This document contains amendments to 26 CFR part 1. On July 18, 2011, a notice of proposed rulemaking (REG-126519-11) under section 901 of the Internal Revenue Code (Code) relating to the determination of the amount of taxes paid for purposes of the foreign tax credit was published in the Federal Register (76 FR 42076). In the same issue of the Federal Register, final and temporary regulations were also issued. The text of those temporary regulations served as the text of the proposed regulations. No comments were received in response to the notice of proposed rulemaking. No public hearing was requested or held. This Treasury Decision adopts the proposed regulations with no substantive change, and the corresponding temporary regulations are removed.

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 is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations will primarily affect affiliated groups of corporations that have foreign operations, which tend to be larger businesses. Moreover the number of taxpayers affected and the average burden are minimal. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding this regulation 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 1.901-2 is amended by:

1. Adding a sentence at the end of paragraph (e)(5)(iv)(B)(1)(ii).

2. Removing paragraph (e)(5)(iv)(B)(1)(iii).

3. Revising the first sentence of paragraph (h)(2).

4. Revising paragraph (h)(3).

The revisions and addition read as follows:

Par. 3. Section 1.901-2T is removed.

Beth Tucker,
Deputy Commissioner for
Operations Support.

Approved August 6, 2013.

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

This document contains amendments to 26 CFR part 1. On January 18, 2001, a notice of proposed rulemaking (REG-105801-00; RIN 1545-AX92) (the 2001 NPRM) was published in the Federal Register (66 FR 4746). The 2001 NPRM addresses the definition of personal property for purposes of section 263(g) of the Internal Revenue Code (Code), the types of expenses subject to capitalization, and the operation of the capitalization rules. Another portion of the 2001 NPRM (proposed regulation §1.1092(d)-1(d)) would clarify the circumstances under which an issuer’s position under a debt instrument is treated as a position in personal property that is part of a straddle.

No public hearing was requested or held. Written and electronic comments responding to the 2001 NPRM were received, and the only commenter that substantively addressed proposed §1.1092(d)-1(d) urged its adoption. This Treasury Decision adopts proposed §1.1092(d)-1(d) (REG-105801-00) in the form proposed. As so adopted, this provision is designated as §1.1092(d)-1T(d). This Treasury Decision also adopts the 2001 NPRM’s proposed amendment to the effective/applicability dates (proposed §1.1092(d)-1(e)). As so adopted, this effective/applicability date is designated as §1.1092(d)-1T(e)(2). The amendments are discussed in section 2 of this preamble. The remainder of the 2001 NPRM remains proposed.

The temporary regulations provide guidance under section 1092 regarding when an issuer’s obligation under a debt instrument may be a position in actively traded personal property and, therefore, may be part of a straddle.

Section 1092(d)(1) defines “personal property” to mean “personal property of a type that is actively traded.” A debt or obligation generally is not property of the debtor or obligor. Nevertheless, if a debt instrument provides for payments that are (or are reasonably expected to be) linked to the value of personal property as so defined, then the obligor on the instrument has a position in the personal property referenced by the debt instrument.

Section 1092(d)(7) provides that if a debt instrument is denominated in a nonfunctional currency, the obligor’s position under the debt obligation is a position in the nonfunctional currency. Some maintain that section 1092(d)(7) evidences an intent by Congress to limit the circumstances in which an obligor’s interest in a debt instrument may be a position in a straddle, and that such treatment is proper only with respect to debt obligations denominated in nonfunctional currency. The IRS and the Treasury Department do not believe that section 1092(d)(7) describes the only circumstance in which an obligor’s interest in a debt instrument may be treated as part of a straddle. The statute and the legislative history do not contain any indication that Congress intended to limit section 1092 in this manner; rather, the legislative history characterizes section 1092(d)(7) as a clarification of prior law:

H. R. REP. NO. 99-841, pt. 2, at 670 (1986) (Conf. Rep.); 1986-3 (Vol. 4) CB 670. Moreover, it is clear that an economic exposure associated with an obligation that is not a debt instrument (such as a written option or the obligation created by a short sale) may be a straddle position. Similarly, a debt instrument may be a position in personal property, and accordingly subject to the straddle rules, if the obligation is linked to personal property. Therefore, §1.1092(d)-1T(d) of the temporary regulations expressly provides that an obligation under a debt instrument may be a position in personal property that is part of a straddle.

The temporary regulations adopt the effective/applicability date set forth in the 2001 NPRM by providing that §1.1092(d)-1T(d) applies to straddles established on or after January 17, 2001 (the date on which the 2001 NPRM was filed with the Federal Register). No inference is intended with respect to straddles established prior to January 17, 2001. In appropriate cases, the IRS may take the position under section 1092(d)(2) that, even in the absence of a regulation, an obligation under a debt instrument was part of a straddle prior to the effective date of §1.1092(d)-1T(d) if the debt instrument functioned economically as an interest in actively traded personal property.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) refer to the Special Analyses section of the preamble to the cross-reference notice of proposed rulemaking published in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, this regulation has been 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 follows:

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

Section 1.1092(d)-1T also issued under 26 U.S.C. 1092(b)(1). * * *

Par. 2. Section 1.1092(d)-1 is amended by redesignating paragraph (d) as newly-designated paragraph (e) and revising newly-designated paragraph (e), and adding new paragraph (d) to read as follows:

An HRA is an arrangement that is funded solely by an employer and that reimburses an employee for medical care expenses (as defined under Code § 213(d)) incurred by the employee, or his spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27, up to a maximum dollar amount for a coverage period. IRS Notice 2002-45, 2002-02 C.B. 93; Revenue Ruling 2002-41, 2002-2 C.B. 75. This reimbursement is excludable from the employee’s income. Amounts that remain at the end of the year generally can be used to reimburse expenses incurred in later years. HRAs generally are considered to be group health plans within the meaning of Code § 9832(a), § 733(a) of the Employee Retirement Income Security Act of 1974 (ERISA), and § 2791(a) of the Public Health Service Act (PHS Act) and are subject to the rules applicable to group health plans.

Revenue Ruling 61-146 holds that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income under Code § 106. This exclusion also applies if the employer pays the premiums directly to the insurance company. An employer payment plan, as the term is used in this notice, does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the DOL’s regulation at 29 C.F.R. § 2510.3-1(j) are met.

In general, a health FSA is a benefit designed to reimburse employees for medical care expenses (as defined in Code § 213(d), other than premiums) incurred by the employee, or the employee’s spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27. See Employee Benefits—Cafeteria Plans, 72 Fed. Reg. 43938, 43957 (August 6, 2007) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. § 1.125-5); Code §§ 105(b) and 106(f). Contributions to a health FSA offered through a cafeteria plan satisfying the requirements of Code § 125 (a Code § 125 plan) do not result in gross income to the employee. Code § 125(a). While employees electing coverage under a health FSA typically also elect to enter into a salary reduction agreement, employers may provide additional health FSA benefits in excess of the salary reduction amount. See Employee Benefits—Cafeteria Plans, 72 Fed. Reg. 43938, 43955-43957 (August 6, 2007) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. §§ 1.125-1(r), 1.125-5(b)). For plan years beginning after December 31, 2012, the amount of the salary reduction is limited by Code § 125(i) to $2,500 (indexed annually for plan years beginning after December 31, 2013). See IRS Notice 2012-40, 2012-26 I.R.B. 1046, for more information about the application of the limitation. Additional employer contributions are not limited by Code § 125(i).

The Code, ERISA, and the PHS Act impose various requirements on group health plans, but certain of these requirements do not apply to a group health plan in relation to its provision of excepted benefits. Code § 9831(b), ERISA § 732(b), PHS Act §§ 2722(b) and 2763. Although a health FSA is a group health plan within the meaning of Code § 9832(a), ERISA § 733(a), and PHS Act § 2791(a), a health FSA may be considered to provide only excepted benefits if other group health plan coverage not limited to excepted benefits is made available for the year to employees by the employer, but only if the arrangement is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election). 26 C.F.R. § 54.9831-1(c)(3)(v), 29 C.F.R. § 2590.732(c)(3)(v), and 45 C.F.R. § 146.145(c)(3)(v).

The Affordable Care Act contains certain market reforms that apply to group health plans (the market reforms).^[2] In accordance with Code § 9831(a)(2) and ERISA § 732(a), the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year, and, in accordance with Code § 9831(b), ERISA § 732(b), and PHS Act §§ 2722(b) and 2763, the market reforms also do not apply to a group health plan in relation to its provision of excepted benefits described in Code § 9832(c), ERISA § 733(c) and PHS Act § 2791(c).^[3] Excepted benefits include, among other things, accident-only coverage, disability income, certain limited-scope dental and vision benefits, certain long-term care benefits, and certain health FSAs.

The market reforms specifically addressed in this notice are:^[4]

(a) PHS Act § 2711 which provides that a group health plan (or a health insurance issuer offering group health insurance coverage) may not establish any annual limit on the dollar amount of benefits for any individual—this rule does not prevent a group health plan, or a health insurance issuer offering group health insurance coverage, from placing an annual limit, with respect to any individual, on specific covered benefits that are not essential health benefits^[5] to the extent that such limits are otherwise permitted under applicable law (the annual dollar limit prohibition); and

(b) PHS Act § 2713 which requires non-grandfathered group health plans (or health insurance issuers offering group health insurance plans) to provide certain preventive services without imposing any cost-sharing requirements for these services (the preventive services requirements).

The preamble to the interim final regulations implementing the annual dollar limit prohibition states that if an HRA is integrated with other coverage as part of a group health plan and the other coverage alone would comply with the annual dollar limit prohibition, the fact that benefits under the HRA by itself are limited does not fail to comply with the annual dollar limit prohibition because the combined benefit satisfies the requirements. Further, the preamble states that in the case of a standalone HRA that is limited to retirees, the exemption from the requirements of the Code and ERISA relating to the Affordable Care Act for plans with fewer than two current employees means that the retiree-only HRA is not subject to the annual dollar limit prohibition. 75 Fed. Reg. 37188, 37190-37191 (June 28, 2010).

On January 24, 2013, the Departments issued FAQs that address the application of the annual dollar limit prohibition to certain HRA arrangements (HRA FAQs).^[6] In the HRA FAQs, the Departments state that an HRA is not integrated with primary health coverage offered by an employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage that is provided by the employer and that meets the annual dollar limit prohibition. Further, the HRA FAQs indicate that the Departments intend to issue guidance providing that:

(a) for purposes of the annual dollar limit prohibition, an employer-sponsored HRA cannot be integrated with individual market coverage or with individual policies provided under an employer payment plan, and, therefore, an HRA used to purchase coverage on the individual market under these arrangements will fail to comply with the annual dollar limit prohibition; and

(b) an employer-sponsored HRA may be treated as integrated with other coverage only if the employee receiving the HRA is actually enrolled in the coverage, and any HRA that credits additional amounts to an individual, when the individual is not enrolled in primary coverage meeting the annual dollar limit prohibition provided by the employer, will fail to comply with the annual dollar limit prohibition.

The HRA FAQs also state that the Departments anticipate that future guidance will provide that, whether or not an HRA is integrated with other group health plan coverage, unused amounts credited before January 1, 2014 consisting of amounts credited before January 1, 2013, and amounts that are credited in 2013 under the terms of an HRA as in effect on January 1, 2013, may be used after December 31, 2013 to reimburse medical expenses in accordance with those terms without causing the HRA to fail to comply with the annual dollar limit prohibition. If the HRA terms in effect on January 1, 2013 did not prescribe a set amount or amounts to be credited during 2013 or the timing for crediting such amounts, then the amounts credited may not exceed those credited for 2012 and may not be credited at a faster rate than the rate that applied during 2012.

Under the interim final rules implementing the annual dollar limit prohibition, a health FSA, as defined in Code § 106(c)(2), is not subject to the annual dollar limit prohibition. See 26 C.F.R. § 54.9815-2711T(a)(2)(ii), 29 C.F.R. § 2590.715-2711(a)(2)(ii), and 45 C.F.R. § 147.126(a)(2)(ii). See Q&A 8 of this notice limiting the exemption from the annual dollar limit prohibition to a health FSA that is offered through a Code § 125 plan.

Section 36B of the Code allows a premium tax credit to certain taxpayers who enroll (or whose family members enroll) in a qualified health plan (QHP) through an Affordable Insurance Exchange (referred to in this notice as an Exchange, and also referred to in other published guidance as a Marketplace). The credit subsidizes a portion of the premiums for the QHP. In general, the premium tax credit may not subsidize coverage for an individual who is eligible for other minimum essential coverage. If the minimum essential coverage is eligible employer-sponsored coverage, however, an individual is treated as eligible for that coverage only if the coverage is affordable and provides minimum value or if the individual enrolls in the coverage.

Coverage provided through Code § 125 plans, employer payment plans, health FSAs, and HRAs are eligible employer-sponsored plans and, therefore, are minimum essential coverage, unless the coverage consists solely of excepted benefits. See Code § 5000A(f)(2) and Treas. Reg. § 1.5000A-2, 78 Fed. Reg. 53646, 53658 (August 30, 2013).

Amounts newly made available for the current plan year under an HRA that is integrated with an eligible employer-sponsored plan and that an employee may use to pay premiums are counted for purposes of determining affordability of an eligible employer-sponsored plan under Code § 36B. See Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, 78 Fed. Reg. 25909, 25914 (May 3, 2013) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. § 1.36B-2(c)(3)(v)(A)(5)). Amounts newly made available for the current plan year under an HRA that is integrated with an eligible employer-sponsored plan are counted toward the plan’s minimum value percentage for that plan year if the amounts may be used only to reduce cost-sharing for covered medical expenses and the amount counted for this purpose is the amount of expected spending for health care costs in a benefit year. See Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, 78 Fed. Reg. 25909, 25916 (May 3, 2013) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. § 1.36B-6(c)(4), (c)(5)). See Q&A 11 of this notice for more explanation of the application of these rules to HRAs and other arrangements.

Question 1: The HRA FAQs provide that an employer-sponsored HRA cannot be integrated with individual market coverage, and, therefore, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition. May other types of group health plans used to purchase coverage on the individual market be integrated with that individual market coverage for purposes of the annual dollar limit prohibition?

Answer 1: No. A group health plan, including an HRA, used to purchase coverage on the individual market is not integrated with that individual market coverage for purposes of the annual dollar limit prohibition.

For example, a group health plan, such as an employer payment plan, that reimburses employees for an employee’s substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However the employer payment plan will fail to comply with the annual dollar limit prohibition because (1) an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.

Question 2: How do the preventive services requirements apply to an HRA that is integrated with a group health plan?

Answer 2: Similar to the analysis of the annual dollar limit prohibition, an HRA that is integrated with a group health plan will comply with the preventive services requirements if the group health plan with which the HRA is integrated complies with the preventive services requirements.

Question 3: The HRA FAQs provide that an employer-sponsored HRA cannot be integrated with individual market coverage, and, therefore, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition. May a group health plan, including an HRA, used to purchase coverage on the individual market be integrated with that individual market coverage for purposes of the preventive services requirements?

Answer 3: No. A group health plan, including an HRA, used to purchase coverage on the individual market is not integrated with that individual market coverage for purposes of the preventive services requirements.

For example, a group health plan, such as an employer payment plan, that reimburses employees for an employee’s substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However, the employer payment plan will fail to comply with the preventive services requirements because (1) an employer payment plan does not provide preventive services without cost-sharing in all instances, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.

Question 4: Under what circumstances will an HRA be integrated with another group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements?

Answer 4: An HRA will be integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if it meets the requirements under either of the integration methods described below. Pursuant to this notice, under both methods, integration does not require that the HRA and the coverage with which it is integrated share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable.

An HRA is integrated with another group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if (1) the employer offers a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits; (2) the employee receiving the HRA is actually enrolled in a group health plan (other than the HRA) that does not consist solely of excepted benefits, regardless of whether the employer sponsors the plan (non-HRA group coverage); (3) the HRA is available only to employees who are enrolled in non-HRA group coverage, regardless of whether the employer sponsors the non-HRA group coverage (for example, the HRA may be offered only to employees who do not enroll in the employer’s group health plan but are enrolled in other non-HRA group coverage, such as a plan maintained by the employer of the employee’s spouse); (4) the HRA is limited to reimbursement of one or more of the following—co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care (as defined under Code § 213(d)) that does not constitute essential health benefits; and (5) under the terms of the HRA, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA at least annually and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA. This opt-out feature is required because the benefits provided by the HRA generally will constitute minimum essential coverage under Code § 5000A (see Q&A 10 of this notice) and will therefore preclude the individual from claiming a Code § 36B premium tax credit.

Alternatively, an HRA that is not limited with respect to reimbursements as required under the integration method expressed above is integrated with a group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if (1) the employer offers a group health plan to the employee that provides minimum value pursuant to Code § 36B(c)(2)(C)(ii); (2) the employee receiving the HRA is actually enrolled in a group health plan that provides minimum value pursuant to Code § 36B(c)(2)(C)(ii), regardless of whether the employer sponsors the plan (non-HRA MV group coverage); (3) the HRA is available only to employees who are actually enrolled in non-HRA MV group coverage, regardless of whether the employer sponsors the non-HRA MV group coverage (for example, the HRA may be offered only to employees who do not enroll in the employer’s group health plan but are enrolled in other non-HRA MV group coverage, such as a plan maintained by an employer of the employee’s spouse); and (4) under the terms of the HRA, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA at least annually, and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA.

Facts. Employer A sponsors a group health plan and an HRA for its employees. Employer A’s HRA is available only to employees who are either enrolled in its group health plan or in non-HRA group coverage through a family member. Employer A’s HRA is limited to reimbursement of co-payments, co-insurance, deductibles, and premiums under Employer A’s group health plan or other non-HRA group coverage (as applicable), as well as medical care (as defined under Code § 213(d)) that does not constitute essential health benefits. Under the terms of Employer A’s HRA, an employee is permitted to permanently opt out of and waive future reimbursements from the HRA both upon termination of employment and at least annually.

Employer A employs Employee X. Employee X chooses to enroll in non-HRA group coverage sponsored by Employer B, the employer of Employee X’s spouse, instead of enrolling in Employer A’s group health plan. Employer A and Employer B are not treated as a single employer under Code § 414(b), (c), (m), or (o). Employee X attests to Employer A that he is covered by Employer B’s non-HRA group coverage. When seeking reimbursement under Employer A’s HRA, Employee X attests that the expense for which he seeks reimbursement is a co-payment, co-insurance, deductible, or premium under Employer B’s non-HRA group coverage or medical care (as defined under Code § 213(d)) that is not an essential health benefit.

Conclusion. Employer A’s HRA is integrated with Employer B’s non-HRA group coverage for purposes of the annual dollar limit prohibition and the preventive services requirements.

Facts. Employer A sponsors a group health plan that provides minimum value and an HRA for its employees. Employer A’s HRA is available only to employees who are either enrolled in its group health plan or in non-HRA MV group coverage through a family member. Under the terms of Employer A’s HRA, an employee is permitted to permanently opt out of and waive future reimbursements from the HRA both upon termination of employment and at least annually.

Employer A employs Employee X. Employee X chooses to enroll in non-HRA MV group coverage sponsored by Employer B, the employer of Employee X’s spouse, instead of enrolling in Employer A’s group health plan. Employer A and Employer B are not treated as a single employer under Code § 414(b), (c), (m), or (o). Employee X attests to Employer A that he is covered by Employer B’s non-HRA MV group coverage and that the coverage provides minimum value.

Conclusion. Employer A’s HRA is integrated with Employer B’s non-HRA MV group coverage for purposes of the annual dollar limit prohibition and the preventive services requirements.

Question 5: May an employee who is covered by both an HRA and a group health plan with which the HRA is integrated, and who then ceases to be covered under the group health plan that is integrated with the HRA, be permitted to use the amounts remaining in the HRA?

Answer 5: Whether or not an HRA is integrated with other group health plan coverage, unused amounts that were credited to an HRA while the HRA was integrated with other group health plan coverage may be used to reimburse medical expenses in accordance with the terms of the HRA after an employee ceases to be covered by other integrated group health plan coverage without causing the HRA to fail to comply with the market reforms. Note that coverage provided through an HRA, other than coverage consisting solely of excepted benefits, is an eligible employer-sponsored plan and, therefore, minimum essential coverage under Code § 5000A.

Question 6: Does an HRA impose an annual limit in violation of the annual dollar limit prohibition if the group health plan with which an HRA is integrated does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits (but limits the coverage to the HRA’s maximum benefit)?

Answer 6: In general, an HRA integrated with a group health plan imposes an annual limit in violation of the annual dollar limit prohibition if the group health plan with which the HRA is integrated does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits and limits the coverage to the HRA’s maximum benefit. This situation should not arise for a group health plan funded through non-grandfathered health insurance coverage in the small group market, as small group market plans must cover all categories of essential health benefits, with the exception of pediatric dental benefits, if pediatric dental benefits are available through a stand-alone dental plan offered in accordance with 45 C.F.R. § 155.1065.^[7]

However, under the integration method available for plans that provide minimum value described under Q&A 4 of this notice, if a group health plan provides minimum value under Code § 36B(c)(2)(C)(ii), an HRA integrated with that group health plan will not be treated as imposing an annual limit in violation of the annual dollar limit prohibition, even if that group health plan does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits and limits the coverage to the HRA’s maximum benefit.

Question 7: How do the market reforms apply to a health FSA that does not qualify as excepted benefits?

Answer 7: The market reforms do not apply to a group health plan in relation to its provision of benefits that are excepted benefits. Health FSAs are group health plans but will be considered to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the health FSA for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election).^[8] See 26 C.F.R. § 54.9831-1(c)(3)(v), 29 C.F.R. § 2590.732(c)(3)(v), and 45 C.F.R. § 146.145(c)(3)(v). Therefore, a health FSA that is considered to provide only excepted benefits is not subject to the market reforms.

If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA generally is subject to the market reforms, including the preventive services requirements. Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventive services requirements.^[9]

The Departments understand that questions have arisen as to whether HRAs that are not integrated with a group health plan may be treated as a health FSA as defined in Code § 106(c)(2). Notice 2002-45, 2002-02 C.B. 93, states that, assuming that the maximum amount of reimbursement which is reasonably available to a participant under an HRA is not substantially in excess of the value of coverage under the HRA, an HRA is a health FSA as defined in Code § 106(c)(2). This statement was intended to clarify the rules limiting the payment of long-term care expenses by health FSAs. The Departments are also considering whether an HRA may be treated as a health FSA for purposes of the exclusion from the annual dollar limit prohibition. In any event, the treatment of an HRA as a health FSA that is not excepted benefits would not exempt the HRA from compliance with the other market reforms, including the preventive services requirements, which the HRA would fail to meet because the HRA would not be integrated with a group health plan. This analysis applies even if an HRA reimburses only premiums.

Question 8 : The interim final regulations regarding the annual dollar limit prohibition contain an exemption for health FSAs (as defined in Code § 106(c)(2)). See 26 C.F.R. § 54.9815-2711T(a)(2)(ii), 29 C.F.R. § 2590.715-2711(a)(2)(ii), and 45 C.F.R. § 147.126(a)(2)(ii). Does this exemption apply to a health FSA that is not offered through a Code § 125 plan?

Answer 8: No. The Departments intended for this exemption from the annual dollar limit prohibition to apply only to a health FSA that is offered through a Code § 125 plan and thus subject to a separate annual limitation under Code § 125(i). There is no similar limitation on a health FSA that is not part of a Code § 125 plan, and thus no basis to imply that it is not subject to the annual dollar limit prohibition.

To clarify this issue, the Departments intend to amend the annual dollar limit prohibition regulations to conform to this Q&A 8 retroactively applicable as of September 13, 2013. As a result, a health FSA that is not offered through a Code § 125 plan is subject to the annual dollar limit prohibition and will fail to comply with the annual dollar limit prohibition.

Question 9: Are benefits under an employee assistance program or EAP considered to be excepted benefits?

Answer 9: The Departments intend to amend 26 C.F.R. § 54.9831-1(c), 29 C.F.R. § 2590.732(c), and 45 C.F.R. § 146.145(c) to provide that benefits under an employee assistance program or EAP are considered to be excepted benefits, but only if the program does not provide significant benefits in the nature of medical care or treatment. Excepted benefits are not subject to the market reforms and are not minimum essential coverage under Code § 5000A. Until rulemaking is finalized, through at least 2014, the Departments will consider an employee assistance program or EAP to constitute excepted benefits only if the employee assistance program or EAP does not provide significant benefits in the nature of medical care or treatment. For this purpose, employers may use a reasonable, good faith interpretation of whether an employee assistance program or EAP provides significant benefits in the nature of medical care or treatment.

Question 10: Is an HRA that has fewer than two participants who are current employees on the first day of the plan year (for example, a retiree-only HRA) minimum essential coverage for purposes of Code §§ 5000A and 36B?

Answer 10: Yes. The Treasury Department and the IRS understand that some employers are considering making amounts available under standalone retiree-only HRAs to retired employees so that the employer would be able to reimburse medical expenses, including the purchase of an individual health insurance policy. For this purpose, the standalone HRA would constitute an eligible employer-sponsored plan under Code § 5000A(f)(2), and therefore the coverage would constitute minimum essential coverage under Code § 5000A, for a month in which funds are retained in the HRA (including amounts retained in the HRA during periods of time after the employer has ceased making contributions). As a result, a retiree covered by a standalone HRA for any month will not be eligible for a Code § 36B premium tax credit for that month. Note that unlike other HRAs, the market reforms generally do not apply to a retiree-only HRA and therefore would not impact an employer’s choice to offer a retiree-only HRA.^[10]

Question 11: How are amounts newly made available under an HRA treated for purposes of Code § 36B?

Answer 11: An individual is not eligible for individual coverage subsidized by the Code § 36B premium tax credit if the individual is eligible for employer-sponsored coverage that is affordable (premiums for self-only coverage do not exceed 9.5 percent of household income) and that provides minimum value (the plan’s share of costs is at least 60 percent). If an employer offers an employee both a primary eligible employer-sponsored plan and an HRA that would be integrated with the primary plan if the employee enrolled in the plan, amounts newly made available for the current plan year under the HRA may be considered in determining whether the arrangement satisfies either the affordability requirement or the minimum value requirement, but not both. Amounts newly made available for the current plan year under the HRA that an employee may use only to reduce cost-sharing for covered medical expenses under the primary employer-sponsored plan count only toward the minimum value requirement. See Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, 78 Fed. Reg. 25909, 25916 (May 3, 2013) (proposed regulations, to be codified, in part, once final, at 26 C.F.R. § 1.36B-6(c)(4), (c)(5)). Amounts newly made available for the current plan year under the HRA that an employee may use to pay premiums or to pay both premiums and cost-sharing under the primary employer-sponsored plan count only toward the affordability requirement. See Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit, 78 Fed. Reg. 25909, 25914 (May 3, 2013) (proposed regulations; to be codified, in part, once final, at 26 C.F.R. § 1.36B-2(c)(3)(v)(A)(5)).

Even if an HRA is integrated with a plan offered by another employer for purposes of the annual dollar limit prohibition and the preventive services requirements (see Q&A 4 of this notice), the HRA does not count toward the affordability or minimum value requirement of the plan offered by the other employer. Additionally, if an employer offers an HRA on the condition that the employee does not enroll in non-HRA coverage offered by the employer and instead enrolls in non-HRA coverage from a different source, the HRA does not count in determining whether the employer’s non-HRA coverage satisfies either the affordability or minimum value requirement.

For purposes of the Code § 36B premium tax credit, the requirements of affordability and minimum value do not apply if an employee enrolls in any employer-sponsored minimum essential coverage, including coverage provided through a Code § 125 plan, an employer payment plan, a health FSA, or an HRA, but only if the coverage offered does not consist solely of excepted benefits. See 26 C.F.R. § 1.36B-2(c)(3)(vii). If an employee enrolls in any employer-sponsored minimum essential coverage, the employee is ineligible for individual coverage subsidized by the Code § 36B premium tax credit.

Question 12: Section 125(f)(3) of the Code, effective for taxable years beginning after December 31, 2013, provides that the term “qualified benefit” does not include any QHP (as defined in ACA § 1301(a)) offered through an Exchange.^[11] This prohibits an employer from providing a QHP offered through an Exchange as a benefit under the employer’s Code § 125 plan. Some states have already established Exchanges and employers in those states may have Code § 125 plan provisions that allow employees to enroll in health coverage through the Exchange as a benefit under a Code § 125 plan. If the employer’s Code § 125 plan operates on a plan year other than a calendar year, may the employer continue to provide the Exchange coverage through a Code § 125 plan after December 31, 2013?

Answer 12: For Code § 125 plans that as of September 13, 2013 operate on a plan year other than a calendar year, the restriction under Code § 125(f)(3) will not apply before the first plan year of the Code § 125 plan that begins after December 31, 2013. Thus, for the remainder of a plan year beginning in 2013, a QHP provided through an Exchange as a benefit under a Code § 125 plan will not result in all benefits provided under the Code § 125 plan being taxable. However, individuals may not claim a Code § 36B premium tax credit for any month in which the individual was covered by a QHP provided through an Exchange as a benefit under a Code § 125 plan.

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) relating to section 1092(d). The temporary regulations provide that if a taxpayer is the obligor under a debt instrument one or more payments on which are linked to the value of personal property or a position with respect to personal property, then the taxpayer’s obligation under the debt instrument is a position with respect to personal property and may be part of a straddle. The temporary regulations apply to straddles established on or after January 17, 2001. The text of the temporary regulations also serves as the text of these proposed regulations and is identical to the text of regulations originally proposed under REG-105801-00.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in the preamble under the “Addresses” heading. The Treasury Department and the IRS welcome comments on this proposed regulation. All comments will be available at www.regulations.gov for public inspection and copying.

A public hearing has been scheduled for January 15, 2014, beginning at 10 a.m. in the IRS Auditorium, Internal Revenue Service Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written comments and an outline of the topics to be discussed and the time to be devoted to each topic by November 4, 2013. Submit a signed paper original and eight (8) copies or an electronic copy. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

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

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

Section 1.1092(d)-1 also issued under 26 U.S.C. 1092(b)(1). * * *

Par. 2. Section 1.1092(d)-1 is amended by revising paragraphs (d) and (e) to read as follows:

The collection of information contained 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 November 8, 2013. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility;

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The collection of information in these proposed regulations is in proposed regulation §§301.6011-9, 301.6056-1, and 301.6056-2. This information will be used by the IRS to verify compliance with the return and employee statement requirements under section 6056 for purposes of section 4980H, and with the eligibility requirements for the premium tax credit. This information will be used to determine whether the information has been reported and calculated correctly for purposes of section 4980H and section 6056, and whether claims for the premium tax credit are correct. The likely respondents are employers that are applicable large employers, as defined under section 4980H(c)(2).

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.

Sections I through V of the preamble (“Background”) describe the statutory provisions governing the information reporting requirements, as well as related statutory provisions. Sections VI through XIII of the preamble (“Explanation of Provisions and Summary of Comments”) describe and explain how these regulations propose to implement the statutory provisions of section 6056 and include a discussion of a variety of potential simplified reporting methods that are under consideration. As is typical with regulations on information reporting, these proposed regulations refer generally to additional information that may be required under the applicable forms and instructions. Sections IX.B and C of this preamble set forth the specific data elements that Treasury and the IRS anticipate will be included with the reporting, including the data elements that Treasury and the IRS anticipate will be provided through the use of an indicator code.

Section 6056^[12] requires applicable large employers, as defined in section 4980H(c)(2), to file returns at the time prescribed by the Secretary with respect to each full-time employee and furnish a statement to each full-time employee by January 31 of the calendar year following the calendar year for which the return must be filed. Section 6056 specifies certain information that must be reported on the section 6056 return and related statement, and authorizes the Secretary to require additional information and determine the form of the return. Section 6056 is effective for periods beginning after December 31, 2013; however, Notice 2013-45 (2013-31 I.R.B. 116) provides transition relief for 2014 from the section 6056 information reporting requirements (as well as the section 6055 information reporting requirements relating to the section 5000A individual shared responsibility provisions and the section 4980H employer shared responsibility provisions).

One of the purposes of section 6056 reporting is to assist with the administration of the employer shared responsibility provisions added by the Affordable Care Act as section 4980H of the Code. Section 4980H imposes an assessable payment on applicable large employers if certain requirements relating to the provision of health care coverage to full-time employees are not met and one or more full-time employees claim a premium tax credit. On December 28, 2012, Treasury and the IRS released proposed regulations under section 4980H. The proposed regulations under section 4980H were published in the Federal Register on January 2, 2013 (REG-138006-12 [78 FR 218]). Section 4980H is effective for months after December 31, 2013; however, Notice 2013-45, issued on July 9, 2013, provides transition relief for 2014 from the section 4980H employer shared responsibility provisions.

The reporting requirements under section 6056 apply only to employers that are subject to section 4980H (which the statute refers to as “applicable large employers”). Section 4980H(c)(2) defines the term “applicable large employer” as, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year. Generally, for purposes of determining applicable large employer status, a full-time employee includes any employee who was employed on average at least 30 hours of service per week and any full-time equivalents determined pursuant to section 4980H(c)(2)(E). All employers treated as a single employer under section 414(b), (c), (m), or (o) are treated as one employer for purposes of determining applicable large employer status. Section 4980H contains rules for determining whether an employer qualifies as an applicable large employer, including special rules addressing an employer’s first year of existence and predecessor and successor employers. See section 4980H(c)(2)(C) and proposed §54.4980H-2. Proposed regulations under section 4980H provide guidance on determining applicable large employer status and determining full-time employee status, including defining and providing rules for calculating hours of service. See proposed §§54.4980H-1(a)(21) (definition of hours of service), 54.4980H-2 (determination of applicable large employer status), and 54.4980H-3 (determination of full-time employee status).

Section 6056 reporting will also be used for the administration of the premium tax credit, which was added by the Affordable Care Act as section 36B of the Code. Section 36B allows an advanceable and refundable premium tax credit to help individuals and families afford health insurance coverage purchased through an Affordable Insurance Exchange (Exchange). An employee is not eligible for a premium tax credit to subsidize the cost of Exchange coverage if the employee is offered affordable coverage under an employer-sponsored plan that provides minimum value, or if the employee enrolls in an employer-sponsored plan. For this purpose, an employer-sponsored plan is affordable if the employee’s required contribution for the lowest-cost self-only minimum value coverage offered does not exceed 9.5% of the employee’s household income. Thus, an employee (and in the case of an employer-sponsored plan that offers coverage to an employee’s spouse or dependents, the employee’s spouse and dependents) who does not accept an offer of affordable minimum value coverage under an employer-sponsored plan and who purchase coverage on an Exchange may not be eligible for a premium tax credit. Individuals and the IRS will use the information on the cost of the lowest-cost employer-sponsored self-only coverage that provides minimum value to verify the individual’s eligibility for the premium tax credit.^[13]

In addition, the Affordable Care Act added section 5000A to the Code. Section 5000A provides nonexempt individuals with a choice: maintain minimum essential coverage for themselves and any nonexempt family members, or include an additional payment with their Federal income tax return. Section 5000A(f)(1)(B) provides that minimum essential coverage includes coverage under an eligible employer-sponsored plan. Under section 5000A(f)(2), an eligible employer-sponsored plan is, with respect to an employee, a group health plan or group health insurance coverage offered by an employer to the employee that is (1) a governmental plan, within the meaning of section 2791(d)(8) of the Public Health Service Act (42 U.S.C. 300gg-91(d)(8)), or (2) any other plan or coverage offered in the small or large group market within a State. An eligible employer-sponsored plan also includes a grandfathered health plan, as defined in section 5000A(f)(1)(D), offered in a group market. Group health plans within the meaning of section 1301(b)(3) of the Affordable Care Act (42 U.S.C. 18021(b)(3)) include both insured health plans and self-insured health plans. Accordingly, a self-insured group health plan is an eligible employer-sponsored plan. See the Questions and Answers on the Individual Shared Responsibility Provision available on the IRS website at www.irs.gov.

The Affordable Care Act also added section 6055 to the Code, providing for information reporting for the administration of section 5000A. The section 6055 reporting requirements are effective for years beginning after December 31, 2013; however, Notice 2013-45 provides transition relief for 2014 from the section 6055 reporting requirements. Section 6055 requires information reporting by any person that provides minimum essential coverage to an individual during a calendar year, including coverage provided under an eligible employer-sponsored plan, and the furnishing to taxpayers of a related statement covering each individual listed on the section 6055 return. The information reported under section 6055 can be used by individuals and the IRS to verify the months (if any) in which they were covered by minimum essential coverage. Treasury and the IRS are issuing proposed regulations under section 6055 (REG-132455-11) concurrently with these proposed regulations.

Section 6056 directs an applicable large employer (within the meaning of section 4980H(c)(2)) to file a return with the IRS that reports for each employee who was a full-time employee for one or more months during the calendar year certain information described in section 6056(b) about the health care coverage the employer offered to that employee (or, if applicable, that the employer did not offer health care coverage to that employee). Section 6056 also requires such employers to furnish by January 31 of the calendar year following the calendar year for which the return must be filed a related statement described in section 6056(c) to each full-time employee for whom information is required to be included on the return.

Section 6056(b) describes the return required to be filed with the IRS under section 6056. It states that a return meets the requirements of section 6056 if the return is in such form as the Secretary may prescribe and contains (1) the name, date, and employer’s employer identification number (EIN), (2) a certification as to whether the employer offers to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2)), (3) the number of full-time employees for each month during the calendar year, and (4) the name, address, and taxpayer identification number of each full-time employee during the calendar year and the months, if any, during which that employee (and any dependents) were covered under any such health benefits plans.

If the applicable large employer certifies that it offered to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2)), section 6056 specifies that the return must also include (1) the length of any waiting period (as defined in section 2701(b)(4) of the Public Health Service Act (42 USC 300gg(b)(4)) with respect to that coverage,^[14] (2) the months during the calendar year for which coverage under the plan was available, (3) the monthly premium for the lowest cost option in each of the enrollment categories under the plan, and (4) the employer’s share of the total allowed costs of benefits provided under the plan. Section 6056(b)(2)(F) provides that the return must include such other information as the Secretary may require. See section IX of this preamble for a discussion of the information proposed to be included in these proposed regulations as part of the reporting requirements, as well as additional information that may be required under the applicable forms and instructions, as is typical with regulations on information reporting.

Section 6056(c) requires that every person required to make a return under section 6056(a) furnish to each full-time employee whose name is required to be set forth in the return a written statement showing (1) the name and address of the person required to make that return and the phone number of the information contact for that person, and (2) the information required to be shown on the return with respect to that individual. The written statement must be furnished on or before January 31 of the year following the calendar year for which the return under section 6056(a) was required to be made.

As discussed in section IX.B of this preamble, the approach contemplated by these proposed regulations would give effect to these statutory provisions by limiting the information elements listed and other information that would be provided annually to those that are needed by individual taxpayers to accurately complete their tax returns or by the IRS to effectively administer other provisions of the Affordable Care Act. Treasury and the IRS seek comments on ways to achieve these goals efficiently and effectively.

Section 6056(d) provides that to the maximum extent feasible, the Secretary may permit combined reporting under section 6056, section 6051 (employers filing and furnishing Forms W-2, Wage and Tax Statement, with respect to employees) or section 6055, and in the case of an applicable large employer offering health insurance coverage of a health insurance issuer, the employer may enter into an agreement with the issuer to include information required under section 6056 with the return and statement required to be provided by the issuer under section 6055.

Section 6056(e) generally permits governmental units, or any agency or instrumentality thereof, to designate a person to comply with the section 6056 requirements on behalf of the governmental unit, agency or instrumentality.

Under section 6724(d), as amended by the Affordable Care Act, an applicable large employer that fails to comply with the filing and statement furnishing requirements of section 6056 may be subject to penalties for failure to file a correct information return (section 6721) and failure to furnish correct payee statements (section 6722). However, these penalties may be waived if the failure is due to reasonable cause and not to willful neglect (section 6724).

Notice 2012-32 (2012-20 I.R.B. 910) requested public comments on issues to be addressed in regulations under section 6055. Notice 2012-33 (2012-20 I.R.B. 912) requested public comments on issues to be addressed in regulations under section 6056. In developing these proposed regulations and the proposed regulations under section 6055, including the potential further simplified reporting methods described in section XI of this preamble, Treasury and the IRS have considered the written comments submitted in response to these notices and other written comments received.

In addition, consistent with Notice 2013-45, Treasury and the IRS have engaged in further dialogue with stakeholders in an effort to simplify section 6056 and section 6055 reporting consistent with effective implementation of the law. This process has included discussions with stakeholders representing a wide range of interests to assist in the consideration of effective information reporting rules that will be as streamlined, simple, and workable as possible. The effort to develop these proposed information reporting rules has reflected a considered balancing of the importance of (1) providing individuals the information to complete their tax returns accurately, including with respect to the individual responsibility provisions and eligibility for the premium tax credit, (2) minimizing cost and administrative tasks for the reporting entities and individuals, and (3) providing the IRS with information to use for effective and efficient tax administration. As noted elsewhere in this preamble, the proposed regulations will be the subject of public comments, including comments that are specifically invited regarding particular issues identified in the preamble.

The Explanation of Provisions that follows (Sections VII through XIII of the preamble) describes the regulatory provisions proposed to implement the statutory reporting provisions described in the Background portion of the preamble. Specifically, this section includes the following:

These proposed regulations under section 6056 use a number of terms that are defined in other Code provisions or regulations. For example, section 6056(f) provides that any term used in section 6056 that is also used in section 4980H shall have the same meaning given to the term by section 4980H. Relevant terms include the following:

The proposed regulations provide that the term applicable large employer has the same meaning as in section 4980H(c)(2) and any applicable guidance. See proposed §54.4980H-1(a)(4).

All persons treated as a single employer under section 414(b), (c), (m), or (o) are treated as one employer for purposes of determining applicable large employer status.^[15] Under the proposed regulations, the section 6056 filing and furnishing requirements are applied separately to each person comprising the applicable large employer consistent with the approach taken in the section 4980H proposed regulations (REG-138006-12 [78 FR 218]) with respect to the determination of any assessable payment under section 4980H. The person or persons that comprise the applicable large employer are referred to as ALE members. The proposed regulations define the term ALE member as a person that, together with one or more other persons, is treated as a single employer that is an applicable large employer. For this purpose, if a person, together with one or more other persons, is treated as a single employer that is an applicable large employer on any day of a calendar month, that person is an ALE member for that calendar month. This definition is the same as the definition provided in the proposed regulations under section 4980H. See §54.4980H-1(a)(5).

The proposed regulations provide that the term dependent has the same meaning as in section 4980H(a) and (b) and any applicable guidance. See proposed §54.4980H-1(a)(11).

The proposed regulations provide that the term eligible employer-sponsored plan has the same meaning as in section 5000A(f)(2) and any applicable guidance.

The proposed regulations provide that the term full-time employee has the same meaning as in section 4980H(c)(4) and any applicable guidance as applied to the determination and calculation of liability under section 4980H(a) and (b) with respect to any individual employee. See proposed §54.4980H-1(a)(18).

The proposed regulations define the term governmental unit as the government of the United States, any State or political subdivision thereof, or any Indian tribal government (as defined in section 7701(a)(40)) or subdivision of an Indian tribal government (as defined in section 7871(d)). The proposed regulations do not define the term agency or instrumentality of a governmental unit, but rather reserve on the issue.

The proposed regulations provide that the term minimum essential coverage has the same meaning as in section 5000A(f)(1) and any applicable guidance.

The proposed regulations provide that the term minimum value has the same meaning as in section 36B and any applicable guidance. See proposed §1.36B-6.

The proposed regulations provide that the term person has the same meaning as provided in section 7701(a)(1) and the regulations thereunder.

As discussed earlier in section VII.B of this preamble, an ALE member is any person that is an applicable large employer or a member of an aggregated group (determined under section 414(b), 414(c), 414(m) or 414(o)) that is determined to be an applicable large employer. Under the proposed regulations, the section 6056 filing and statement furnishing requirements apply on a member-by-member basis to each ALE member, even though the determination of whether an entity is an applicable large employer is made at the aggregated group level. For example, if an applicable large employer is comprised of a parent corporation and 10 wholly-owned subsidiary corporations, there are 11 ALE members (the parent corporation and each of the 10 subsidiary corporations). Under the proposed regulations, each ALE member with full-time employees, rather than the group of entities that comprise the applicable large employer, is the entity responsible for filing and furnishing statements with respect to its full-time employees under section 6056. This is consistent with the manner in which any potential assessable payments under section 4980H will be calculated and administered.

Treasury and the IRS understand that ALE members may benefit from the assistance of a third party in preparing these returns, for example a third-party plan administrator or a related ALE member tasked with preparing the returns for all the members of that applicable large employer. For a discussion of how these third parties may help an ALE member fulfill its reporting obligations, see section XII.C of this preamble.

Whether an employee is a full-time employee is determined under section 4980H(c)(4) and any applicable guidance. See proposed §§54.4980H-1(a)(18) and 54.4980H-3. This includes any full-time employees who may perform services for multiple ALE members within the applicable large employer.^[16] Under the proposed regulations, only ALE members with full-time employees are subject to the filing and statement furnishing requirements of section 6056 (and only with respect to their full-time employees).

Generally, the ALE member providing the section 6056 reporting is the common law employer. Disregarded entities are treated for section 4980H purposes, and therefore for section 6056 purposes, similarly to the way they are treated for employment tax purposes, so that the reporting requirements under section 6056 are imposed on a disregarded entity that is an applicable large employer, and not on its owner.^[17]

This section describes the general method for reporting to the IRS and furnishing statements to employees pursuant to section 6056 that is set forth in the proposed regulations. This general method would be available for all employers and with respect to reporting for all employees. Treasury and the IRS are also considering certain simplified reporting methods, such as using codes on Form W-2 to report whether full-time employees, spouses, and their dependents have been offered coverage, which in some cases may be available only with respect to certain groups of employees. In those cases, with respect to those employees for whom the simplified reporting method was not available, the employer would use the general method. In any case, however, the simplified reporting methods under consideration would be optional so that an employer could choose to report for all of its full-time employees using the general method described in these proposed regulations even if a simplified reporting method is available. For a further description of the simplified reporting methods under consideration, see section XI of this preamble.

In accordance with section 6056, the proposed regulations provide for every ALE member to file a section 6056 return with respect to its full-time employees. Similar to the separate Form W-2, Wage and Tax Statement, filed by an employer for each employee and the Form W-3, Transmittal of Wage and Tax Statements, filed as a transmittal form for the Forms W-2, the proposed regulations provide that a separate return is required for each full-time employee, accompanied by a single transmittal form for all of the returns filed for a given calendar year.

As a general method, the proposed regulations further provide that the section 6056 return may be made by filing Form 1094-C (a transmittal) and Form 1095-C (an employee statement), or other forms the IRS designates. Alternatively, the section 6056 return may be made by filing other form(s) designated by the IRS or a substitute form. Under the proposed regulations, a substitute form must include all of the information required to be reported on Forms 1094-C and 1095-C or other forms the IRS designates and comply with applicable revenue procedures or other published guidance relating to substitute returns. See §601.601(d)(2). In accordance with usual procedures, these forms will be made available in draft form at a later date.

The proposed regulations provide that every ALE member will report on the section 6056 information return the following information: (1) the name, address, and employer identification number of the ALE member, the name and telephone number of the applicable large employer’s contact person, and the calendar year for which the information is reported; (2) a certification as to whether the ALE member offered to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2)), by calendar month; (3) the number of full-time employees for each month during the calendar year; (4) for each full-time employee, the months during the calendar year for which coverage under the plan was available; (5) for each full-time employee, the employee’s share of the lowest cost monthly premium (self-only) for coverage providing minimum value offered to that full-time employee under an eligible employer-sponsored plan, by calendar month; and (6) the name, address, and taxpayer identification number of each full-time employee during the calendar year and the months, if any, during which the employee was covered under an eligible employer-sponsored plan. In addition, the proposed regulations provide, as with other information reporting, that the section 6056 information return may request such other information as the Secretary may prescribe or as may be required by the form or instructions.

As part of the effort to minimize the cost and administrative steps associated with the reporting requirements, Treasury and the IRS have sought to identify any information that would not be relevant to individual taxpayers or the IRS for purposes of administering the premium tax credit and employer shared responsibility provisions or that is already provided at the same time through other means. Specifically, the proposed regulations do not require the reporting of the following four data elements (a more detailed description of the data elements that Treasury and the IRS anticipate will be included is provided later in this section of the preamble).

First, the proposed regulations do not require the reporting of the length of any waiting period, because the length of the waiting period is not relevant for administration of the premium tax credit or employer shared responsibility provisions or for an individual in preparing his or her tax return. However, Treasury and the IRS anticipate that information will be requested, using an indicator code, regarding whether an employee’s coverage was not effective during certain months because of a waiting period since this information is relevant to the administration of the employer shared responsibility provisions.

Second, the proposed regulations do not require reporting of the employer’s share of the total allowed costs of benefits provided under the plan because this information also is not relevant to the administration of the premium tax credit and the employer shared responsibility provisions. In contrast, whether the employer-sponsored plan provides minimum value coverage is relevant information; accordingly, Treasury and the IRS anticipate that information will be requested, also using an indicator code.

Third, the proposed regulations do not require the reporting of the monthly premium for the lowest-cost option in each of the enrollment categories (such as self-only coverage or family coverage) under the plan. Rather, because only the lowest-cost option of self-only coverage offered under any of the enrollment categories for which the employee is eligible is relevant to the determination of whether coverage is affordable (and thus to the administration of the premium tax credit and employer shared responsibility provisions), that is the only cost information proposed to be requested.

Fourth, the proposed regulations do not require the reporting of the months, if any, during which any of the employee’s dependents were covered under the plan. Instead, the proposed regulations require reporting only regarding whether the employee was covered under a plan. This is because information relating to the months during which any of the employee’s dependents were covered under the plan will be reported on the section 6055 information return associated with that employee’s coverage.

Under the proposed regulations, each ALE member must file and furnish the section 6056 return and employee statement using its EIN. Any ALE member that does not have an EIN may easily apply for one online, by telephone, fax, or mail. See Publication 1635, Employer Identification Number, for further information at www.irs.gov.

Having considered the information required by section 6056 and the information needed to verify employer-sponsored coverage and to administer the employer shared responsibility provisions under section 4980H and the premium tax credit, Treasury and the IRS anticipate that as part of the general method for section 6056 reporting, the IRS will need certain information not specifically set forth under section 6056 but authorized under section 6056(b)(2)(F). Accordingly, the proposed regulations provide, in a manner similar to other information reporting guidance, that additional information may be prescribed by guidance, forms, or instructions. Treasury and the IRS are also considering potential simplified reporting methods that in certain situations may permit an employer to provide less information than all data elements required under the general method for reporting. See section XI of this preamble.

Under the general method of section 6056 reporting, the following information is expected to be requested, through the use of indicator codes for some information, as part of the section 6056 return (as well as an indication of how many individual employee statements are being submitted):

(1) information as to whether the coverage offered to employees and their dependents under an employer-sponsored plan meets minimum value and whether the employee had the opportunity to enroll his or her spouse in the coverage;

(2) the total number of employees, by calendar month;

(3) whether an employee’s effective date of coverage was affected by a waiting period;

(4) if the ALE member was not conducting business during any particular month, by month;

(5) if the ALE member expects that it will not be an ALE member the following year;

(6) information regarding whether the ALE member is a person that is a member of an aggregated group, determined under section 414(b), 414(c), 414(m), or 414(o), and, if applicable, the name and EIN of each employer member of the aggregated group constituting the applicable large employer on any day of the calendar year for which the information is reported;

(7) if an appropriately designated entity is reporting on behalf of an ALE member that is a governmental unit or any agency or instrumentality thereof for purposes of section 6056, the name, address, and identification number of the appropriately designated person;

(8) if an ALE member is a contributing employer to a multiemployer plan, whether a full-time employee is treated as eligible to participate in a multiemployer plan due to the employer’s contributions to the multiemployer plan; and

(9) if the administrator of a multiemployer plan is reporting on behalf of the ALE member with respect to the ALE member’s full-time employees who are eligible for coverage under the multiemployer plan, the name, address, and identification number of the administrator of the multiemployer plan (in addition to the name, address, and EIN of the ALE member already required under the proposed regulations).

In an effort to simplify and streamline the section 6056 reporting process even under the general section 6056 reporting rules, Treasury and the IRS anticipate that certain of the information described above as applied to a particular full-time employee will be reported to the IRS, and furnished to the full-time employee, through the use of a code rather than by providing specific or detailed information. Specifically, it is contemplated that the following information will be reported with respect to each full-time employee for each calendar month using a code:^[18]

(1) minimum essential coverage meeting minimum value was offered to:

a. the employee only;

b. the employee and the employee’s dependents only;

c. the employee and the employee’s spouse only; or

d. the employee, the employee’s spouse and dependents;

(2) coverage was not offered to the employee and:

a. the employee was in a waiting period that complies with the requirements of PHS Act section 2708 and its implementing regulations;

b. the employee was not a full-time employee;

c. the employee was not employed by the ALE member during that month; or

d. no other code or exception applies;

(3) coverage was offered to the employee for the month although the employee was not a full-time employee during that month; and

(4) the ALE member met one of the affordability safe harbors under proposed §54.4980H-5(e)(2) with respect to the employee.

It is anticipated that if multiple codes apply with respect to a full-time employee for a particular calendar month, the reporting format will accommodate the necessary codes.

Under the general section 6056 reporting rules set forth in the proposed regulations, every ALE member required to file a section 6056 return must furnish a section 6056 employee statement to each of its full-time employees that includes the name, address and EIN of the ALE member and the information required to be shown on the section 6056 return with respect to the full-time employee. The section 6056 employee statement is not required to include a copy of the transmittal form that accompanies the returns. As part of the potential simplified reporting methods Treasury and the IRS are also considering whether, in certain circumstances, other methods of furnishing information to an employee may be sufficient (for example, through the use of a code on the Form W-2). For a detailed description of these potential simplified reporting methods, see section XI of this preamble.

Some employers may wish to have the flexibility to use a substitute type of statement to provide the necessary information to full-time employees. The proposed regulations provide that the section 6056 employee statement may be made by furnishing a copy of the section 6056 return on Form 1095-C (or another form the IRS designates) or a substitute employee statement for that full-time employee. Under the proposed regulations, a substitute statement must include the information required to be shown on the section 6056 return filed with the IRS with respect to that employee and must comply with applicable revenue procedures or other published guidance relating to substitute statements. See §601.601(d)(2). These proposed regulations provide that section 6056 employee statements filed using Form 1095-C or another form the IRS designates will be included in the proposed IRS truncated TIN program. Under this proposed program, an IRS truncated taxpayer identifying number may be used as the identifying number for an individual in lieu of the identifying number appearing on the corresponding information return filed with the IRS. See the proposed regulations on IRS Truncated Taxpayer Identification Numbers (REG-148873-09 [78 FR 913]).

The proposed regulations provide that section 6056 returns must be filed with the IRS annually, no later than February 28 (March 31 if filed electronically) of the year immediately following the calendar year to which the return relates. This is the same filing schedule applicable to other information returns with which employers are familiar such as Forms W-2 and 1099. Because Notice 2013-45 provided transition relief for section 6056 reporting for 2014, the first section 6056 returns required to be filed are for the 2015 calendar year and must be filed no later than March 1, 2016 (February 28, 2016, being a Sunday), or March 31, 2016, if filed electronically. In addition, the regulations propose that the section 6056 employee statements be furnished annually to full-time employees on or before January 31 of the year immediately following the calendar year to which the employee statements relate. This means that the first section 6056 employee statements (meaning the statements for 2015) must be furnished no later than February 1, 2016 (January 31, 2016, being a Sunday).

In preparation for the application of the section 4980H provisions beginning in 2015, employers are encouraged to voluntarily comply for 2014 (that is, for section 6056 returns and statements filed and furnished in 2015) with the information reporting provisions (once the information reporting rules have been issued) and to maintain or expand health coverage in 2014. Real-world testing of reporting systems and plan designs through voluntary compliance for 2014 will contribute to a smoother transition to full implementation for 2015.

Some commenters asked for use of an alternate filing date for employers whose health plan is not a calendar year plan. While Treasury and the IRS understand that employers may collect information on a plan year basis, employees generally will need to receive their section 6056 employee statements early in the calendar year in order to have the requisite information to correctly and completely file their income tax returns reflecting any available premium tax credit. For this reason, the proposed regulations do not adopt this suggestion. However, Treasury and the IRS are considering a simplified reporting method, described in section XI of this preamble, that in certain circumstances could permit the employer to report the required information on the Form W-2 which is already being furnished to an employee on the same schedule.

These proposed regulations do not include rules regarding extensions of the time to file section 6056 returns but this topic is addressed elsewhere. Specifically, the notice of proposed rulemaking under section 6055 (REG-132455-11) includes proposed amendments to the regulations under section 6081 relating to general rules on extensions of time to file to include returns under both sections 6055 and 6056. The final section 6056 regulations are expected to cross-reference the amendments to the regulations under section 6081. These proposed regulations reserve a paragraph for this cross-reference.

Treasury and the IRS understand that electronic filing is often easier and more efficient for taxpayers, and several commenters requested that employers be permitted to file section 6056 returns electronically. The proposed regulations require electronic filing of section 6056 information returns except for an ALE member filing fewer than 250 returns during the calendar year. Each section 6056 return for a full-time employee is a separate return. Although an ALE member filing fewer than 250 returns during the calendar year may always choose to make the section 6056 returns on the prescribed paper form, that member is permitted (and encouraged) to file section 6056 returns electronically. This proposed requirement for electronic filing is the same as the current requirements for other information returns.

The proposed regulations provide that all returns are aggregated for the purpose of applying the 250-return threshold so that, for example, an ALE member required to file 150 section 6056 returns and 200 Forms W-2 will be required to electronically file section 6056 returns. A reporting entity must submit the prescribed form(s) to request authorization and obtain a Transmitter Control Code from the IRS to be able to file an information return electronically.

In addition to electronic filing, Treasury and the IRS understand that electronic methods are often a simpler and more efficient method to supply employees with the required information, and several commenters requested that employers be permitted to electronically furnish section 6056 employee statements to full-time employees. In response, the proposed regulations permit electronic furnishing of section 6056 employee statements if certain notice, consent, and hardware or software requirements are met. To provide rules for electronic furnishing with which employers are already familiar, the proposed regulations adopt by analogy the process currently in place for the electronic furnishing of employee statements (that is, Forms W-2) pursuant to section 6051 and applicable regulations.

In addition to the reporting under section 6056, two other reporting provisions provide for annual reporting with respect to certain individuals and the furnishing of statements to those individuals. Specifically, section 6051 requires employers to provide Forms W-2 reporting wages paid and taxes withheld. Section 6055 requires information reporting by any person that provides minimum essential coverage to an individual. ALE members that provide minimum essential coverage on a self-insured basis are subject to the reporting requirements of all three sections (6051, 6055 and 6056). Notices 2012-32 and 2012-33 requested comments on how to minimize duplication in reporting under these provisions.

Several commenters recommended that the regulations allow combined information reporting under sections 6055 and 6056 for applicable large employers that sponsor self-insured plans and must report under both sections. Other commenters recommended that employers be permitted to use a single information return to report under sections 6051 (Form W-2) and 6055. Some commenters suggested adding section 6055 or section 6056 reporting to Form W-2.

Because not all employers are subject to each of these three reporting requirements, independent reporting methods under each section need to be available; otherwise, employers subject to only one reporting requirement may have to expend additional effort to use a combined reporting method. Optional combined reporting therefore would require development of multiple forms for each reporting requirement (some forms for combined reporting, other forms for separate reporting), which could create administrative complexity and create confusion for employees.

In addition, any consideration of combined reporting must take into account that sections 6051, 6055 and 6056 apply to different types of entities (subject to the various reporting requirements, which differ among the Code provisions), and require reporting of different types of information. Section 6051 requires reporting of certain wage and wage-related information on an annual basis by all employers for all employees (and only employees). Section 6055 requires reporting of certain health coverage information by various entities (issuers, employers sponsoring self-insured group health plans, and governmental units) only for individuals who are actually covered (and not for individuals who are offered coverage but do not enroll), and multiple covered individuals may be included on one return. Section 6056 requires reporting of information by applicable large employers on offers of coverage that have or have not been made only to full-time employees (whether or not the offer has been accepted). Further, unlike Form W-2 reporting under section 6051, which provides annual information, both sections 6055 and 6056 require reporting some information on a monthly basis. Accordingly, the general section 6056 reporting method under the proposed regulations does not assume overall combined reporting under sections 6051, 6055, and 6056.

However, as described more fully below in section XI of this preamble, Treasury and the IRS are considering whether it may be possible to permit a type of combined reporting under sections 6051 and 6056 by providing an option to use a code on the Form W-2 in certain circumstances to provide information needed by both the employee and the IRS rather than through the use of the section 6056 employee statement (with employer-level information being provided separately). In addition, in other limited circumstances involving no-cost or very low-cost coverage provided under a self-insured group health plan, Treasury and the IRS are considering whether the employee and the IRS could rely solely on the information provided by the employer on a section 6055 return and the Form W-2 without any further information reporting under section 6056. For further discussion of these potential approaches, see section XI of this preamble.

In response to comments, Treasury and the IRS also have considered suggestions to use, for section 6055 and 6056 reporting purposes, information that employers communicate to employees about employer-sponsored coverage prior to employees’ potential enrollment in Exchange coverage. These comments have observed that, under the Affordable Care Act, employers are required to provide pre-enrollment information to employees by various means, including information in the Notice of Coverage Options provided to employees pursuant to the requirements under section 18B of the Fair Labor Standards Act^[19] in the Exchanges and potentially via the Employer Coverage Tool developed by the Department of Health and Human Services (HHS) that supports the application for enrollment in a qualified health plan and insurance affordability programs.^[20]

Treasury and the IRS have considered and coordinated with the Departments of HHS and Labor regarding the various reporting provisions with a view to identifying ways to make the entire process as effective and efficient as possible for all parties. That said, the various reports are designed for different purposes, and pre-enrollment reporting regarding anticipated employer coverage in an upcoming coverage year is unlikely to be helpful to individual taxpayers in accurately completing their tax returns more than a year later, after the coverage year. Among other issues, the pre-enrollment information may not be readily available to individuals at the time they are filing their tax returns, could be confused with the more recently received pre-enrollment information that applies to the subsequent year (not the year for which the tax return is being filed), and is in a format that does not facilitate easy transfer to the appropriate location on the Federal income tax return. Notwithstanding these challenges, Treasury and the IRS continue to work with the other Departments and stakeholders to consider approaches that might help minimize cost and administrative complexity and realize efficiencies in the reporting process.

Both sections 6055 and 6056 require employers to furnish to employees information about health care coverage. Solely for the purpose of furnishing information to employees (as opposed to filing with the IRS), Treasury and the IRS are considering whether employers sponsoring self-insured group health plans could fulfill their obligation to furnish an employee statement under both sections 6055 and 6056 through the use of a single substitute statement, within the parameters of the rules provided in revenue procedures or other published guidance relating to substitute returns. See §601.601(d)(2) of this chapter.

In developing these regulations, Treasury and the IRS have sought to develop simplified reporting methods that will minimize the cost and administrative tasks for employers, consistent with the statutory requirements to file an information return and furnish an employee statement to each full-time employee. Comments have suggested that, at least for some employers, the collection, assembling and processing of the necessary data into an appropriate format for filing may not be necessary if the employer offers sufficient coverage to make it unlikely that the employer will be subject to an assessable payment under section 4980H because the employee will be ineligible for a premium tax credit. Treasury and the IRS have considered these comments in formulating the potential simplified reporting methods described in this section. If Treasury and the IRS adopt one or more of these simplified reporting methods, they would be optional alternatives to the general reporting method set forth in the proposed regulations, which could substantially reduce the data elements reported using the general method. It is anticipated that, if an employer uses one or more of the simplified reporting methods, the employer would indicate on its section 6056 transmittal which simplified reporting method(s) was used and the number of employees for which the particular method was used. Comments are invited on these potential simplified reporting methods and on other possible simplified approaches that would benefit employers while providing sufficient and timely information to individual taxpayers and the IRS.

The information provided to the IRS and the employee pursuant to section 6056 is important for administering the section 4980H shared employer responsibility provisions and the premium tax credit. However, in looking at the potential flow of information, Treasury and the IRS have determined that in some circumstances only some of the information required under the general method is necessary. Treasury and the IRS have attempted to identify the specific groups of employees for whom simplified reporting would provide sufficient information, and simplified reporting approaches for these groups are outlined below. In many situations, not every full-time employee of an employer would fit into the groups of employees for which simplified reporting would be available. In that case, the employer would continue to use the general reporting method in the proposed regulations for those full-time employees for whom the employers could not use a simplified method. However, it is anticipated that a significant number of employers will have a sufficient number of employees that fit into one or more of the categories described below to make use of the simplified reporting method preferable to the general reporting method.

Subsections A through F of this section XI of the preamble describe, and comments are invited on, possible simplified methods of reporting under section 6056. Each of these possible methods would be optional for the reporting employer, and, except where specifically noted, would not affect any reporting obligations under section 6055.

In response to stakeholder comments, Treasury and the IRS are considering allowing employers in certain circumstances to report offers of minimum value coverage on an employee’s Form W-2, instead of reporting the offers to the IRS on a section 6056 employee statement or furnishing a section 6056 employee statement to the employee. The reporting is envisioned as using an existing box on the Form W-2 to provide the monthly dollar amount of the required employee contribution for the lowest cost minimum value self-only coverage offered to the employee and using a letter code to describe the offer of coverage. Specifically, Treasury and the IRS anticipate that this approach could be used for any employee employed by the employer for the entire calendar year when the offer, the individuals to whom the offer is made, and the employee contribution for the lowest-cost option for self-only coverage all remained the same for all twelve months of the calendar year. The letter code could be used to indicate that minimum value coverage was offered to: (1) the employee, the employee’s spouse and the employee’s dependents, (2) the employee and the employee’s dependents but not the employee’s spouse; (3) the employee and the employee’s spouse but not the employee’s dependents; (4) the employee, but not the employee’s spouse or the employee’s dependents; or that the employee was (5) only offered coverage that was not minimum value coverage; or (6) not offered coverage. For this purpose, an employer is treated as offering coverage to the employee’s spouse or dependents even if the employee does not have a spouse or dependent, if the employee could elect such coverage if the employee did have a spouse or dependent. If an employee was not offered coverage, it is anticipated that the dollar amount of the employee share of the lowest-cost employee-only coverage option would be shown as zero.

Example: Employer has 100 full-time employees, all of whom are employed for the entire year. Employer offers all of its full-time employees, spouses and dependents the opportunity to enroll in health care coverage that provides minimum value. Under the potential simplified reporting method, it is contemplated that, for all employees, Employer would be permitted to avoid filing or furnishing section 6056 employee statements if it used a letter code on the Form W-2 to report that an offer of coverage had been made to the employee, the employee’s spouse (if any), and the employee’s dependents (if any), and a dollar amount indicating the required monthly employee contribution to purchase the lowest cost option offered to the employee for self-only coverage.

Treasury and the IRS are also considering whether this or a similar simplified reporting method could be extended to cases in which the required monthly employee contribution is below a specified threshold. For example, if the annual employee cost of self-only coverage is $800 or less, the employer would be permitted to report zero as the employee cost. The $800 amount is less than 9.5 percent of the federal poverty line for a single individual. Thus, regardless of the size of the employee’s household or the level of other income or loss of any member of the employee’s household, either the employer’s coverage will be affordable for purposes of section 36B(c)(2)(C)(i) or the employee’s household income will be less than 100 percent of the federal poverty line and the employee will not be an applicable taxpayer under section 36B(c)(2) who is eligible for the credit. In addition, even if other income increases the employee’s household income, the employee would not be entitled to the affordability exemption to the shared responsibility payment under section 5000A(e)(1) because the $800 amount would not exceed 8 percent of the employee’s household income. Alternatively, if other losses reduce the employee’s household income below the income tax filing threshold, the employee will qualify for the exemption under section 5000A(e)(2), and the information otherwise reported under section 6056 would not be required to determine whether the employee satisfied section 5000A. Comments are also requested on the extent to which this approach could reasonably be combined with the other simplified reporting methods described in this section XI of the preamble.

An employer that decides to use this simplified reporting method would not be required to file or furnish a section 6056 employee statement with respect to the employees for whom this method was used. Instead, the employer would simply indicate on a section 6056 transmittal that it had chosen to use this method. If the Form W-2 for an employee used an EIN other than the employer’s EIN (for example, a third-party payor treated as an employer under section 3401(d)(1) of the Code filed the Form W-2), the employer (that is, the ALE member) may be required as part of the 6056 transmittal to identify those employees for whom a third party reported on Form W-2 without the employer’s EIN and to list the employees’ social security numbers.

Stakeholders have inquired whether a similar optional Form W-2 reporting method could be used for employees offered coverage under their employer’s plan for less than a full calendar year (for example for a new employee hired during the year), but offered no coverage for the remainder of the year. Treasury and the IRS note that this type of reporting would leave gaps in information that would otherwise be used for tax administration purposes. For example, the reporting would not provide any information regarding the particular calendar months during which coverage was offered (or not offered). Even if the employer represented that the coverage was offered during all periods of employment, the reporting would not be able to be reconciled, for example, with another Form W-2 received by the employee from another employer using the same reporting method. That is because while both employers would report the number of months coverage was offered, that information would not be sufficient to determine whether offers of coverage were overlapping (because the employee was employed simultaneously at both employers).

Additionally, for months for which coverage was not offered, information as to whether the employee was employed and also the reason coverage was not offered during certain months of the calendar year would not be captured (for example, the employee was in a waiting period or employed but not as a full-time employee). The specific reason coverage was not offered is relevant to the administration of the employer shared responsibility provisions since the failure to offer coverage for certain reasons does not result in an assessable payment under the employer shared responsibility provisions for a calendar month, even if the full-time employee receives a premium tax credit for that month. Comments are requested on whether this approach to reporting would be useful for employers and, if so, on possible ways to address issues concerning the information gaps that would exist in reporting on employees offered coverage for less than a full calendar year.

Treasury and the IRS understand that some employers offer coverage to all or nearly all of their employees, and are able to accurately represent that the only employees not offered coverage are not full-time employees. In that case, the employer will have determined that it would not owe an assessable payment under section 4980H(a) because it would have made an offer of coverage to all of its full-time employees. However, the employer might not have determined whether every employee to whom coverage is offered is or is not a full-time employee. Treasury and the IRS are considering whether these employers may provide section 6056 reporting that does not identify the number of full-time employees and that does not specify whether a particular employee offered coverage is a full-time employee, provided that the employer certifies that all of its employees to whom it did not offer coverage during the calendar year were not full-time employees (or were otherwise ineligible for coverage, for example because they were in the initial permitted waiting period following the date of hire). This method would permit the employer to forgo identifying the full-time status of its employees prior to filing a section 6056 return. However, if an employee who was offered coverage claimed a premium tax credit, the employer could be asked to confirm at a later date (after the filing of the section 6056 return and the relevant Form 1040 return) whether that employee was a full-time employee during that calendar year (in the same manner that an employer reporting only on behalf of full-time employees might later be asked about the status of an employee claiming the premium tax credit if the employee was not listed on that employer’s section 6056 return). Treasury and the IRS recognize that this method often would result in over-reporting of certain elements in the sense that reporting would occur with respect to one or more employees who may not be full-time employees during the calendar year. But some employers have indicated that they anticipate relatively few of their employees will claim the premium tax credit, and that determining those few employees’ status as full-time employees later would be administratively easier than determining the full-time employee status of all employees at the time of the initial filing.

Example: Employer has 100 employees. Employer makes an offer of minimum value coverage to 90 of the employees. Employer has determined that the ten employees to whom coverage is not offered are not full-time employees for any calendar month during the year. Employer has not determined which of the remaining 90 employees were full-time employees for one or more calendar months during the year. Employer certifies as part of its section 6056 transmittal return that the only employees to whom it did not offer coverage were not full-time employees or were otherwise not required to be offered coverage for all months of employment (for example, a full-time employee was hired in November and, under the terms of the plan, which comply with the Affordable Care Act, would not be initially offered coverage until the following calendar year). Employer would file a section 6056 return and furnish an employee statement for each of the 90 employees, but would not be required to report either the total number of full-time employees for the year or whether any particular employee was a full-time employee for any calendar month during the year. If one of the employees included as part of the return declined the offer of coverage and properly claimed a premium tax credit with respect to coverage provided through an Exchange, and the employer were contacted by the IRS to determine whether the employer did or did not owe an assessable payment under section 4980H(b), the employer could determine at that point whether the employee was a full-time employee for one or more months during that calendar year and supply that information to the IRS.

Some employers may provide mandatory minimum value coverage under a self-insured group health plan to an employee, an employee’s spouse, and an employee’s dependents, with no employee contribution. In that case, none of those individuals would be eligible for a premium tax credit for any month during which the coverage was provided, and the employer would indicate on the return required under section 6055 for the employee all months for which that coverage was provided with respect to each individual in the employee’s family. Because the section 6055 return would provide the individual taxpayers the necessary information to accurately file the taxpayers’ income tax returns, and would provide the IRS the information concerning those employees to administer the premium tax credit and employer shared responsibility provisions, Treasury and the IRS are considering whether for those employees the employer could file and furnish only the return required under section 6055, a code on the Form W-2, the summary information provided in the section 6056 transmittal form, and no further information reporting under section 6056.

Some employers have expressed an interest in voluntarily reporting information about the coverage they offer their employees prior to the end of a coverage year, for example at their open enrollment or before the open enrollment at the Exchanges, on the theory that earlier section 6056 reporting to the IRS could lead to greater efficiency in the employer verification system employed by Exchanges to determine eligibility for premium tax credits. Under such an arrangement, they believe that if some employers chose to provide part of their section 6056 reporting to the IRS earlier in the process, the IRS, in turn, would be able to transmit any pertinent data to the Exchanges.

A proposal of this kind would need to address a number of issues. First, the regulations under section 6103 do not authorize the IRS to share taxpayer information in this manner. Even if this information sharing were permitted, information reporting plays a role in enabling individuals to file complete and accurate tax returns. Under the proposal, individuals would not receive the information for their tax return preparation proximate to when they are completing their tax returns. Employees may bear less burden and prepare more accurate tax returns when their employer furnishes a statement at the start of the relevant tax season reflecting all the information the employee needs to file a correct tax return for the prior year. Gaps in complete and timely information increase the need for additional follow-up communication among employers, employees, and the IRS.

Also, offering two sets of reporting alternatives with filing occurring at different time periods would present challenges. Because the reporting options would be voluntary, different reporting protocols and regimes would need to be established and would need to accommodate employer choices to change the method of reporting from year to year. The multiple forms, procedures, and protocols could create complexity and be difficult to administer.

In addition, the information about the offer of coverage made before the year starts may change during the calendar year. For example, during the year, an employee may be hired or may terminate employment, a part-time employee may become full-time and be eligible for different coverage options, or an employee may change positions during the year and no longer be offered coverage. Accordingly, disclosure before the coverage year does not adequately substitute for disclosure to employees and reporting to the IRS after the coverage year.

Employers, employees, and the IRS share the goal of aligning eligibility for advance payments of premium tax credits as closely as possible with eligibility for the premium tax credit on the employee’s annual tax return filed after the coverage year. This would reduce confusion and minimize the risk of employees owing advance payments back as liabilities on their tax returns. Regardless of the final rules on section 6056 information reporting, employers are encouraged to make their pre-enrollment disclosures to employees and Exchanges as effective and helpful to individuals as possible.

Comments are invited on whether there could be a way to design such a voluntary partial early reporting arrangement that would reduce complexity and avoid confusion for employers and employees, be administrable for the IRS, and provide timely information to individuals so that they can meet their income tax filing obligation without undue burden or undue risk of inaccuracy.

Some employers have indicated that, because many of their employees are relatively highly paid, they are unlikely to be eligible for a premium tax credit. The assumption is that the employee’s household income is likely to exceed 400 percent of the Federal poverty line, and therefore the employee would not benefit from receiving the information otherwise included with a section 6056 employee statement. Further, because the employee is unlikely to qualify for a premium tax credit, employers have stated that the information will not be useful to the IRS in administering the employer shared responsibility provisions because the precondition of a section 4980H(b) assessable payment—that the employee receive a premium tax credit—is unlikely to be satisfied.

Treasury and the IRS have considered this request and welcome comments both on its potential usefulness to employers and its administrability. Employers would still need to report to the IRS the months during which the employee was a full-time employee, at least to the extent the employee was included in a full-time employee count. Additionally, employers will not be in a position to know the correlation between an employee’s Form W-2 wages and household income with sufficient accuracy to determine whether an employee may be eligible for the premium tax credit. The only pertinent information the employer retains is the employee’s annual wages, yet the poverty level from which the premium tax credit income threshold is determined varies considerably based on family size (which employers will not necessarily know). In addition, employees for whom an employer may use an affordability safe harbor based on wages for purposes of compliance with the employer shared responsibility provisions under section 4980H might still be eligible for a premium tax credit based on their household income. Employers generally do not know employees’ household income, and will not have information as to whether the employee (or another member of the employee’s household) has incurred losses or expenses (such as alimony, casualty losses, Schedule C business deductions, and the like) that reduce the employee’s household modified adjusted gross income below 400 percent of the Federal poverty line. Accordingly, it is unclear whether Form W-2 wages alone would provide sufficient information to determine eligibility for the premium tax credit because the employee’s household income may be well below the employee’s Form W-2 wages. Comments are requested as to whether there is a level of Form W-2 wages at which such a determination might be made with sufficient confidence, and whether that level of wages is so high as not to be of practical use to employers.

The potential simplified reporting methods described above would apply to particular groups of employees that in many cases would not overlap. In such cases, two different potential simplified reporting methods could not be applied to the same employee. Treasury and the IRS anticipate that, to the extent any of these potential reporting methods are adopted in final regulations or other administrative guidance, including forms and instructions, an employer would be permitted to use different simplified methods for different employees at the employer’s election.

Under the proposed regulations, in general, each ALE member must file a section 6056 return with respect to its full-time employees for a calendar year.

In accordance with section 6056(e), the proposed regulations provide that in the case of any ALE member that is a governmental unit or any agency or instrumentality thereof (together referred to in this preamble as a governmental unit), that governmental unit may report under section 6056 on its own behalf or may appropriately designate another person or persons to report on its behalf.^[21] For purposes of designation, another person is appropriately designated for purposes of the filing and furnishing requirements of section 6056 if that other person is part of or related to the same governmental unit as the ALE member. For example, a political subdivision of a state may designate the state, another political subdivision of the state, or an agency or instrumentality of the foregoing as the designated person for purposes of section 6056 reporting. The person designated might be the governmental unit that operates the relevant health plan or the governmental unit that does other information reporting on behalf of the designating governmental unit. Further, the governmental unit may designate more than one governmental unit to file and furnish under section 6056 on its behalf, such as, for example, if different categories of employees are offered coverage under different health plans operated by different governmental units. In addition, a governmental unit may designate another person to file and furnish with respect to all or some of its full-time employees. If the designation is accepted by the designee and is made before the filing deadline, the designated governmental unit is the designated entity responsible for section 6056 reporting.

The person (or persons) appropriately designated for this purpose would report under section 6056 on behalf of the ALE member. Accordingly, the person (or persons) appropriately designated is (are) the person(s) responsible for section 6056 reporting on behalf of the ALE member and subject to the penalties for failure to comply with information return requirements under sections 6721 and 6722. However, the ALE member remains subject to the requirements of section 4980H.

Under the proposed regulations, a separate section 6056 return and transmittal must be filed for each ALE member for which the appropriately designated person is reporting. The designated entity must report its name, address, and EIN on the section 6056 return to indicate it is the appropriately designated person.

The proposed regulations further provide that the designation under section 6056(e) must be in writing and must contain certain language. Specifically, under the proposed regulations, the designation must be signed by both the ALE member and the designated person, and must be effective under all applicable laws. The proposed regulations also require that the designation set forth the name and EIN of the designated person, and appoint that person as the person responsible for reporting under section 6056 on behalf of the ALE member. The designation must contain information identifying the category of full-time employees (which may be full-time employees eligible for a specified health plan, or in a particular job category, provided that the specific employees covered by the designation can be identified) for which the designated person is responsible for reporting under section 6056 on behalf of the ALE member. If the designated person is responsible for reporting under section 6056 for all full-time employees of an ALE member, the designation should so indicate.

The designation must also contain language that the designated person agrees that it is the appropriately designated person under section 6056(e), and an acknowledgement that the designated person is responsible for reporting under section 6056 on behalf of the ALE member and subject to the requirements of section 6056, and the information reporting penalty provisions of sections 6721 and 6722. The designation must also set forth the name and EIN of the ALE member, identifying the ALE member as the person subject to the requirements of section 4980H. The proposed regulations provide that an equivalent applicable statutory or regulatory designation containing similar language will be treated as a written designation for purposes of section 6056(e).

Several commenters suggested that administrators of multiemployer plans may be willing to file section 6056 returns reporting information for coverage offered to full-time employees under the multiemployer plan and recommended in such cases that an ALE member not be required to report coverage information for those employees.

Treasury and the IRS understand that the plan administrator of a multiemployer plan may have better access than a participating employer to certain information on participating employees required to be included as part of section 6056 reporting. For this reason, Treasury and the IRS anticipate that the section 6056 reporting with respect to full-time employees eligible to participate in a multiemployer plan will be permitted to be provided in a bifurcated manner. Under the bifurcated approach, one return would pertain to the full-time employees eligible to participate in the multiemployer plan (or, if the employer participates in more than one multiemployer plan, one return for each relevant multiemployer plan in which full-time employees are eligible to participate), and another return would pertain to the remaining full-time employees (those who are not eligible to participate in a multiemployer plan). As in the case of other third parties, as discussed in section XII.C of this preamble, the administrator (or administrators, in the case of an employer contributing to two or more multiemployer plans) of a multiemployer plan is permitted to report on behalf of an ALE member that is a contributing employer, and is permitted to report with respect to the ALE member’s full-time employees who are eligible for coverage under the multiemployer plan (but not with respect to any other full-time employees of the ALE member). The administrator of the multiemployer plan would file a separate section 6056 return for any ALE member that is a contributing employer on behalf of whom it files using the ALE member’s EIN. The administrator of the multiemployer plan would also provide its own name, address, and identification number (in addition to the name, address, and EIN of the ALE member already required). The ALE member would remain the responsible person under section 6056 with respect to all of its full-time employees and accordingly would be required to sign the section 6056 return filed on its behalf and be subject to any potential liability for failure to properly file returns or furnish statements. To the extent the plan administrator that prepares returns or statements required under section 6056 is a tax return preparer, it will be subject to the requirements generally applicable to return preparers.

Treasury and the IRS understand that third party administrators or other third party service providers are integral to the operation of many employers’ health plans, including with respect to compliance with any reporting requirements. As requested by several commenters, ALE members are permitted to contract with and use third parties to facilitate filing returns and furnishing employee statements to comply with section 6056. The proposed regulations make clear, however, that ALE members are responsible for reporting under section 6056, with the exception of certain governmental unit applicable large employers that properly designate under section 6056(e). While the proposed regulations do not provide guidance on contractual or other reporting arrangements between private ALE members and other parties, they do not prohibit these arrangements. Such contractual arrangements would not transfer the potential liability of the ALE member for failure to report and furnish under section 6056 and the regulations, or the ALE member’s potential liability under section 4980H.

As one example, an applicable large employer that is a member of an aggregated group of related entities (determined under section 414(b), 414(c), 414(m) or 414(o)), may file returns and furnish employee statements on behalf of one or more of the other ALE members of the aggregated group. Each other ALE member of the group, for example, could have the ALE member that operates the employer-sponsored plan file section 6056 returns and furnish section 6056 employee statements on its behalf. However, a separate section 6056 return must be filed for each ALE member, providing that ALE member’s EIN. Each ALE member in the aggregated group would continue to be the responsible person under section 6056, would be required to sign the return filed on its behalf, and would be subject to any potential liability for failure to properly file returns or furnish statements. To the extent the other party that prepares returns or statements required under section 6056 is a tax return preparer, it will be subject to the requirements generally applicable to return preparers.

The proposed regulations provide that an ALE member that fails to comply with the section 6056 information return and employee statement requirements may be subject to the general reporting penalty provisions under sections 6721 (failure to file correct information returns), and 6722 (failure to furnish correct payee statement). The proposed regulations also provide, however, that the waiver of penalty and special rules under section 6724 and the applicable regulations, including abatement of information return penalties for reasonable cause, apply. The proposed regulations under section 6055 (REG-132455-11) include proposed amendments to the regulations under sections 6721 and 6722 to include returns under both sections 6055 and 6056 in the definitions of information return and payee statement. Treasury and the IRS anticipate that the final regulations under section 6056 will cross-reference those amendments to the regulations under sections 6721 and 6722.

These regulations are proposed to be effective the date the final regulations are published in the Federal Register. These regulations are proposed to apply for calendar years beginning after December 31, 2014. Consistent with Notice 2013-45, reporting entities will not be subject to penalties for failure to comply with the section 6506 information reporting provisions for 2014 (including the furnishing of employee statements in 2015). Accordingly, a reporting entity will not be subject to penalties if it first reports beginning in 2016 for 2015 (including the furnishing of employee statements). Taxpayers are encouraged, however, to voluntarily comply with section 6056 information reporting for 2014 by using the general reporting method set forth in these regulations once finalized.

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

It is hereby certified that 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 regulations are consistent with the requirements imposed by section 6056. Consistent with the statute, the regulations require applicable large employers, as defined in section 4980H(c)(2), to file a return with the IRS, using either the prescribed form or a substitute form, for each full-time employee reporting certain information regarding the health care coverage offered and provided to the employee for the year. Consistent with the statute, the proposed regulations further require applicable large employers to furnish to each full-time employee a copy of the return, or a substitute statement, required to be filed by the applicable large employer with respect to the employee. Accordingly, these regulations merely prescribe the method of filing and furnishing returns and employee statements as required under section 6056. Moreover, the proposed regulations attempt to minimize the burden associated with this collection of information by requiring that applicable large employers file and furnish only information that the IRS will utilize to administer the shared employer responsibility provisions under section 4980H and administer the premium tax credit under section 36B, and information employees will need in order to complete their tax returns.

Based on these facts, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the 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 as prescribed in this preamble under the “Addresses” heading. Treasury and the IRS specifically request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection at www.regulations.gov or upon request. A public hearing has been scheduled for November 18, 2013, in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments by November 8, 2013 and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by November 8, 2013.

A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

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

Par. 2. Section 301.6011-9 is added to read as follows:

The final regulations that are the subject of these corrections are §§ 1.1471-1 through 1.1474-7, promulgated under sections 1471 through 1474 of the Internal Revenue Code. These regulations affect persons making certain U.S.-related payments to FFIs and other foreign entities, and affect payments by FFIs to other persons. Sections 1471 through 1474 were added to the Internal Revenue Code, as Chapter 4 of Subtitle A, by the Hiring Incentives to Restore Employment Act of 2010 (Public Law 111-147, 124 Stat. 71).

As published, the final regulations contain a number of items that need to be corrected or clarified. Several citations and cross references are corrected. The correcting amendments also include the addition, deletion, or modification of regulatory language to clarify the relevant provisions to meet their intended purposes. Additions, deletions, and modifications are also made to ensure that the rules in the final regulations are coordinated with other rules contained in other relevant regulations (e.g., under chapters 3 and 61). For example in § 1.1471-3(c)(3)(iii)(B)(2), the definition of an FFI withholding statement was modified to add an applicable cross reference to the reporting on the statement that is required under chapter 61 (in addition to the reporting required under chapters 3 and 4); to delete an incorrect reference to a pool of payees exempt from chapter 4 withholding; and to add the modified requirements of an FFI withholding statement provided by a Qualified Intermediary that should have been referenced in this paragraph.

* * * * *

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

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

Par. 2. Section 1.1471-0 is amended by:

1. Revising paragraph (a)(2)(i) under § 1.1471-2.

2. Revising paragraphs (b)(7) and (c)(2)(v) under § 1.1471-4.

3. Revising paragraph (b)(2)(i)(E) under § 1.1471-5.

4. Revising paragraph (a)(5)(vii) and removing paragraph (b)(3)(iii) under § 1.1473-1.

The revisions read as follows:

* * * * *

(a) * * *

(2) * * *

(i) Requirement to withhold on payments of U.S. source FDAP income to participating FFIs and deemed-compliant FFIs that are NQIs, NWPs, or NWTs.

* * * * *

* * * * *

(b) * * *

(7) Withholding requirements for U.S. branches of participating FFIs (and reporting Model 1 FFIs) that are treated as U.S. persons.

(c) * * *

(2) * * *

(v) Special rule for U.S. branches of participating FFIs (and reporting Model 1 FFIs) that are treated as U.S. persons.

* * * * *

* * * * *

(b) * * *

(2) * * *

(i) * * *

(E) Account that is tax-favored.

* * * * *

(a) * * *

(5) * * *

(vii) Special rules for determining when gross proceeds are treated as paid to a partner, owner, or beneficiary of a flow-through entity.

* * * * *

Par. 3. Section 1.1471-1 is amended by revising paragraph (b)(23), the first sentence of paragraph (b)(34), and paragraph (b)(99) to read as follows:

* * * * *

(b) * * *

(23) Customer master file. A customer master file includes the primary files of a withholding agent, participating FFI, or deemed-compliant FFI for maintaining account holder information, such as information used for contacting account holders and for satisfying AML due diligence.

* * * * *

(34) * * * The term electronically searchable information means information that a withholding agent or FFI maintains in its tax reporting files, customer master files, or similar files, and that is stored in the form of an electronic database against which standard queries in programming languages, such as Structured Query Language, may be used. * * *

* * * * *

(99) Pre-FATCA Form W-8. The term pre-FATCA Form W-8 means a version of a Form W-8 that was issued by the IRS prior to 2013 (including an acceptable substitute form based on such version) and that does not contain chapter 4 statuses but otherwise meets the requirements of § 1.1441-1(e)(1)(ii) applicable to such certificate (or substitute form) and has not expired.

* * * * *

Par. 4. Section 1.1471-2 is amended by:

1. Revising the heading and first two sentences of paragraph (a)(2)(i),

2. Revising the first sentence of paragraph (a)(2)(iii)(A),

3. Revising paragraphs (a)(2)(iii)(A)(2) and (a)(2)(iv),

4. Revising the third and fifth sentences of paragraph (a)(2)(v),

5. Revising the first sentence of paragraph (a)(4)(i)(A), and

6. Revising paragraph (a)(4)(viii).

The revisions read as follows:

(a) * * *

(2) * * *

(i) Requirement to withhold on payments of U.S. source FDAP income to participating FFIs and deemed-compliant FFIs that are NQIs, NWPs, or NWTs. A withholding agent that, after December 31, 2013, makes a payment of U.S. source FDAP income to a participating FFI or deemed-compliant FFI that is an NQI receiving the payment as an intermediary, or a NWP or NWT, must withhold 30 percent of the payment unless the withholding is reduced under this paragraph (a)(2)(i). A withholding agent is not required to withhold on a payment, or portion of a payment, that it can reliably associate, in the manner described in § 1.1471-3(c)(2), with a valid intermediary or flow-through withholding certificate that meets the requirements of § 1.1471-3(d)(4) and a withholding statement that meets the requirements of § 1.1471-3(c)(3)(iii)(B) and that allocates the payment or portion of the payment to payees for which no withholding is required under chapter 4. * * *

* * * * *

(iii) * * *

(A) * * * A withholding agent is required to withhold with respect to a payment, or portion of a payment, that is U.S. source FDAP income subject to withholding that is made after December 31, 2013, to a QI that has elected in accordance with this paragraph to be withheld upon, unless such withholding agent also makes an election to be withheld upon under this paragraph (a)(2)(iii)(A) or is an FFI that may not accept primary withholding responsibility for the payment. * * *

* * * * *

(2) The person who receives the payment is a participating FFI or registered deemed-compliant FFI that acts as a QI with respect to the payment;

* * * * *

(iv) Withholding obligation of a territory financial institution. A territory financial institution that is a flow-through entity or that acts as an intermediary with respect to a withholdable payment has an obligation to withhold (to the extent required under this section and § 1.1472-1(b)) if it agrees to be treated as a U.S. person with respect to the payment for purposes of both chapter 4 and § 1.1441-1(b)(2)(iv)(A). A territory financial institution that is a flow-through entity or that acts as an intermediary with respect to a withholdable payment is not required to withhold under paragraph (a)(1) of this section or § 1.1472-1(b), however, if it has provided the withholding agent that is a U.S. withholding agent, participating FFI, reporting Model 1 FFI, or QI with all of the documentation described in § 1.1471-3(c)(3)(iii) (in which it has not agreed to be treated as a U.S. person with respect to the payment), and it does not know, or have reason to know, that another withholding agent failed to withhold the correct amount or failed to report the payment correctly under § 1.1474-1(d).

(v) * * * Accordingly, a QI branch of a U.S. financial institution must withhold in accordance with this section and § 1.1472-1(b) in addition to meeting its obligations under either § 1.1471-4(b) and its FFI agreement or § 1.1471-5(f). * * * Accordingly, a foreign branch of a U.S. financial institution that is a reporting Model 1 FFI must withhold in accordance with this section and § 1.1472-1(b). * * *

* * * * *

(4) * * *

(i) * * *

(A) * * * A withholding agent that is not related to the payee or beneficial owner has an obligation to withhold under chapter 4 only to the extent that, at any time between the date that the obligation to withhold would arise (but for the provisions of this paragraph (a)(4)(i)) and the due date for filing the return on Form 1042 (including extensions) for the year in which the payment occurs, it has control over or custody of money or property owned by the payee or beneficial owner from which to withhold an amount and has knowledge of the facts that give rise to the payment. * * *

* * * * *

(viii) Payments to certain excepted accounts. A withholding agent is not required to withhold under chapter 4 on a withholdable payment made to an account described in § 1.1471-5(b)(2).

* * * * *

Par. 5. Section 1.1471-3 is amended by:

1. Revising the fourth sentence of paragraph (b)(2),

2. Adding a sentence to the end of paragraph (c)(2)(i),

3. Revising paragraph (c)(3)(iii)(A)(5),

4. Revising the first two sentences of paragraph (c)(3)(iii)(B)(2),

5. Revising the first sentence of paragraph (c)(6),

6. Revising paragraphs (c)(6)(ii)(B)(2), (c)(6)(ii)(B)(3), and (c)(6)(ii)(C)(2)(vi),

7. Revising the second sentence of paragraph (c)(6)(v)(B),

8. Revising the second sentence of paragraph (c)(9)(iv)(A),

9. Revising the first sentence of paragraph (d)(1),

10. Revising the second sentence of paragraph (d)(2)(i),

11. Revising paragraph (d)(2)(ii),

12. Revising the second sentence of paragraph (d)(2)(iii),

13. Revising the second sentence of paragraph (d)(4)(i),

14. Revising paragraph (d)(6)(i)(F),

15. Revising the third sentence of paragraph (d)(6)(ii),

16. Revising the first sentence of paragraph (d)(6)(iii), and

17. Revising the first sentence of paragraph (d)(9)(i)(A).

The revisions and addition read as follows:

* * * * *

(b) * * *

(2) * * * A withholding agent that makes a payment with respect to an offshore obligation may also rely upon a written notification provided by the person who receives the payment, regardless of whether such notification is signed, that indicates the person’s entity classification (other than as a QI, WP, or WT) unless the withholding agent knows or has reason to know that the entity classification indicated by the person who receives the payment is incorrect. * * *

* * * * *

(c) * * *

(2) * * *

(i) * * * With respect to the documentation provided for the owners of a foreign flow-through entity, the foreign flow-through entity is permitted to provide the documentary evidence described in paragraph (d) of this section applicable to each payee in lieu of a withholding certificate, regardless of whether the payment is made with respect to an offshore obligation.

* * * * *

(3) * * *

(iii) * * *

(A) * * *

(5) A GIIN, in the case of a participating FFI or a registered deemed-compliant FFI (including a U.S. branch of such an entity), and an EIN in the case of a QI, WP, or WT.

* * * * *

(B) * * *

(2) * * * An FFI withholding statement must include either pooled information that indicates the portion of the payment attributable to a class of U.S. persons, each class of recalcitrant account holders identified in § 1.1471-5(g)(2), or a class of nonparticipating FFIs; or payee-specific information, if payee-specific information is provided for purposes of chapter 3 or 61, which indicates both the portion of the payment attributable to each payee and each payee’s chapter 4 status. Regardless of whether the FFI withholding statement provides information on a pooled or payee-specific basis, a withholding statement provided by an FFI other than an FFI acting as a QI with respect to the account must identify each intermediary or flow-through entity that receives the payment on behalf of a payee with such entity’s chapter 4 status and GIIN, when applicable. * * *

* * * * *

(6) * * * The provisions in this paragraph (c)(6) describe standards generally applicable to withholding certificates on Forms W-8 (or substitute forms), written statements, and documentary evidence furnished to establish the payee’s chapter 4 status. * * *

* * * * *

(ii) * * *

(B) * * *

(2) A beneficial owner withholding certificate and documentary evidence supporting the individual’s claim of foreign status when both are provided together by an individual claiming foreign status, if the withholding agent does not have a current U.S. residence or U.S. mailing address for the payee and does not have one or more current U.S. telephone numbers that are the only telephone numbers the withholding agent has for the payee;

(3) A beneficial owner withholding certificate that is provided by an entity described in paragraph (c)(6)(ii)(C)(2) of this section and documentary evidence establishing the entity’s foreign status when both are provided together;

* * * * *

(C) * * *

(2) * * *

(vi) A territory financial institution;

* * * * *

(v) * * *

(B) * * * However, in addition to the name and address of the individual that is the payee or beneficial owner, the form must provide all countries for which the individual is a resident for tax purposes, the individual’s city and country of birth, a tax identification number, if any, for each country of residence (or the individual’s date of birth if the individual does not have a foreign tax identification number for the country of residence claimed), and must contain a signed and dated certification made under penalties of perjury that the information provided on the form is accurate and will be updated by the individual within 30 days of a change in circumstances that causes the form to become incorrect. * * *

* * * * *

(9) * * *

(iv) * * *

(A) * * * However, an agent that makes a payment pursuant to an agency arrangement (paying agent) is also a withholding agent with respect to the payment unless an exception under § 1.1473-1(d) applies. * * *

* * * * *

(d) * * *

(1) * * * To establish a payee’s status as a foreign individual, foreign government, government of a U.S. territory, or international organization, a withholding agent may rely upon a pre-FATCA Form W-8 in lieu of obtaining an updated version of the withholding certificate. * * *

(2) * * *

(i) * * * Consistent with the presumption rules in paragraph (f)(3) of this section, a withholding agent must treat a payee that has provided a valid Form W-9 as a specified U.S. person unless the Form W-9 certifies that the payee is other than a specified U.S. person. * * *

(ii) Reliance on documentary evidence. A withholding agent may also treat the payee as a U.S. person that is other than a specified U.S. person if the withholding agent has documentary evidence described in paragraphs (c)(5)(i)(C) and (D) of this section or general documentary evidence (as described in paragraph (c)(5)(ii)(A) of this section) that both establishes that the payee is a U.S. person and establishes (either through the documentation or the application of the rules in § 1.6049-4(c)(1)(ii) or paragraph (f)(3) of this section) that the payee is an exempt recipient. For purposes of the previous sentence, an exempt recipient means with respect to a withholding agent other than a participating FFI or registered deemed-compliant FFI, an exempt recipient under § 1.6049-4(c)(1)(ii) or, with respect to a withholding agent that is a participating FFI or registered deemed-compliant FFI, a U.S. person other than a specified U.S. person as described under § 1.1473-1(c).

(iii) * * * A withholding agent, other than a participating FFI or registered deemed-compliant FFI, may also treat a payee as a U.S. person if it has previously reviewed a Form W-9 or documentary evidence that established that the payee is a U.S. person and established (through the documentation or the application of the rules in § 1.6049-4(c)(1)(ii)) that the payee is an exempt recipient for purposes of chapter 61.

* * * * *

(4) * * *

(i) * * * For payments made prior to January 1, 2016, a registered deemed-compliant FFI that is a sponsored FFI must provide the GIIN of its sponsoring entity on the withholding certificate if the sponsored FFI has not obtained a GIIN.

* * * * *

(6) * * *

(i) * * *

(F) The withholding agent does not know or have reason to know that the payee is a member of an expanded affiliated group with any other FFI other than an FFI that is also treated as an owner-documented FFI by the withholding agent or that the FFI has any specified U.S. persons that own an equity interest in the FFI or a debt interest (other than a debt interest that is not a financial account or that has a balance or value not exceeding $50,000) in the FFI other than those identified on the FFI owner reporting statement described in paragraph (d)(6)(iv) of this section.

(ii) * * * A withholding agent may rely upon the letter described in this paragraph (d)(6)(ii) if it does not know or have reason to know that any of the information contained in the letter is unreliable or incorrect.

(iii) * * * Acceptable documentation for an individual owning an equity interest in the payee or a debt holder described in paragraph (d)(6)(iv) of this section means a valid withholding certificate, valid Form W-9 (including any necessary waiver), or documentary evidence establishing the foreign status of the individual as set forth in paragraph (d)(3)(ii) of this section (regardless of whether the payment is made with respect to an offshore obligation). * * *

* * * * *

(9) * * *

(i) * * *

(A) * * * A withholding agent may treat a payee as a foreign government, government of a U.S. territory, international organization, or foreign central bank of issue if it has a withholding certificate that identifies the payee as such an entity, indicates that the payee is the beneficial owner of the payment, and indicates that the payee is not engaged in commercial financial activities with respect to the payments or accounts identified on the form. * * *

* * * * *

Par. 6. Section 1471-4 is amended by:

1. Revising the seventh sentence of paragraph (b)(1),

2. Revising the first and third sentences of paragraph (b)(2),

3. Revising the fifth sentence of paragraph (b)(3),

4. Revising paragraph (b)(7),

5. Revising the first and third sentences of paragraph (c)(2)(iii)(B),

6. Revising the second sentence of paragraph (c)(2)(iii)(C),

7. Revising the heading and first sentence of paragraph (c)(2)(v),

8. Removing the language “this paragraph (c)(5)(iv)(D)” from paragraph (c)(5)(iv)(D)(4) and adding “paragraph (c)(5)(iv)(D)(3) of this section” in its place,

9. Revising the second, fourth, and eighth sentences of paragraph (c)(6) Example 2,

10. Revising the fourth sentence of paragraph (c)(7),

11. Revising paragraphs (d)(2)(iii)(B) introductory text, (d)(2)(iii)(B)(4), (d)(3)(iv)(B), and (d)(3)(iv)(D),

12. Revising the third sentence of paragraph (d)(4)(i),

13. Revising paragraph (d)(5)(iii)(B),

14. Revising the first sentence of paragraph (d)(6)(i),

15. Revising paragraph (d)(7)(ii)(A)(1),

16. Revising the first sentence of paragraph (e)(2)(ii),

17. Removing the language “as of February 15, 2012, and” from paragraph (e)(2)(iii),

18. Revising paragraph (e)(2)(iv)(B),

19. Revising the second sentence of paragraph (e)(3)(ii)(B),

20. Revising paragraph (e)(3)(iii)(B), and

21. Revising the first sentence of paragraph (i)(1).

The revisions read as follows:

* * * * *

(b) * * *

(1) * * * See § 1.1471-2 for the exceptions to and special rules for withholding and the exclusion from the definition of withholdable payment and foreign passthru payment that applies to any payment made under a grandfathered obligation or the gross proceeds from the disposition of such an obligation. * * *

(2) * * * Except as otherwise provided under § 1.1471-2 and, with respect to certain preexisting accounts, under paragraph (c) of this section, a participating FFI is required to determine whether withholding applies at the time a payment is made by reliably associating the payment with valid documentation described in paragraph (c) of this section for the payee of the payment. * * * For a payment made to an account held by an entity, except as otherwise provided in § 1.1471-3(a)(3), the payee is the account holder. * * *

(3) * * * See the QI, WP, or WT agreement for the withholding requirements of an FFI that is a QI, WP, or WT for purposes of chapter 4.

* * * * *

(7) Withholding requirements for U.S. branches of participating FFIs (and reporting Model 1 FFIs) that are treated as U.S. persons. A U.S. branch of a participating FFI (and reporting Model 1 FFI) that is treated as a U.S. person and that satisfies its backup withholding obligations under section 3406(a) with respect to accounts held at the U.S. branch by account holders that are payees treated as other than exempt recipients under chapter 61 will be treated as satisfying its withholding obligation with respect to such accounts under section 1471(b)(1) and this paragraph (b). See paragraph (d)(2)(iii)(B) of this section for the special reporting requirements applicable to U.S. branches of participating FFIs (and reporting Model 1 FFIs) that are treated as U.S. persons. See paragraphs (c)(2) and (d)(4) of this section for the reporting requirements of U.S. branches of participating FFIs (and reporting Model 1 FFIs) with respect to payments that are chapter 4 reportable amounts.

(c) * * *

(2) * * *

(iii) * * *

(B) * * * For purposes of this section, a change in circumstances (as defined in § 1.1471-3(c)(6)(ii)(E)) includes any change or addition of information to the account holder’s account (including the addition, substitution, or other change of an account holder) or any change or addition of information to any account associated with such account (applying the account aggregation rules described in § 1.1471-5(b)(4)(iii) or by treating the accounts as consolidated obligations) if such change or addition of information affects the chapter 4 status of the account holder. * * * With respect to a preexisting account that meets a documentation exception described in paragraphs (c)(3)(iii) and (c)(5)(iii) of this section, a change in circumstances also includes a change in account balance or value as of the end of the first subsequent year that causes the account no longer to meet the documentation exception.

(C) * * * With respect to an account held by an entity other than a passive NFFE described in the preceding sentence, following a change in circumstances, the participating FFI must retain a record of the appropriate documentation described in paragraph (c)(3) of this section by the date that is 90 days after the change in circumstances or, if unable to do so, must treat such account as held by a nonparticipating FFI.

* * * * *

(v) Special rule for U.S. branches of participating FFIs (and reporting Model 1 FFIs) that are treated as U.S. persons. A U.S. branch of a participating FFI (and reporting Model 1 FFI) that is treated as a U.S. person shall apply, in lieu of the due diligence requirements of this paragraph (c), the due diligence requirements of § 1.1471-3 to determine the chapter 4 status of account holders and payees that are entities and shall apply the documentation requirements of chapter 3 or 61 (as applicable) with respect to individual account holders. * * *

* * * * *

(6) * * *

Example 2. * * * The balance in U’s depository account on the effective date of CB’s FFI agreement is $20,000. * * * The balance in Entity X’s account on the effective date of CB’s FFI agreement is $130,000, and the balance in Entity Y’s account on the effective date of CB’s FFI agreement is $110,000. * * * U’s depository account qualifies for the § 1.1471-5(a)(4)(i) exception to U.S. account status because it does not exceed the $50,000 threshold, taking into account the aggregation rule described in § 1.1471-5(a)(4)(iii)(A). * * *

(7) * * * The responsible officer must also certify that the participating FFI has completed the account identification procedures and documentation requirements of this paragraph (c) for all other preexisting accounts or, if it has not retained a record of the documentation required under this paragraph (c) with respect to an account, treats such account in accordance with the requirements of this section and § 1.1471-5(g) or § 1.1471-3(f) (as applicable). * * *

(d) * * *

(2) * * *

(iii) * * *

(B) Special reporting rules for U.S. branches treated as U.S. persons. A U.S. branch of a participating FFI (and reporting Model 1 FFI) that is treated as a U.S. person shall be treated as having satisfied the reporting requirements described in paragraphs (d)(2)(i) and (d)(2)(ii)(C) of this section if it reports under—

* * * * *

(4) Section 1.1474-1(i) with respect to specified U.S. persons identified in § 1.1471-3(d)(6)(iv)(A)(1) and (2) of owner-documented FFIs.

(3) * * *

(iv) * * *

(B) The name, address, and TIN of each specified U.S. person identified in § 1.1471-3(d)(6)(iv)(A)(1) and (2);

* * * * *

(D) The account balance or value of the account held by the owner-documented FFI;

* * * * *

(4) * * *

(i) * * * In the case of an account held by an owner-documented FFI, the address to be reported is the address of each specified U.S. person identified in § 1.1471-3(d)(6)(iv)(A)(1) and (2).

* * * * *

(5) * * *

(iii) * * *

(B) The name, address, and TIN of each specified U.S. person identified in § 1.1471-3(d)(6)(iv)(A)(1) and (2); and

* * * * *

(6) * * *

(i) * * * Except as otherwise provided in a Model 2 IGA, a participating FFI, as part of its reporting responsibilities under this paragraph (d), shall report to the IRS for each calendar year the information described for each of the classes of account holders described in paragraphs (d)(6)(i)(A) through (E) of this section. * * *

* * * * *

(7) * * *

(ii) * * *

(A) * * *

(1) The name, address, and TIN of each specified U.S. person who is an account holder and, in the case of any account holder that is an NFFE that is a U.S. owned foreign entity or that is an owner-documented FFI, the name of such entity and the name, address, and TIN of each substantial U.S. owner of such NFFE or, in the case of an owner-documented FFI, of each specified U.S. person identified in § 1.1471-3(d)(6)(iv)(A)(1) and (2);

* * * * *

(e) * * *

(2) * * *

* * * * *

(ii) * * * For purposes of this section, a branch is a unit, business, or office of an FFI that is treated as a branch under the regulatory regime of a country or is otherwise regulated under the laws of such country as separate from other offices, units, or branches of the FFI. * * *

* * * * *

(iv) * * *

(B) Agree that each such branch will identify its account holders under the due diligence requirements applicable to participating FFIs under paragraph (c) of this section, retain a record of account holder and payee documentation pertaining to those identification requirements for the longer of six years from the effective date of the FFI agreement or for as long as the branch maintains the account or obligation, and report to the IRS with respect to accounts that it is required to treat as U.S. accounts to the extent permitted under the relevant laws pertaining to the branch;

* * * * *

(3) * * *

(ii) * * *

(B) * * * See paragraph (e)(2)(iii)(B) of this section for when an account is considered blocked.

(iii) * * *

(B) Agree as part of such registration to identify its account holders under the due diligence requirements applicable to participating FFIs under paragraph (c) of this section, retain a record of account holder and payee documentation pertaining to those identification requirements for the longer of six years from the effective date of its registration as a limited FFI or for as long as the FFI maintains the account or obligation, and report with respect to accounts that it is required to treat as U.S. accounts to the extent permitted under the relevant laws pertaining to the FFI;

* * * * *

(i) * * *

(1) * * * Except to the extent otherwise provided in a Model 2 IGA, a participating FFI (or branch thereof) that is prohibited by foreign law from reporting the information required under paragraph (d) of this section with respect to a U.S. account must follow the procedures of paragraph (i)(2) of this section to obtain a valid and effective waiver of such law and, if such waiver is not obtained within a reasonable period of time, to close or transfer such account. * * *

* * * * *

Par. 7. Section 1.1471-5 is amended by:

1. Removing the language “(e)(3)(iv)” from paragraphs (b)(1)(iii)(A), (b)(1)(iii)(B), and (b)(1)(iii)(C) and adding “(b)(3)(iv)” in its place,

2. Revising paragraphs (b)(2)(i)(C) and (b)(2)(v),

3. Revising the first sentence of and adding a new second sentence in paragraph (b)(3)(iv),

4. Revising the third sentence of paragraph (b)(4)(iv),

5. Revising the third, fourth, and fifth sentences of paragraph (e)(4)(v) Example1,

6. Revising the second sentence of paragraph (e)(5),

7. Adding the language “and income derived from transactions between members of the expanded affiliated group” to the end of the first parenthetical in paragraph (e)(5)(i)(B)(1),

8. Revising paragraphs (e)(5)(iv)(D), (f)(1)(i)(F)(3)(i), and (f)(1)(i)(F)(3)(iii),

9. Revising the first sentence of paragraph (f)(2),

10. Revising paragraph (f)(2)(iii)(B),

11. Revising the first sentence of paragraph (f)(3)(ii)(E),

12. Removing the language “§ 1.1471-4(c)(8)” in paragraph (g)(3)(i)(B) and adding “§ 1.1471-4(c)(5)(iv)(D)” in its place,

13. Revising the first sentence of paragraph (g)(3)(ii), and

14. Revising the first sentence of paragraph (g)(3)(iii).

The revisions read as follows:

* * * * *

(b) * * *

(2) * * *

(i) * * *

(C) Rollovers. An account that otherwise satisfies the requirements of paragraph (b)(2)(i)(A) or (B) of this section will not fail to satisfy such requirements solely because such account may receive assets or funds transferred from one or more accounts that meet the requirements of paragraph (b)(2)(i)(A) or (B) of this section, one or more retirement or pension funds that meet the requirements of § 1.1471-6(f), one or more accounts described in paragraph (b)(2)(vi) of this section, or one or more entities identified as nonreporting financial institutions under the terms of an applicable Model 1 or Model 2 IGA because they are retirement or pension funds.

* * * * *

(v) Certain annuity contracts. A non-investment linked, non-transferable, immediate life annuity contract (including a disability annuity) that monetizes a retirement or pension account described in paragraph (b)(2)(i)(A) or (b)(2)(vi) of this section.

* * * * *

(3) * * *

(iv) * * * To determine if debt or equity interests described in paragraph (b)(1)(iii) of this section are regularly traded, the principles of § 1.1472-1(c)(1)(i)(A)(2)(i) and (ii) shall apply with respect to the interests, and the principles of § 1.1472-1(c)(1)(i)(B)(1) shall apply for this purpose in the case of an initial public offering of such interests. See § 1.1472-1(c)(1)(i)(C) for the definition of an established securities market. * * *

* * * * *

(4) * * *

* * * * *

(iv) * * * In the case of an FFI determining whether an account meets (or continues to meet) a preexisting account documentation exception described in § 1.1471-4(c)(3)(iii) or (c)(5)(iii), or whether the account is an account described in paragraph (a)(4)(i) of this section, the spot rate must be determined on the date for which the FFI is determining the threshold amount as prescribed in those provisions.

* * * * *

(e) * * *

(4) * * *

(v) * * *

Example 1. * * * Fund Manager hires Investment Advisor, a foreign entity, to provide advice and discretionary management of a portion of the financial assets held by Fund A. Investment Advisor earned more than 50% of its gross income for the last three years from providing similar services. Because Investment Advisor primarily conducts a business of managing financial assets on behalf of clients, Investment Advisor is an investment entity under paragraph (e)(4)(i)(A) of this section and an FFI under paragraph (e)(1)(iii) of this section.

* * * * *

(5) * * * For the treatment of foreign entities described in this paragraph under section 1472, see § 1.1472-1(c)(1)(v).

* * * * *

(iv) * * *

(D) The entity has not agreed to report under § 1.1471-4(d)(2)(ii)(C) or otherwise act as an agent for chapter 4 purposes on behalf of any financial institution, including a member of its expanded affiliated group.

* * * * *

(f) * * *

(1) * * *

(i) * * *

(F) * * *

(3) * * *

(i) Is authorized to act on behalf of the FFI (such as a fund manager, trustee, corporate director, or managing partner) to fulfill the requirements of the FFI agreement;

* * * * *

(iii) Has registered the FFI with the IRS by the later of January 1, 2016, or the date that the FFI identifies itself as qualifying under this paragraph (f)(1)(i)(F);

* * * * *

(2) * * * A certified deemed-compliant FFI means an FFI described in any of paragraphs (f)(2)(i) through (iv) of this section that has certified as to its status as a deemed-compliant FFI by providing a withholding agent with the documentation described in § 1.1471-3(d)(5) applicable to the relevant deemed-compliant category. * * *

* * * * *

(iii) * * *

(B) A participating FFI, reporting Model 1 FFI, or U.S. financial institution agrees to fulfill all due diligence, withholding, and reporting responsibilities that the FFI would have assumed if it were a participating FFI.

* * * * *

(3) * * *

(ii) * * *

(E) The designated withholding agent agrees to report to the IRS (or, in the case of a reporting Model 1 FFI, to the relevant foreign government or agency thereof) all of the information described in § 1.1471-4(d) or § 1.1474-1(i) (as appropriate) with respect to any specified U.S. persons that are identified in § 1.1471-3(d)(6)(iv)(A)(1) and (2). * * *

* * * * *

(g) * * *

(3) * * *

(ii) * * * An account holder of an account other than a preexisting account and that is described in paragraph (g)(2) of this section will be treated as a recalcitrant account holder beginning on the date that is the earlier of 90 days after the account is opened by the participating FFI or the date that a withholdable payment that is subject to withholding under § 1.1441-2(a) is made to the account. * * *

(iii) * * * An account holder holding an account that is described in paragraph (g)(2) of this section following a change in circumstances (other than a change in account balance or value in a subsequent year that causes an individual account to be identified as a high-value account) will be treated as a recalcitrant account holder beginning on the date that is 90 days after the change in circumstances. * * *

* * * * *

Par. 8. Section 1471-6 is amended by revising paragraph (h)(2)(ii) to read as follows:

* * * * *

(h) * * *

(2) * * *

(ii) The entity has no outstanding debt that would be a financial account under § 1.1471-5(b)(1)(iii)(C); and

* * * * *

Par. 9. Section 1.1472-1 is amended by revising the fourth sentence of and adding a new fifth sentence to paragraph (a), and revising paragraphs (b)(1) introductory text, (b)(2), and (c)(2)(i) to read as follows:

(a) * * * See § 1.1473-1(a)(4)(vi), however, for rules excepting from the definition of withholdable payment certain payments of U.S. source FDAP income made prior to January 1, 2017, with respect to an offshore obligation and § 1.1471-2(b) for rules excepting from the definition of withholdable payment a grandfathered obligation. See also § 1.1471-2(a)(2)(ii), (iv), (v), and (vi) for special rules of withholding that apply for purposes of this section and § 1.1471-2(a)(5) for withholding requirements if the source or character of a payment is unknown.

(b) * * *

(1) In general. Except as otherwise provided in paragraph (b)(2) of this section (providing transitional relief), paragraph (c) of this section (providing exceptions for payments to an excepted NFFE, a WP or WT, or an exempt beneficial owner), § 1.1471-2(a)(4)(i) (providing an exception to withholding if the withholding agent lacks control, custody, or knowledge), § 1.1471-2(a)(4)(vii) (providing an exception to withholding for payments made to an account held with or equity interests traded through a clearing organization with FATCA-compliant membership), or § 1.1471-2(a)(4)(viii) (providing an exception to withholding for payments to certain excepted accounts), a withholding agent must withhold 30 percent of any withholdable payment made after December 31, 2013, to a payee that is an NFFE unless—

* * * * *

(2) Transitional relief. For any withholdable payment made prior to January 1, 2016, with respect to a preexisting obligation to a payee that is not a prima facie FFI and for which a withholding agent does not have documentation indicating the payee’s status as a passive NFFE when the NFFE has failed to provide the owner certification as required under § 1.1471-3(d)(12)(iii), the withholding agent is not required to withhold under this section or report under § 1.1474-1(i)(2) (describing the reporting obligations of withholding agents with respect to NFFEs).

(c) * * *

(2) * * *

(i) Treat the payee as an NFFE that is a WP or WT in accordance with § 1.1441-5(c)(2) (for a WP) or § 1.1441-5(e)(5)(v) (for a WT); or

* * * * *

Par. 10. Section 1.1473-1 is amended by:

1. Removing the second sentence of paragraph (a)(3)(iii)(A),

2. Revising the second sentence of paragraph (a)(4)(iii),

3. Revising the first sentence of paragraph (a)(4)(vi),

4. Revising the heading of paragraph (a)(5)(vii),

5. Removing the language “beneficiary” from paragraph (b)(3)(ii)(A) and adding “person” in its place, and

6. Removing the language “trust; or” from paragraph (b)(3)(ii)(B) and adding “trust as of the end of the prior calendar year; or” in its place.

The revisions read as follows:

(a) * * *

(4) * * *

(iii) * * * Notwithstanding the preceding sentence, excluded nonfinancial payments do not include: payments in connection with a lending transaction (including loans of securities), a forward, futures, option, or notional principal contract, or a similar financial instrument; premiums for insurance contracts or annuity contracts; amounts paid under cash value insurance or annuity contracts; dividends; interest (including substitute interest described in § 1.861-2(a)(7)) other than interest described in the preceding sentence; gross proceeds other than gross proceeds described in paragraph (a)(4)(iv) of this section; investment advisory fees; custodial fees; and bank or brokerage fees.

* * * * *

(vi) * * * A payment of U.S. source FDAP income made prior to January 1, 2017, with respect to an offshore obligation if such payment is made by a person that is not acting as an intermediary or as a WP or WT with respect to the payment. * * *

(5) * * *

(vii) Special rules for determining when gross proceeds are treated as paid to a partner, owner, or beneficiary of a flow-through entity. * * *

* * * * *

Par. 11. Section 1.1474-1 is amended by:

1. Revising paragraph (a)(2),

2. Revising the first sentence of paragraph (b)(1),

3. Removing the language “Except as otherwise provided under an FFI agreement, a” in the first sentence of paragraph (c)(2) and adding “A” in its place,

4. Removing the language “(including its U.S. branch that is not treated as a U.S. person)” from paragraphs (d)(1)(ii)(A)(1)(iii), (d)(1)(ii)(B)(1)(i), and (d)(1)(ii)(B)(1)(iii) and adding “(including a U.S. branch of a participating FFI that is not treated as a U.S. person)” in its place,

5. Revising the second and sixth sentences of paragraph (d)(4)(i)(B),

6. Revising paragraph (d)(4)(i)(C)(1),

7. Removing the language “If the U.S. branch is not treated” from paragraphs (d)(4)(i)(C)(2) and (d)(4)(i)(C)(3) and adding “If the U.S. branch of a participating FFI is not treated” in its place,

8. Removing the language “its reporting pools as described in paragraph (d)(4)(i)(B)” from paragraph (d)(4)(i)(C)(2) and adding “its reporting pools referenced in paragraph (d)(4)(i)(B)” in its place,

9. Revising the first sentence of paragraph (d)(4)(ii)(C),

10. Revising the first, second, and fifth sentences of paragraph (d)(4)(iii)(A),

11. Revising the first sentence of paragraph (d)(4)(iii)(B),

12. Revising paragraph (d)(4)(iii)(C),

13. Revising the first sentence of paragraph (i)(1), and

14. Revising paragraphs (i)(1)(ii), (i)(1)(iii), and (i)(2)(iii).

The revisions read as follows:

(a) * * *

(2) Withholding agent liability. A withholding agent that is required to withhold with respect to a payment under § 1.1471-2(a), 1.1471-4(b) (in the case of a participating FFI), or 1.1472-1(b) but fails either to withhold or to deposit any tax withheld as required under paragraph (b) of this section is liable for the amount of tax not withheld and deposited.

* * * * *

(b) * * *

(1) * * * Except as otherwise provided in this paragraph (b), every withholding agent who withholds tax pursuant to chapter 4 shall deposit such tax within the time provided in § 1.6302-2(a) by electronic funds transfer as provided under § 31.6302-1(h) of this chapter. * * *

* * * * *

(d) * * *

(4) * * *

(i) * * *

(B) * * * With respect to a payment of U.S. source FDAP income made to a participating FFI or registered deemed-compliant FFI that is an NQI, NWP, or NWT or QI that elects to be withheld upon under section 1471(b)(3) and from whom the withholding agent receives pooled information regarding such FFI’s account holders and payees, a U.S. withholding agent must complete a separate Form 1042-S issued to the participating FFI, registered deemed-compliant FFI, or QI (as applicable) as the recipient with respect to each pool provided in an FFI withholding statement described in § 1.1471-3(c)(3)(iii)(B)(2). * * * See paragraph (d)(4)(ii)(A) of this section for reporting rules applicable if participating FFIs or deemed-compliant FFIs provide specific payee information for reporting to the recipient of the payment for Form 1042-S reporting purposes. * * *

(C) * * *

(1) If the U.S. branch is treated as a U.S. person, if the withholding agent treats amounts paid as effectively connected with the conduct of the branch’s trade or business in the United States, or if the U.S. branch is the beneficial owner of the payment, the withholding agent must file Form 1042-S reporting the U.S. branch as the recipient;

* * * * *

(ii) * * *

(C) * * * If a U.S. withholding agent makes a payment to a disregarded entity and receives a valid withholding certificate or other documentary evidence from the person that is the single owner of such disregarded entity, the withholding agent must file a Form 1042-S treating the single owner as the recipient. * * *

(iii) * * *

(A) * * * Except as otherwise provided in paragraphs (d)(4)(iii)(B) (relating to NQIs, NWPs, NWTs, and FFIs electing under section 1471(b)(3)) and (d)(4)(iii)(C) of this section (relating to transitional payee-specific reporting for payments to nonparticipating FFIs), a participating FFI or deemed-compliant FFI (including a QI, WP, WT, or U.S. branch of a participating FFI that is not treated as a U.S. person) that makes a payment that is a chapter 4 reportable amount to a recalcitrant account holder or nonparticipating FFI, must complete a Form 1042-S to report such payments. A participating FFI or registered deemed-compliant FFI (including a QI, WP, WT, or U.S. branch of a participating FFI that is not treated as a U.S. person) may report in pools consisting of its recalcitrant account holders and payees that are nonparticipating FFIs. * * * Alternatively, a participating FFI or registered deemed-compliant FFI (including a QI, WP, WT, or U.S. branch of a participating FFI that is not treated as a U.S. person) may (and a certified deemed-compliant FFI is required to) perform payee-specific reporting to report a chapter 4 reportable amount made to a recalcitrant account holder or a nonparticipating FFI when withholding was applied (or should have applied) to the payment.

(B) * * * Except as otherwise provided in paragraph (d)(4)(iii)(C) of this section, a participating FFI or deemed-compliant FFI that is an NQI, NWP, NWT (including a U.S. branch of a participating FFI that is not treated as a U.S. person), or an FFI that has made an election under section 1471(b)(3) and has provided sufficient information to its withholding agent to withhold and report the payment is not required to report the payment on Form 1042-S as described in paragraph (d)(4)(iii)(A) of this section if the payment is made to a nonparticipating FFI or recalcitrant account holder and its withholding agent has withheld the correct amount of tax on such payment and correctly reported the payment on a Form 1042-S. * * *

(C) Reporting by participating FFIs and registered deemed-compliant FFIs (including QIs, WPs, and WTs) for certain payments made to nonparticipating FFIs (transitional). Except as otherwise provided in the instructions to Form 1042-S or under a Model 2 IGA, if a participating FFI or registered deemed-compliant FFI (including a QI, WP, WT, or U.S. branch of a participating FFI that is not treated as a U.S. person) makes a payment to a nonparticipating FFI of a foreign reportable amount as defined in paragraph (d)(2)(i)(D) of this section, the FFI must report on Form 1042-S on a payee-specific basis the aggregate amount of all foreign reportable amounts paid by the FFI to the nonparticipating FFI for each of the calendar years 2015 and 2016.

* * * * *

(i) * * *

(1) * * * Beginning in calendar year 2014, if a withholding agent (other than an FFI reporting accounts held by owner-documented FFIs under § 1.1471-4(d)) makes during a calendar year a withholdable payment to an entity account holder or payee of an obligation and the withholding agent treats the entity as an owner-documented FFI under § 1.1471-3(d)(6), the withholding agent is required to report for such calendar year with respect to each specified U.S. person identified under § 1.1471-3(d)(6)(iv)(A)(1) or (2). * * *

* * * * *

(ii) The name, address, and TIN of each specified U.S. person identified in § 1.1471-3(d)(6)(iv)(A)(1) and (2);

(iii) The total of all withholdable payments made to the owner-documented FFI;

* * * * *

(2) * * *

(iii) The total of all withholdable payments made to the NFFE; and

* * * * *

Martin V. Franks,
Chief, Publications and Regulations Branch
Legal Processing Division,
Associate Chief Counsel
(Procedure & Administration).