance issuers meeting the requirements of 45 CFR Part 46 are not required to provide additional disclosures, and the Departments have assumed that all entities using the research exemption will meet these requirements. The costs and burdens associated with complying with the participant disclosure requirement already are accounted for in the information collection request for the informed consent requirements contained in 45 CFR Part 46 approved under the Department of Health and Human Services’ OMB Control Number (0990-0260).

Currently, the Departments are soliciting comments concerning the notice. The Departments have submitted a copy of these interim final regulations to OMB in accordance with 44 U.S.C. 3507(d) for review of its information collections. The Departments and OMB are particularly interested in comments that:

Comments should be sent to the Office of Information and Regulatory Affairs, Attention: Desk Officer for the Employee Benefits Security Administration either by fax to (202) 395-7285 or by email to oira_submission@omb.eop.gov. Although comments may be submitted through December 7, 2009, OMB requests that comments be received within 30 days of publication of these interim final regulations to ensure their consideration. A copy of the ICR may be obtained by contacting the PRA addressee: G. Christopher Cosby, Office of Policy and Research, U.S. Department of Labor, Employee Benefits Security Administration, 200 Constitution Avenue, NW, Room N-5718, Washington, DC 20210. Telephone: (202) 693-8410; Fax: (202) 219-4745. These are not toll-free numbers. E-mail: ebsa.opr@dol.gov. ICRs submitted to OMB also are available at reginfo.gov (http://www.reginfo.gov/public/do/PRAMain).

The Departments estimate that completing and mailing the notice will require 15 minutes of clerical time at an hourly rate of $26 per hour. Therefore, the total hour burden associated with completing the notice is estimated to be 0.75 hours of clerical time. The cost burden consists of material and mailing cost to mail the two-page notice and is estimated to total $20. Although the Departments share the burden for this ICR, the Departments have agreed to allocate the hour and cost burden associated with the rule entirely to the Department of Labor, because it is so minimal. The Departments note that persons are not required to respond to, and generally are not subject to any penalty for failing to comply with, an ICR unless the ICR has a valid OMB control number.^[32]

These paperwork burden estimates are summarized as follows:

Type of Review: New collection.

Agencies: Employee Benefits Security Administration, Department of Labor; Internal Revenue Service, Department of the Treasury

Title: Notice of Research Exception under the Genetic Information Nondiscrimination Act

OMB Number: 1210-NEW.

Affected Public: Business or other for-profit; not-for-profit institutions.

Respondents: 3.

Responses: 3.

Frequency of Response: Occasionally.

Estimated Total Annual Burden Hours: 0.75 hours

Estimated Total Annual Burden Cost: $20

Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:

We are soliciting public comment on each of these issues for the following sections of this document that contain information collection requirements (ICRs):

As stated in the interim final regulations at 45 CFR 146.122(c), there are limitations on requesting or requiring genetic testing. The interim final regulations at 45 CFR 146.122(c)(1) state that a group health plan, and a health insurance issuer offering health insurance coverage in connection with a group health plan, must not request or require an individual or a family member of the individual to undergo a genetic test. Section 146.122(c)(5) explains the research exception with respect to the limitations on requesting or requiring genetic testing as defined in 45 CFR 146.122(c)(1). Specifically, 45 CFR 146.122(c)(5) states that a plan or issuer may request, but not require, that a participant or beneficiary undergo a genetic test if all of the following conditions are met:

There are two information collection requirements associated with obtaining a GINA research exception. The first is the informed consent requirement as described above. To comply with the informed consent requirements of 45 CFR 46.116(a)(8), a participant must receive a disclosure that participation in the research is voluntary, refusal to participate cannot involve any penalty or loss of benefits to which the subject is otherwise entitled, and the subject may discontinue participation at anytime without penalty or loss of benefits to which the subject is entitled (the participant disclosure).^[34] These interim final regulations provide that when the participant disclosure is received by participants when their informed consent is sought, no additional disclosures are required for purposes of the GINA research exception.

The burden associated with this requirement is the time and effort necessary to develop, draft, and disseminate the information consent notice to patients. While this requirement is subject to the PRA, the associated burden is already approved under OMB control number 0990-0260. We are not soliciting comments on this requirement at this time.

The second information collection requirement associated with obtaining a GINA research exception is the Notice of Research Exception under the Genetic Information Nondiscrimination Act (the Notice). The burden associated with this requirement is the time and effort necessary for a plan or issuer to complete a copy of the notice and submit it to CMS. CMS also estimates that completing and mailing the notice will require 15 minutes of clerical time at an hourly rate of $26 per hour. Therefore, the total hour burden associated with completing the notice is estimated to be 0.5 hours of clerical time. The cost burden consists of material and mailing cost to mail the two-page notice and is estimated to total $13.

The information collection requirements affecting the individual health insurance market as stated in 45 CFR 148.180 mirror the information collection requirements affecting the group health insurance market as stated in 45 CFR 146.122. The burden is discussed in detail in section IV.F.2.A. of this preamble. As stated in section IV.F.2.A. we expect no more than a combined total of 2 entities between the group health insurance market and the individual health insurance market to be subject to the information collection requirements contained in this interim final rule.

We have submitted a copy of this interim final rule to OMB for its review and approval of the aforementioned information collection requirements. These requirements are not effective until approved by OMB. Although comments may be submitted through December 7, 2009, OMB requests that comments be received within 30 days of publication of these interim final regulations to ensure their consideration.

If you comment on these information collection and recordkeeping requirements, please do either of the following:

1. Submit your comments electronically as specified in the ADDRESSES section of this proposed rule; or

2. Submit your comments to the Office of Information and Regulatory Affairs, Office of Management and Budget,

Attention: CMS Desk Officer, CMS-4137-IFC

Fax: (202) 395-7285; or

Email: OIRA_submission@omb.eop.gov

Please reference “ICRs Regarding Prohibition of Discrimination Based on Genetic Information (§148.180)” when submitting your comments.

These interim final regulations are subject to the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and have been transmitted to Congress and the Comptroller General for review.

For purposes of the Unfunded Mandates Reform Act of 1995 (Public Law 104-4), as well as Executive Order 12875, these interim final regulations do not include any federal mandate that may result in expenditures by state, local, or tribal governments, nor do they include mandates which may impose an annual burden of $100 million or more (as adjusted for inflation) on the private sector.

Executive Order 13132 outlines fundamental principles of federalism, and requires the adherence to specific criteria by federal agencies in the process of their formulation and implementation of policies that have “substantial direct effects” on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have these federalism implications must consult with State and local officials, and describe the extent of their consultation and the nature of the concerns of State and local officials in the preamble to the regulation.

In the Departments’ view, these interim final regulations have federalism implications, because they have direct effects on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among various levels of government. However, in the Departments’ view, the federalism implications of these regulations are substantially mitigated because, with respect to health insurance issuers, the Departments expect that the majority of States will enact laws or take other appropriate action resulting in their meeting or exceeding the federal GINA standards prohibiting discrimination based on genetic information.

In general, through section 514, ERISA supersedes State laws to the extent that they relate to any covered employee benefit plan, and preserves State laws that regulate insurance, banking, or securities. While ERISA prohibits States from regulating a plan as an insurance or investment company or bank, HIPAA added a new preemption provision to ERISA (as well as to the PHS Act) narrowly preempting State requirements for group health insurance coverage. This amendment applies to the GINA nondiscrimination provisions. With respect to these provisions, States may continue to apply State law requirements except to the extent that such requirements prevent the application of the portability, access, and renewability requirements of HIPAA, which include GINA’s nondiscrimination requirements that are the subject of this rulemaking. State insurance laws that are more stringent than the federal requirements are unlikely to “prevent the application of” GINA, and be preempted. Accordingly, States have significant latitude to impose requirements on health insurance issuers that are more restrictive than the federal law.

GINA provides the Secretary of Labor with the express authority to impose a penalty against any health insurance issuer offering health insurance to a group health plan covered by ERISA for any failure by the issuer to meet the GINA requirements. The States may enforce the provisions of GINA as they pertain to issuers, but the Secretary of HHS is required to enforce any provisions that a State fails to substantially enforce. This relates to HHS’ responsibility to enforce the HIPAA nondiscrimination provisions. In exercising its responsibility, HHS works cooperatively with the State for the purpose of addressing the State’s concerns and avoiding conflicts with the exercise of State authority. HHS has developed procedures to implement its enforcement responsibilities, and to afford the States the maximum opportunity to enforce HIPAA’s requirements in the first instance. HHS’ procedures address the handling of reports that States may not be enforcing HIPAA’s requirements, and the mechanism for allocating enforcement responsibility between the States and HHS. In compliance with the requirement of Executive Order 13132 that agencies examine closely any policies that may have federalism implications or limit the policy making discretion of the States, the Department of Labor and HHS have engaged in numerous efforts to consult with and work cooperatively with affected State and local officials. It is expected that the Departments will act in a similar fashion in enforcing the GINA requirements.

In addition, the Departments specifically consulted with the National Association of Insurance Commissioners (NAIC) in developing these interim final regulations. Through the NAIC, the Departments sought and received the input of State insurance departments regarding certain insurance rating practices. The Departments have also cooperated with the States in several ongoing outreach initiatives, through which information on GINA is shared among federal regulators, State regulators, and the regulated community.

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

Pursuant to the requirements set forth in section 8(a) of Executive Order 13132, and by the signatures affixed to these regulations, the Departments certify that the Employee Benefits Security Administration and the Centers for Medicare & Medicaid Services have complied with the requirements of Executive Order 13132 for the attached interim final regulations in a meaningful and timely manner.

The Department of the Treasury temporary and final regulations are adopted pursuant to the authority contained in sections 7805 and 9833 of the Code.

The Department of Labor interim final regulations are adopted pursuant to the authority contained in 29 USC 1027, 1059, 1135, 1161-1168, 1169, 1181-1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 1191b, and 1191c; sec.101(g), Public Law 104-191, 110 Stat. 1936; sec. 401(b), Public Law 105-200, 112 Stat. 645 (42 USC 651 note); sec. 101(f), Public Law 110-233, 122 Stat. 881; Secretary of Labor’s Order 1-2003, 68 FR 5374 (Feb. 3, 2003).

The Department of Health and Human Services interim final regulations are adopted pursuant to the authority contained in sections 2701 through 2763, 2791, and 2792 of the PHS Act (42 USC 300gg through 300gg-63, 300gg-91, and 300gg-92), as added by Public Law 104-191, and amended by Public Law 104-204, Public Law 105-277, and Public Law 110-233.

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Paragraph 1. The authority citation for part 54 is amended by adding an entry for §54.9802-3T in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805. * * *

Section 54.9802-3T also issued under 26 U.S.C. 9833. * * *

Par. 2. Section 54.9801-1 is amended by revising paragraph (a) and adding paragraph (b)(6) to read as follows:

Generally, employers are liable for the withholding of income tax on remuneration for services performed within the United States by a nonresident alien employee. Section 3402(a)(1) of the Code provides that, except as otherwise provided in section 3402, every employer making a payment of wages shall deduct and withhold from such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary. Section 3402(a)(1) further provides that any tables or procedures prescribed under section 3402(a)(1) shall be in such form, and provide for such amounts to be deducted and withheld, as the Secretary determines to be appropriate to carry out the purposes of chapter 1 (imposition of individual income tax).

Income tax withholding tables in Publication 15, (Circular E) Employer’s Tax Guide, for use with the percentage and wage bracket methods of withholding, are based on the assumption that the employee receiving the wages is entitled to a standard deduction in determining his or her income tax liability. However, in the case of a nonresident alien individual, section 63(c)(6)(B) provides that the standard deduction shall be zero. Notice 2005-76 addresses this difference in treatment by directing an employer to add an amount to the wages of a nonresident alien employee solely for purposes of calculating the income tax withholding for each payroll period.

Section 36A, which was added to the Code by the ARRA, provides a credit against income tax to an eligible individual in an amount equal to the lesser of (1) 6.2 percent of earned income, or (2) $400 ($800 in the case of a joint return). The credit is reduced or completely eliminated for individuals with modified adjusted gross income exceeding threshold amounts. Section 36A(d)(1)(A)(i) provides that an eligible individual for purposes of section 36A does not include a nonresident alien individual. As currently enacted, the Making Work Pay Tax Credit does not apply to taxable years beginning after December 31, 2010. See section 36A(e). Under the ARRA, taxpayers’ reduced tax liability under the provision is expeditiously implemented through revised income tax withholding. See H.R. Conf. Rep. 111-16, 111^th Cong., 1^st Sess. (2009) at 517. Accordingly, the income tax withholding tables have been revised to take the Making Work Pay Tax Credit into account in determining the amount of income tax to be withheld.

The income tax withholding tables reflect two tax benefits for which nonresident alien employees are not eligible: (1) the standard deduction; and (2) the Making Work Pay Tax Credit. If adjustments from the generally applicable procedures for using the income tax withholding tables are not made in determining income tax withholding for nonresident alien employees, the withholding on the wages of such employees will generally be less than their tax liability. This notice modifies the rules for employers to use in calculating income tax withholding on nonresident alien employees to offset the effects of both the standard deduction and Making Work Pay Tax Credit as assumed under the withholding tables.

The modification applies only to the procedure used by employers in calculating income tax withholding on wages paid to nonresident alien employees as set forth in part III.B. of Notice 2005-76. The requirements in Notice 2005-76 (part III.A.) relating to the completion of Form W-4, Employee’s Withholding Allowance Certificate, by nonresident alien employees, continue in effect.

The collection of information referenced in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by December 7, 2010. Comments are specifically requested concerning:

The collection of information is in §54.9802-3 (see the temporary regulations published elsewhere in this issue of the Bulletin). The collection of information is required so that the IRS can be apprised when a group health plan is conducting research with respect to genetic information of plan participants or beneficiaries to ensure that all the requirements of the research exception to GINA are being complied with. The likely respondents are business or other for-profit institutions, and nonprofit institutions. Responses to this collection of information are required if a plan wishes to conduct genetic research with respect to participants or beneficiaries of the plan.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

The temporary regulations published elsewhere in this issue of the Bulletin add a new §54.9802-3T to the Miscellaneous Excise Tax Regulations. In the same document, certain conforming changes are also being made to the final regulations under §§54.9801-1, 54.9801-2, 54.9802-1, and 54.9831-1. The proposed, temporary, and final regulations are being published as part of a joint rulemaking with the Department of Labor and the Department of Health and Human Services (the joint rulemaking). The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to this proposed regulation. It is hereby certified that the collection of information contained in this notice of proposed rulemaking will not have a significant impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. GINA requires group health plans claiming the research exception to GINA to notify the Secretary of the Treasury when the exception is being claimed. This notice of proposed rulemaking does not add to the reporting requirement imposed by the statute. Moreover, it is anticipated that very few and only the largest group health plans are likely to claim the research exception to GINA and thus be subject to the reporting requirement. For this reason, the burden imposed by the reporting requirement of the statute and this notice of proposed rulemaking on small entities is expected to be near zero. For further information and for analyses relating to the joint rulemaking, see the preamble to the joint rulemaking. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. Comments are specifically requested on the clarity of the proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register.

The principal author of these proposed regulations is Russ Weinheimer, Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), IRS. The proposed regulations, as well as the temporary and final regulations, have been developed in coordination with personnel from the U.S. Department of Labor and the U.S. Department of Health and Human Services.

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Paragraph 1. The authority citation for part 54 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 54.9802-3 also issued under 26 U.S.C. 9833. * * *

Par. 2. Section 54.9802-3 is added to read as follows: