Bulletin No. 2010-29July 19, 2010

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

SPECIAL ANNOUNCEMENT

Notice 2010–51, page 83.This notice invites public comments regarding guidance to beprovided to payors and other affected persons concerning thenew requirements under the amendments to section 6041 ofthe Code expanding reporting to payments to corporations andto payments of gross proceeds and with respect to property.

EMPLOYEE PLANS

T.D. 9489, page 55.REG–118412–10, page 85.Temporary and proposed regulations under section 9815 of theCode provide guidance concerning the rules for group healthplans and health insurance coverage relating to status as agrandfathered health plan under the Affordable Care Act.

EXEMPT ORGANIZATIONS

Announcement 2010–45, page 87.The IRS has revoked its determination that Baby Boomers andBeyond, Inc., of Denham Springs, LA; Children’s Angelcare AidInternational, Inc., of San Diego, CA; Institute for Unpopular Cul-ture of San Francisco, CA; Jolene’s Horse Rescue of Palmdale,CA; Military Order of the Cootie of the US Tent # 20 of Wellston,OK; Rochester Hills Dance & Arts Society of Rochester Hills,MI; City Club of Dallas, TX; Four a Foundation an IntegratedAuxiliary of First Baptist Church of Garland, TX; Georgian Com-munity Services Program, Inc., of Morrow, GA; TARU Gardens,Inc., of Charlottesville, VA; and UTAH Citizens Alliance of SaltLake City, UT, qualify as organizations in sections 501(c)(3) and170(c)(2) of the Code.

EXCISE TAX

T.D. 9489, page 55.REG–118412–10, page 85.Temporary and proposed regulations under section 9815 of theCode provide guidance concerning the rules for group healthplans and health insurance coverage relating to status as agrandfathered health plan under the Affordable Care Act.

ADMINISTRATIVE

Notice 2010–51, page 83.This notice invites public comments regarding guidance to beprovided to payors and other affected persons concerning thenew requirements under the amendments to section 6041 ofthe Code expanding reporting to payments to corporations andto payments of gross proceeds and with respect to property.

Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 87.Finding Lists begin on page ii.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-

force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

July 19, 2010 2010–29 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 9815.—AdditionalMarket Reforms

T.D. 9489

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 54 and 602RIN 1545–BJ51

DEPARTMENT OF LABOREmployee Benefits SecurityAdministration29 CFR Part 2590RIN 1210–AB42

DEPARTMENT OF HEALTHAND HUMAN SERVICESOCIIO–9991–IFC45 CFR Part 147RIN 0991–AB68

Interim Final Rules for GroupHealth Plans and HealthInsurance Coverage Relatingto Status as a GrandfatheredHealth Plan under the PatientProtection and AffordableCare Act

AGENCIES: Internal Revenue Service,Department of the Treasury; EmployeeBenefits Security Administration, De-partment of Labor; Office of ConsumerInformation and Insurance Oversight, De-partment of Health and Human Services.

ACTION: Interim final rules with requestfor comments.

SUMMARY: This document contains in-terim final regulations implementing therules for group health plans and health in-surance coverage in the group and indi-vidual markets under provisions of the Pa-tient Protection and Affordable Care Actregarding status as a grandfathered healthplan.

DATES: Effective Date: These in-terim final regulations are effective on

June 14, 2010, except that the amendmentsto 26 CFR 54.9815–2714T, 29 CFR2590.715–2714, and 45 CFR 147.120 areeffective July 12, 2010.

Comment date. Comments are due onor before August 16, 2010.

ADDRESSES: Written comments may besubmitted to any of the addresses specifiedbelow. Any comment that is submitted toany Department will be shared with theother Departments. Please do not submitduplicates.

All comments will be made availableto the public. WARNING: Do not in-clude any personally identifiable informa-tion (such as name, address, or other con-tact information) or confidential businessinformation that you do not want publiclydisclosed. All comments are posted on theInternet exactly as received, and can beretrieved by most Internet search engines.No deletions, modifications, or redactionswill be made to the comments received, asthey are public records. Comments may besubmitted anonymously.

Department of Labor. Comments to theDepartment of Labor, identified by RIN1210–AB42, by one of the following meth-ods:

• Federal eRulemaking Portal:http://www.regulations.gov. Followthe instructions for submitting com-ments.

• Email:E-OHPSCA1251.EBSA@dol.gov.

• Mail or Hand Delivery: Office ofHealth Plan Standards and ComplianceAssistance, Employee Benefits Secu-rity Administration, Room N–5653,U.S. Department of Labor, 200 Con-stitution Avenue NW, Washington, DC20210, Attention: RIN 1210–AB42.

Comments received by the Depart-ment of Labor will be posted withoutchange to http://www.regulations.gov andhttp://www.dol.gov/ebsa, and available forpublic inspection at the Public DisclosureRoom, N–1513, Employee Benefits Se-curity Administration, 200 ConstitutionAvenue, NW, Washington, DC 20210.

Department of Health and Human Ser-vices. In commenting, please refer to file

code OCIIO–9991–IFC. Because of staffand resource limitations, the Departmentscannot accept comments by facsimile(FAX) transmission.

You may submit comments in one offour ways (please choose only one of theways listed):

1. Electronically. You may submitelectronic comments on this regulation tohttp://www.regulations.gov. Follow theinstructions under the “More Search Op-tions” tab.

2. By regular mail. You may mailwritten comments to the following addressONLY:

Office of Consumer Information andInsurance Oversight

Department of Health and HumanServices,

Attention: OCIIO–9991–IFC,P.O. Box 8016,Baltimore, MD 21244–1850.

Please allow sufficient time for mailedcomments to be received before the closeof the comment period.

3. By express or overnight mail. Youmay send written comments to the follow-ing address ONLY:

Office of Consumer Information andInsurance Oversight,

Department of Health and HumanServices,

Attention: OCIIO–9991–IFC,Mail Stop C4–26–05,7500 Security Boulevard,Baltimore, MD 21244–1850.

4. By hand or courier. If you prefer,you may deliver (by hand or courier) yourwritten comments before the close of thecomment period to either of the followingaddresses:

a. For delivery in Washington, DC—

Office of Consumer Information andInsurance Oversight,

Department of Health and HumanServices,

Room 445–G, Hubert H. HumphreyBuilding,

200 Independence Avenue, SW,Washington, DC 20201

2010–29 I.R.B. 55 July 19, 2010

(Because access to the interior of theHubert H. Humphrey Building is not read-ily available to persons without Federalgovernment identification, commentersare encouraged to leave their comments inthe OCIIO drop slots located in the mainlobby of the building. A stamp-in clock isavailable for persons wishing to retain aproof of filing by stamping in and retain-ing an extra copy of the comments beingfiled.)

b. For delivery in Baltimore, MD—

Centers for Medicare & MedicaidServices,

Department of Health and HumanServices,

7500 Security Boulevard,Baltimore, MD 21244–1850

If you intend to deliver your commentsto the Baltimore address, please call (410)786–7195 in advance to schedule your ar-rival with one of our staff members.

Comments mailed to the addresses in-dicated as appropriate for hand or courierdelivery may be delayed and received afterthe comment period.

Submission of comments on paperworkrequirements. You may submit commentson this document’s paperwork require-ments by following the instructions at theend of the “Collection of Information Re-quirements” section in this document.

Inspection of Public Comments: Allcomments received before the close of thecomment period are available for viewingby the public, including any personallyidentifiable or confidential business in-formation that is included in a comment.The Departments post all comments re-ceived before the close of the commentperiod on the following website as soonas possible after they have been received:http://www.regulations.gov. Follow thesearch instructions on that Web site toview public comments.

Comments received timely will alsobe available for public inspection as theyare received, generally beginning ap-proximately three weeks after publicationof a document, at the headquarters ofthe Centers for Medicare & MedicaidServices, 7500 Security Boulevard, Balti-more, Maryland 21244, Monday throughFriday of each week from 8:30 a.m. to

4:00 p.m. EST. To schedule an appoint-ment to view public comments, phone1–800–743–3951.

Internal Revenue Service. Commentsto the IRS, identified by REG–118412–10,by one of the following methods:

• Federal eRulemaking Portal:http://www.regulations.gov. Followthe instructions for submitting com-ments.

• Mail: CC:PA:LPD:PR(REG–118412–10), room 5205, Inter-nal Revenue Service, P.O. Box 7604,Ben Franklin Station, Washington, DC20044.

• Hand or courier delivery: Mondaythrough Friday between the hours of8 a.m. and 4 p.m. to: CC:PA:LPD:PR(REG–118412–10), Courier’s Desk,Internal Revenue Service, 1111Constitution Avenue, NW, WashingtonDC 20224.

All submissions to the IRS will be opento public inspection and copying in room1621, 1111 Constitution Avenue, NW,Washington, DC from 9 a.m. to 4 p.m.

FOR FURTHER INFORMATIONCONTACT: Amy Turner or Beth Baum,Employee Benefits Security Adminis-tration, Department of Labor, at (202)693–8335; Karen Levin, Internal RevenueService, Department of the Treasury, at(202) 622–6080; Jim Mayhew, Officeof Consumer Information and InsuranceOversight, Department of Health and Hu-man Services, at (410) 786–1565.

Customer Service Information: In-dividuals interested in obtaining infor-mation from the Department of Laborconcerning employment-based health cov-erage laws may call the EBSA Toll-FreeHotline at 1–866–444–EBSA (3272) orvisit the Department of Labor’s web-site (http://www.dol.gov/ebsa). In ad-dition, information from HHS on pri-vate health insurance for consumers canbe found on the Centers for Medicare& Medicaid Services (CMS) website(http://www.cms.hhs.gov/HealthInsRe-formforConsume/01_Overview.asp) andinformation on health reform can be foundat http://www.healthreform.gov.

SUPPLEMENTARY INFORMATION:

I. Background

The Patient Protection and Afford-able Care Act (the Affordable CareAct), Pub. L. 111–148, was enactedon March 23, 2010; the Health Careand Education Reconciliation Act (theReconciliation Act), Pub. L. 111–152,was enacted on March 30, 2010.The Affordable Care Act and theReconciliation Act reorganize, amend,and add to the provisions in part A oftitle XXVII of the Public Health ServiceAct (PHS Act) relating to group healthplans and health insurance issuers in thegroup and individual markets. The term“group health plan” includes both insuredand self-insured group health plans.1

The Affordable Care Act adds section715(a)(1) to the Employee RetirementIncome Security Act (ERISA) and section9815(a)(1) to the Internal Revenue Code(the Code) to incorporate the provisionsof part A of title XXVII of the PHS Actinto ERISA and the Code, and make themapplicable to group health plans, andhealth insurance issuers providing healthinsurance coverage in connection withgroup health plans. The PHS Act sectionsincorporated by this reference are sections2701 through 2728. PHS Act sections2701 through 2719A are substantially new,though they incorporate some provisionsof prior law. PHS Act sections 2722through 2728 are sections of prior lawrenumbered, with some, mostly minor,changes. Section 1251 of the AffordableCare Act, as modified by section 10103 ofthe Affordable Care Act and section 2301of the Reconciliation Act, specifies thatcertain plans or coverage existing as of thedate of enactment (that is, grandfatheredhealth plans) are only subject to certainprovisions.

The Affordable Care Act also adds sec-tion 715(a)(2) of ERISA, which providesthat, to the extent that any provision ofpart 7 of ERISA conflicts with part A oftitle XXVII of the PHS Act with respectto group health plans or group health in-surance coverage, the PHS Act provisionsapply. Similarly, the Affordable Care Actadds section 9815(a)(2) of the Code, whichprovides that, to the extent that any provi-

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

July 19, 2010 56 2010–29 I.R.B.

sion of subchapter B of chapter 100 of theCode conflicts with part A of title XXVIIof the PHS Act with respect to group healthplans or group health insurance coverage,the PHS Act provisions apply. There-fore, although ERISA section 715(a)(1)and Code section 9815(a)(1) incorporateby reference new provisions, they do notaffect preexisting sections of ERISA or theCode unless they cannot be read consis-tently with an incorporated provision ofthe PHS Act. For example, ERISA sec-tion 732(a) generally provides that part 7of ERISA — and Code section 9831(a)generally provides that chapter 100 of theCode — does not apply to plans with lessthan two participants who are current em-ployees (including retiree-only plans thatcover less than two participants who arecurrent employees). Prior to enactmentof the Affordable Care Act, the PHS Acthad a parallel provision at section 2721(a).After the Affordable Care Act amended,reorganized, and renumbered most of ti-tle XXVII of the PHS Act, that excep-tion no longer exists. Similarly, ERISAsection 732(b) and (c) generally providesthat the requirements of part 7 of ERISA— and Code section 9831(b) and (c) gen-erally provides that the requirements ofchapter 100 of the Code — do not ap-ply to excepted benefits.2 Prior to enact-ment of the Affordable Care Act, the PHSAct had a parallel section 2721(c) and (d)that indicated that the provisions of sub-parts 1 through 3 of part A of title XXVIIof the PHS Act did not apply to exceptedbenefits. After the Affordable Care Actamended and renumbered PHS Act sec-tion 2721(c) and (d) as section 2722(b) and(c), that exception could be read to be nar-rowed so that it applies only with respectto subpart 2 of part A of title XXVII of thePHS Act, thus, in effect requiring exceptedbenefits to comply with subparts I and II ofpart A.

The absence of an express provision inpart A of title XXVII of the PHS Act doesnot create a conflict with the relevant re-quirements of ERISA and the Code. Ac-cordingly, the exceptions of ERISA sec-tion 732 and Code section 9831 for very

small plans and certain retiree-only healthplans, and for excepted benefits, remain ineffect and, thus, ERISA section 715 andCode section 9815, as added by the Afford-able Care Act, do not apply to such plansor excepted benefits.

Moreover, there is no express indica-tion in the legislative history of an in-tent to treat issuers of group health insur-ance coverage or nonfederal governmen-tal plans (that are subject to the PHS Act)any differently in this respect from planssubject to ERISA and the Code. The De-partments of Health and Human Services,Labor, and the Treasury (the Departments)operate under a Memorandum of Under-standing (MOU)3 that implements section104 of the Health Insurance Portability andAccountability Act of 1996 (HIPAA), en-acted on August 21, 1996, and subsequentamendments, and provides that require-ments over which two or more Secretarieshave responsibility (“shared provisions”)must be administered so as to have thesame effect at all times. HIPAA section104 also requires the coordination of poli-cies relating to enforcing the shared pro-visions in order to avoid duplication of en-forcement efforts and to assign priorities inenforcement.

There is no express statement of intentthat nonfederal governmental retiree-onlyplans should be treated differently fromprivate sector plans or that excepted ben-efits offered by nonfederal governmentalplans should be treated differently from ex-cepted benefits offered by private sectorplans. Because treating nonfederal gov-ernmental retiree-only plans and exceptedbenefits provided by nonfederal govern-mental plans differently would create con-fusion with respect to the obligations ofissuers that do not distinguish whether agroup health plan is subject to ERISA orthe PHS Act, and in light of the MOU,the Department of Health and Human Ser-vices (HHS) does not intend to use itsresources to enforce the requirements ofHIPAA or the Affordable Care Act with re-spect to nonfederal governmental retiree-only plans or with respect to excepted ben-

efits provided by nonfederal governmentalplans.

PHS Act section 2723(a)(2) (formerlysection 2722(a)(2)) gives the States pri-mary authority to enforce the PHS Actgroup and individual market provisionsover group and individual health insuranceissuers. HHS enforces these provisionswith respect to issuers only if it determinesthat the State has “failed to substantiallyenforce” one of the Federal provisions.Furthermore, the PHS Act preemptionprovisions allow States to impose re-quirements on issuers in the group andindividual markets that are more protec-tive than the Federal provisions. However,HHS is encouraging States not to applythe provisions of title XXVII of the PHSAct to issuers of retiree-only plans or ofexcepted benefits. HHS advises Statesthat if they do not apply these provisionsto the issuers of retiree-only plans or ofexcepted benefits, HHS will not cite aState for failing to substantially enforcethe provisions of part A of title XXVII ofthe PHS Act in these situations.

Subtitles A and C of title I of theAffordable Care Act amend the re-quirements of title XXVII of the PHSAct (changes to which are incorporatedinto ERISA section 715). The pre-emption provisions of ERISA section731 and PHS Act section 27244 (im-plemented in 29 CFR 2590.731(a) and45 CFR 146.143(a)) apply so that therequirements of part 7 of ERISA andtitle XXVII of PHS Act, as amended bythe Affordable Care Act, are not to be“construed to supersede any provision ofState law which establishes, implements,or continues in effect any standard orrequirement solely relating to healthinsurance issuers in connection with groupor individual health insurance coverageexcept to the extent that such standard orrequirement prevents the application of arequirement” of the Affordable Care Act.Accordingly, State laws that impose onhealth insurance issuers requirements thatare stricter than the requirements imposedby the Affordable Care Act will not besuperseded by the Affordable Care Act.

2 Excepted benefits generally include dental-only and vision-only plans, most health flexible spending arrangements, Medigap policies, and accidental death and dismemberment coverage.For more information on excepted benefits, see 26 CFR 54.9831–1, 29 CFR 2590.732, 45 CFR 146.145, and 45 CFR 148.220.

3 See 64 FR 70164 (December 15, 1999).

4 Code section 9815 incorporates the preemption provisions of PHS Act section 2724. Prior to the Affordable Care Act, there were no express preemption provisions in chapter 100 of theCode.

2010–29 I.R.B. 57 July 19, 2010

The Departments are issuing regula-tions implementing the revised PHS Actsections 2701 through 2719A in severalphases. The first publication in this serieswas a Request for Information relating tothe medical loss ratio provisions of PHSAct section 2718, published in the Fed-eral Register on April 14, 2010 (75 FR19297). The second publication was in-terim final regulations implementing PHSAct section 2714 (requiring dependentcoverage of children to age 26), publishedin the Federal Register on May 13, 2010(T.D. 9482, 2010–22 I.R.B. 698 [75 FR27122]). This document contains interimfinal regulations implementing section1251 of the Affordable Care Act (relatingto grandfathered health plans), as well asadding a cross-reference to these interimfinal regulations in the regulations im-plementing PHS Act section 2714. Theimplementation of other provisions in PHSAct sections 2701 through 2719A will beaddressed in future regulations.

II. Overview of the Regulations:Section 1251 of the AffordableCare Act, Preservation of Right toMaintain Existing Coverage (26 CFR54.9815–1251T, 29 CFR 2590.715–1251,and 45 CFR 147.140)

A. Introduction

Section 1251 of the Affordable CareAct, as modified by section 10103 of theAffordable Care Act and section 2301 ofthe Reconciliation Act, provides that cer-tain group health plans and health insur-ance coverage existing as of March 23,2010 (the date of enactment of the Afford-able Care Act), are subject only to certainprovisions of the Affordable Care Act. Thestatute and these interim final regulationsrefer to these plans and health insurancecoverage as grandfathered health plans.

The Affordable Care Act balances theobjective of preserving the ability of in-dividuals to maintain their existing cov-erage with the goals of ensuring accessto affordable essential coverage and im-proving the quality of coverage. Section1251 provides that nothing in the Afford-able Care Act requires an individual to ter-minate the coverage in which the individ-ual was enrolled on March 23, 2010. Italso generally provides that, with respectto group health plans or health insurance

coverage in which an individual was en-rolled on March 23, 2010, various require-ments of the Act shall not apply to suchplan or coverage, regardless of whetherthe individual renews such coverage af-ter March 23, 2010. However, to ensureaccess to coverage with certain particu-larly significant protections, Congress re-quired grandfathered health plans to com-ply with a subset of the Affordable CareAct’s health reform provisions. Thus, forexample, grandfathered health plans mustcomply with the prohibition on rescissionsof coverage except in the case of fraud orintentional misrepresentation and the elim-ination of lifetime limits (both of whichapply for plan years, or in the individualmarket, policy years, beginning on or afterSeptember 23, 2010). On the other hand,grandfathered health plans are not requiredto comply with certain other requirementsof the Affordable Care Act; for example,the requirement that preventive health ser-vices be covered without any cost sharing(which otherwise becomes generally ap-plicable for plan years, or in the individualmarket, policy years, beginning on or afterSeptember 23, 2010).

A number of additional reforms applyfor plan years (in the individual market,policy years) beginning on or after Jan-uary 1, 2014. As with the requirementseffective for plan years (in the individualmarket, policy years) beginning on or afterSeptember 23, 2010, grandfathered healthplans must then comply with some, but notall of these reforms. See Table 1 in sectionII.D of this preamble for a list of variousrequirements that apply to grandfatheredhealth plans.

In making grandfathered health planssubject to some but not all of the healthreforms contained in the Affordable CareAct, the statute balances its objective ofpreserving the ability to maintain existingcoverage with the goals of expanding ac-cess to and improving the quality of healthcoverage. The statute does not, however,address at what point changes to a grouphealth plan or health insurance coveragein which an individual was enrolled onMarch 23, 2010 are significant enough tocause the plan or health insurance cover-age to cease to be a grandfathered healthplan, leaving that question to be addressedby regulatory guidance.

These interim final regulations are de-signed to ease the transition of the health-

care industry into the reforms establishedby the Affordable Care Act by allowingfor gradual implementation of reformsthrough a reasonable grandfathering rule.A more detailed description of the basisfor these interim final regulations andother regulatory alternatives consideredis included in section IV.B later in thispreamble.

B. Definition of Grandfathered HealthPlan Coverage in Paragraph (a) of26 CFR 54.9815–1251T, 29 CFR2590.715–1251, and 45 CFR 147.140 ofthese Interim Final Regulations

Under the statute and these interimfinal regulations, a group health planor group or individual health insur-ance coverage is a grandfathered healthplan with respect to individuals enrolledon March 23, 2010. Paragraph (a)(1)of 26 CFR 54.9815–1251T, 29 CFR2590.715–1251, and 45 CFR 147.140 ofthese interim final regulations providesthat a group health plan or group healthinsurance coverage does not cease tobe grandfathered health plan coveragemerely because one or more (or even all)individuals enrolled on March 23, 2010cease to be covered, provided that theplan or group health insurance coveragehas continuously covered someone sinceMarch 23, 2010 (not necessarily the sameperson, but at all times at least one person).The determination under the rules ofthese interim final regulations is madeseparately with respect to each benefitpackage made available under a grouphealth plan or health insurance coverage.

Moreover, these interim final regula-tions provide that, subject to the rules ofparagraph (f) of 26 CFR 54.9815–1251T,29 CFR 2590.715–1251, and 45 CFR147.140 for collectively bargained plans,if an employer or employee organiza-tion enters into a new policy, certificate,or contract of insurance after March 23,2010 (because, for example, any pre-vious policy, certificate, or contract ofinsurance is not being renewed), then thatpolicy, certificate, or contract of insur-ance is not a grandfathered health planwith respect to the individuals in thegroup health plan. Any policies sold inthe group and individual health insurancemarkets to new entities or individuals afterMarch 23, 2010 will not be grandfathered

July 19, 2010 58 2010–29 I.R.B.

health plans even if the health insuranceproducts sold to those subscribers wereoffered in the group or individual marketbefore March 23, 2010.

To maintain status as a grandfatheredhealth plan, a plan or health insurancecoverage (1) must include a statement,in any plan materials provided to partic-ipants or beneficiaries (in the individualmarket, primary subscribers) describingthe benefits provided under the plan orhealth insurance coverage, that the plan orhealth insurance coverage believes that itis a grandfathered health plan within themeaning of section 1251 of the AffordableCare Act and (2) must provide contactinformation for questions and complaints.

Model language is provided in these in-terim final regulations that can be used tosatisfy this disclosure requirement. Com-ments are invited on possible improve-ments to the model language of grandfa-thered health plan status. Some have sug-gested, for example, that each grandfa-thered health plan be required to list anddescribe the various consumer protectionsthat do not apply to the plan or health insur-ance coverage because it is grandfathered,together with their effective dates. TheDepartments intend to consider any com-ments regarding possible improvements tothe model language in the near term; anychanges to the model language that mayresult from such comments could be pub-lished in additional administrative guid-ance other than in the form of regulations.

Similarly, under these interim finalregulations, to maintain status as a grand-fathered health plan, a plan or issuer mustalso maintain records documenting theterms of the plan or health insurance cov-erage that were in effect on March 23,2010, and any other documents necessaryto verify, explain, or clarify its status asa grandfathered health plan. Such doc-uments could include intervening andcurrent plan documents, health insur-ance policies, certificates or contracts ofinsurance, summary plan descriptions,documentation of premiums or the cost ofcoverage, and documentation of requiredemployee contribution rates. In addition,the plan or issuer must make such recordsavailable for examination. Accordingly,a participant, beneficiary, individual pol-

icy subscriber, or State or Federal agencyofficial would be able to inspect such doc-uments to verify the status of the plan orhealth insurance coverage as a grandfa-thered health plan. The plan or issuer mustmaintain such records and make themavailable for examination for as long asthe plan or issuer takes the position thatthe plan or health insurance coverage is agrandfathered health plan.

Under the statute and these interim fi-nal regulations, if family members of anindividual who is enrolled in a grandfa-thered health plan as of March 23, 2010enroll in the plan after March 23, 2010, theplan or health insurance coverage is also agrandfathered health plan with respect tothe family members.

C. Adding New Employees in Paragraph(b) of 26 CFR 54.9815–1251T, 29 CFR2590.715–1251, and 45 CFR 147.140 ofthese Interim Final Regulations

These interim final regulations at26 CFR 54.9815–1251T, 29 CFR2590.715–1251, and 45 CFR 147.140 pro-vide that a group health plan that providedcoverage on March 23, 2010 generallyis also a grandfathered health plan withrespect to new employees (whether newlyhired or newly enrolled) and their familieswho enroll in the grandfathered healthplan after March 23, 2010. These interimfinal regulations clarify that in such cases,any health insurance coverage providedunder the group health plan in which an in-dividual was enrolled on March 23, 2010is also a grandfathered health plan. To pre-vent abuse, these interim final regulationsprovide that if the principal purpose of amerger, acquisition, or similar businessrestructuring is to cover new individualsunder a grandfathered health plan, the planceases to be a grandfathered health plan.The goal of this rule is to prevent grand-father status from being bought and soldas a commodity in commercial transac-tions. These interim final regulations alsocontain a second anti-abuse rule designedto prevent a plan or issuer from circum-venting the limits on changes that cause aplan or health insurance coverage to ceaseto be a grandfathered health plan underparagraph (g) (described more fully in

section II.F of this preamble). This rule inparagraph (b)(2)(ii) addresses a situationunder which employees who previouslywere covered by a grandfathered healthplan are transferred to another grandfa-thered health plan. This rule is intended toprevent efforts to retain grandfather statusby indirectly making changes that wouldresult in loss of that status if those changeswere made directly.

D. Applicability of Part A of Title XXVIIof the PHS Act to Grandfathered HealthPlans Paragraphs (c), (d), and (e)of 26 CFR 54.9815–1251T, 29 CFR2590.715–1251, and 45 CFR 147.140 ofthese Interim Final Regulations

A grandfathered health plan generallyis not subject to subtitles A and C of titleI of the Affordable Care Act, except asspecifically provided by the statute andthese interim final regulations. The statuteand these interim final regulations providethat some provisions of subtitles A and Cof title I of the Affordable Care Act con-tinue to apply to all grandfathered healthplans and some provisions continue to ap-ply only to grandfathered health plans thatare group health plans. These interim finalregulations clarify that a grandfatheredhealth plan must continue to comply withthe requirements of the PHS Act, ERISA,and the Code that were applicable priorto the changes enacted by the AffordableCare Act, except to the extent supplantedby changes made by the Affordable CareAct. Therefore, the HIPAA portability andnondiscrimination requirements and theGenetic Information NondiscriminationAct requirements applicable prior to theeffective date of the Affordable Care Actcontinue to apply to grandfathered healthplans. In addition, the mental health parityprovisions, the Newborns’ and Moth-ers’ Health Protection Act provisions, theWomen’s Health and Cancer Rights Act,and Michelle’s Law continue to apply tograndfathered health plans. The followingtable lists the new health coverage reformsin part A of title XXVII of the PHS Act(as amended by the Affordable Care Act)that apply to grandfathered health plans:

2010–29 I.R.B. 59 July 19, 2010

TABLE 1.—List of the New Health Reform Provisions of Part A of Title XXVII of the PHS Act that Apply to GrandfatheredHealth Plans

PHS Act Statutory Provisions Application to Grandfathered Health Plans

§2704 Prohibition of preexisting condition exclusion or otherdiscrimination based on health status

Applicable to grandfathered group health plans and grouphealth insurance coverage.

Not applicable to grandfathered individual health insurancecoverage.

§2708 Prohibition on excessive waiting periods Applicable

§2711 No lifetime or annual limits Lifetime limits: Applicable

Annual limits: Applicable to grandfathered group healthplans and group health insurance coverage; not applicable tograndfathered individual health insurance coverage.

§2712 Prohibition on rescissions Applicable

§2714 Extension of dependent coverage until age 26 Applicable5

§2715 Development and utilization of uniform explanation ofcoverage documents and standardized definitions

Applicable

§2718 Bringing down cost of health care coverage (for insuredcoverage)

Applicable to insured grandfathered health plans.

E. Health Insurance Coverage MaintainedPursuant to a Collective BargainingAgreement of Paragraph (f) of 26 CFR54.9815–1251T, 29 CFR 2590.715–1251,and 45 CFR 147.140 of these InterimFinal Regulations

In paragraph (f) of 26 CFR54.9815–1251T, 29 CFR 2590.715–1251,and 45 CFR 147.140, these interim finalregulations provide that in the case ofhealth insurance coverage maintainedpursuant to one or more collectivebargaining agreements ratified beforeMarch 23, 2010, the coverage is agrandfathered health plan at least untilthe date on which the last agreementrelating to the coverage that was in effecton March 23, 2010 terminates. Thus,before the last of the applicable collectivebargaining agreement terminates, anyhealth insurance coverage providedpursuant to the collective bargainingagreements is a grandfathered health plan,even if there is a change in issuers (orany other change described in paragraph(g)(1) of 26 CFR 54.9815–1251T,29 CFR 2590.715–1251, and 45 CFR147.140 of these interim final regulations)

during the period of the agreement. Thestatutory language of the provision referssolely to “health insurance coverage”and does not refer to a group healthplan; therefore, these interim finalregulations apply this provision only toinsured plans maintained pursuant to acollective bargaining agreement and notto self-insured plans. After the date onwhich the last of the collective bargainingagreements terminates, the determinationof whether health insurance coveragemaintained pursuant to a collectivebargaining agreement is grandfatheredhealth plan coverage is made under therules of paragraph (g). This determinationis made by comparing the terms of thecoverage on the date of determinationwith the terms of the coverage that werein effect on March 23, 2010. A change inissuers during the period of the agreement,by itself, would not cause the plan tocease to be a grandfathered health planat the termination of the agreement.However, for a change in issuers afterthe termination of the agreement, therules of paragraph (a)(1)(ii) of 26 CFR54.9815–1251T, 29 CFR 2590.715–1251,

and 45 CFR 147.140 of these interim finalregulations apply.

Similar language to section 1251(d) inrelated bills that were not enacted wouldhave provided a delayed effective date forcollectively bargained plans with respectto the Affordable Care Act requirements.Questions have arisen as to whether sec-tion 1251(d) as enacted in the AffordableCare Act similarly operated to delay theapplication of the Affordable Care Act’srequirements to collectively bargainedplans — specifically, whether the pro-vision of section 1251(d) that exemptscollectively bargained plans from require-ments for the duration of the agreementeffectively provides the plans with a de-layed effective date with respect to all newPHS Act requirements (in contrast to therules for grandfathered health plans whichprovide that specified PHS Act provisionsapply to all plans, including grandfatheredhealth plans). However, the statutory lan-guage that applies only to collectivelybargained plans, as signed into law aspart of the Affordable Care Act, providesthat insured collectively bargained plansin which individuals were enrolled onthe date of enactment are included in the

5 For a group health plan or group health insurance coverage that is a grandfathered health plan for plan years beginning before January 1, 2014, PHS Act section 2714 is applicable in thecase of an adult child only if the adult child is not eligible for other employer-sponsored health plan coverage. The interim final regulations relating to PHS Act section 2714, published in75 FR 27122 (May 13, 2010), and these interim final regulations clarify that, in the case of an adult child who is eligible for coverage under the employer-sponsored plans of both parents,neither parent’s plan may exclude the adult child from coverage based on the fact that the adult child is eligible to enroll in the other parent’s employer-sponsored plan.

July 19, 2010 60 2010–29 I.R.B.

definition of a grandfathered health plan.Therefore, collectively bargained plans(both insured and self-insured) that aregrandfathered health plans are subject tothe same requirements as other grandfa-thered health plans, and are not providedwith a delayed effective date for PHS Actprovisions with which other grandfatheredhealth plans must comply. Thus, the pro-visions that apply to grandfathered healthplans apply to collectively bargained plansbefore and after termination of the last ofthe applicable collective bargaining agree-ment.

F. Maintenance of Grandfather Status ofParagraph (g) of 26 CFR 54.9815–1251T,29 CFR 2590.715–1251, and 45CFR 147.140 of these Interim FinalRegulations)

Questions have arisen regarding the ex-tent to which changes can be made to aplan or health insurance coverage and stillhave the plan or coverage considered thesame as that in existence on March 23,2010, so as to maintain status as a grandfa-thered health plan. Some have suggestedthat any change would cause a plan orhealth insurance coverage to be considereddifferent and thus cease to be a grandfa-thered health plan. Others have suggestedthat any degree of change, no matter howlarge, is irrelevant provided the plan orhealth insurance coverage can trace somecontinuous legal relationship to the plan orhealth insurance coverage that was in ex-istence on March 23, 2010.

In paragraph (g)(1) of 26 CFR54.9815–1251T, 29 CFR 2590.715–1251,and 45 CFR 147.140 of these interim finalregulations, coordinated rules are set forthfor determining when changes to the termsof a plan or health insurance coveragecause the plan or coverage to cease to bea grandfathered health plan. The first ofthose rules (in paragraph (g)(1)(i)) con-strains the extent to which the scope ofbenefits can be reduced. It provides thatthe elimination of all or substantially allbenefits to diagnose or treat a particularcondition causes a plan or health insurancecoverage to cease to be a grandfatheredhealth plan. If, for example, a plan elim-inates all benefits for cystic fibrosis, theplan ceases to be a grandfathered healthplan (even though this condition may af-

fect relatively few individuals coveredunder the plan). Moreover, for purposesof paragraph (g)(1)(i), the elimination ofbenefits for any necessary element to di-agnose or treat a condition is consideredthe elimination of all or substantially allbenefits to diagnose or treat a particularcondition. An example in these interimfinal regulations illustrates that if a planprovides benefits for a particular mentalhealth condition, the treatment for which isa combination of counseling and prescrip-tion drugs, and subsequently eliminatesbenefits for counseling, the plan is treatedas having eliminated all or substantially allbenefits for that mental health condition.

A second set of rules (in paragraphs(g)(1)(ii) through (g)(1)(iv)) limits the ex-tent to which plans and issuers can in-crease the fixed-amount and the percent-age cost-sharing requirements that are im-posed with respect to individuals for cov-ered items and services. Plans and issuerscan choose to make larger increases tofixed-amount or percentage cost-sharingrequirements than permissible under theseinterim final regulations, but at that pointthe individual’s plan or health insurancecoverage would cease to be grandfatheredhealth plan coverage. A more detailed de-scription of the basis for the cost-sharingrequirements in these interim final regula-tions is included in section IV.B later in thispreamble.

These interim final regulations pro-vide different standards with respect tocoinsurance and fixed-amount cost shar-ing. Coinsurance automatically rises withmedical inflation. Therefore, changes tothe level of coinsurance (such as movingfrom a requirement that the patient pay20 percent to a requirement that the pa-tient pay 30 percent of inpatient surgerycosts) would significantly alter the levelof benefits provided. On the other hand,fixed-amount cost-sharing requirements(such as copayments and deductibles)do not take into account medical infla-tion. Therefore, changes to fixed-amountcost-sharing requirements (for example,moving from a $35 copayment to a $40copayment for outpatient doctor visits)may be reasonable to keep up with therising cost of medical items and services.Accordingly, paragraph (g)(1)(ii) providesthat any increase in a percentage cost-shar-

ing requirement (such as coinsurance)causes a plan or health insurance coverageto cease to be a grandfathered health plan.

With respect to fixed-amount cost-shar-ing requirements, paragraph (g)(1)(iii)provides two rules: a rule for cost-shar-ing requirements other than copaymentsand a rule for copayments. Fixed-amountcost-sharing requirements include, forexample, a $500 deductible, a $30 co-payment, or a $2,500 out-of-pocket limit.With respect to fixed-amount cost-sharingrequirements other than copayments, aplan or health insurance coverage ceasesto be a grandfathered health plan if thereis an increase, since March 23, 2010, ina fixed-amount cost-sharing requirementthat is greater than the maximum percent-age increase. The maximum percentageincrease is defined as medical inflation(from March 23, 2010) plus 15 percentagepoints. For this purpose, medical inflationis defined in these interim final regula-tions by reference to the overall medicalcare component of the Consumer Price In-dex for All Urban Consumers, unadjusted(CPI), published by the Department ofLabor. For fixed-amount copayments, aplan or health insurance coverage ceasesto be a grandfathered health plan if thereis an increase since March 23, 2010 in thecopayment that exceeds the greater of (A)the maximum percentage increase or (B)five dollars increased by medical inflation.A more detailed description of the basisfor these rules relating to cost-sharingrequirements is included in section IV.Blater in this preamble.

With respect to employer contributions,these interim final regulations include astandard for changes that would result incessation of grandfather status. Specifi-cally, paragraph (g)(1)(v) limits the abilityof an employer or employee organizationto decrease its contribution rate for cov-erage under a group health plan or grouphealth insurance coverage. Two differentsituations are addressed. First, if the con-tribution rate is based on the cost of cov-erage, a group health plan or group healthinsurance coverage ceases to be a grandfa-thered health plan if the employer or em-ployee organization decreases its contribu-tion rate towards the cost of any tier ofcoverage for any class of similarly situ-ated individuals6 by more than 5 percent-

6 Similarly situated individuals are described in the HIPAA nondiscrimination regulations at 26 CFR 54.9802–1(d), 29 CFR 2590.702(d), and 45 CFR 146.121(d).

2010–29 I.R.B. 61 July 19, 2010

age points below the contribution rate onMarch 23, 2010. For this purpose, con-tribution rate is defined as the amount ofcontributions made by an employer or em-ployee organization compared to the to-tal cost of coverage, expressed as a per-centage. These interim final regulationsprovide that total cost of coverage is de-termined in the same manner as the ap-plicable premium is calculated under theCOBRA continuation provisions of sec-tion 604 of ERISA, section 4980B(f)(4) ofthe Code, and section 2204 of the PHS Act.In the case of a self-insured plan, contribu-tions by an employer or employee organ-ization are calculated by subtracting theemployee contributions towards the totalcost of coverage from the total cost of cov-erage. Second, if the contribution rate isbased on a formula, such as hours workedor tons of coal mined, a group health planor group health insurance coverage ceasesto be a grandfathered health plan if the em-ployer or employee organization decreasesits contribution rate towards the cost of anytier of coverage for any class of similarlysituated individuals by more than 5 percentbelow the contribution rate on March 23,2010.

Finally, paragraph (g)(1)(vi) addressesthe imposition of a new or modified an-nual limit by a plan, or group or individualhealth insurance coverage.7 Three differ-ent situations are addressed:

• A plan or health insurance coveragethat, on March 23, 2010, did not im-pose an overall annual or lifetimelimit on the dollar value of all benefitsceases to be a grandfathered healthplan if the plan or health insurancecoverage imposes an overall annuallimit on the dollar value of benefits.

• A plan or health insurance coverage,that, on March 23, 2010, imposedan overall lifetime limit on the dollarvalue of all benefits but no overallannual limit on the dollar value of allbenefits ceases to be a grandfatheredhealth plan if the plan or health insur-ance coverage adopts an overall annuallimit at a dollar value that is lower thanthe dollar value of the lifetime limit onMarch 23, 2010.

• A plan or health insurance coveragethat, on March 23, 2010, imposed anoverall annual limit on the dollar valueof all benefits ceases to be a grandfa-thered health plan if the plan or healthinsurance coverage decreases the dol-lar value of the annual limit (regardlessof whether the plan or health insurancecoverage also imposed an overall life-time limit on March 23, 2010 on thedollar value of all benefits).

Under these interim final regula-tions, changes other than the changes de-scribed in 26 CFR 54.9815–1251T(g)(1),29 CFR 2590.715–1251(g)(1), and45 CFR 147.140(g)(1) will not cause a planor coverage to cease to be a grandfatheredhealth plan. Examples include changes topremiums, changes to comply with Federalor State legal requirements, changes tovoluntarily comply with provisions ofthe Affordable Care Act, and changingthird party administrators, provided thesechanges are made without exceeding thestandards established by paragraph (g)(1).

These interim final regulations providetransitional rules for plans and issuers thatmade changes after the enactment of theAffordable Care Act pursuant to a legallybinding contract entered into prior to en-actment, made changes to the terms ofhealth insurance coverage pursuant to a fil-ing before March 23, 2010 with a State in-surance department, or made changes pur-suant to written amendments to a plan thatwere adopted prior to March 23, 2010.If a plan or issuer makes changes in anyof these situations, the changes are effec-tively considered part of the plan terms onMarch 23, 2010 even though they are notthen effective. Therefore, such changesare not taken into account in consideringwhether the plan or health insurance cov-erage remains a grandfathered health plan.

Because status as a grandfatheredhealth plan under section 1251 of the Af-fordable Care Act is determined in relationto coverage on March 23, 2010, the dateof enactment of the Affordable Care Act,the Departments considered whether theyshould provide a good faith complianceperiod from Departmental enforcementuntil guidance regarding the standards formaintaining grandfather status was made

available to the public. Group health plansand health insurance issuers often makeroutine changes from year to year, andsome plans and issuers may have neededto implement such changes prior to theissuance of these interim final regulations.

Accordingly, for purposes of enforce-ment, the Departments will take intoaccount good-faith efforts to comply witha reasonable interpretation of the statutoryrequirements and may disregard changesto plan and policy terms that only modestlyexceed those changes described in para-graph (g)(1) of 26 CFR 54.9815–1251T,29 CFR 2590.715–1251, and 45 CFR147.140 and that are adopted before June14, 2010, the date the regulations weremade publicly available.

In addition, these interim final reg-ulations provide employers and issuerswith a grace period within which to re-voke or modify any changes adoptedprior to June 14, 2010, where the changesmight otherwise cause the plan or healthinsurance coverage to cease to be agrandfathered health plan. Under thisrule, grandfather status is preserved if thechanges are revoked, and the plan or healthinsurance coverage is modified, effectiveas of the first day of the first plan or policyyear beginning on or after September 23,2010 to bring the terms within the limitsfor retaining grandfather status in theseinterim final regulations. For this purpose,and for purposes of the reasonable goodfaith standard changes will be consideredto have been adopted before these interimfinal regulations are publicly available ifthe changes are effective before that date,the changes are effective on or after thatdate pursuant to a legally binding contractentered into before that date, the changesare effective on or after that date pursuantto a filing before that date with a Stateinsurance department, or the changes areeffective on or after that date pursuant towritten amendments to a plan that wereadopted before that date.

While the Departments have deter-mined that the changes identified in para-graph (g)(1) of these interim final regula-tions would cause a group health plan orhealth insurance coverage to cease to bea grandfathered health plan, the Depart-ments invite comments from the public on

7 Independent of these rules regarding the impact on grandfather status of newly adopted or reduced annual limits, group health plans and group or individual health insurance coverage(other than individual health insurance policies that are grandfathered health plans) are required to comply with PHS Act section 2711, which permits restricted annual limits (as defined inregulations) until 2014. The Departments expect to publish regulations regarding restricted annual limits in the very near future.

July 19, 2010 62 2010–29 I.R.B.

whether this list of changes is appropriateand what other changes, if any, should beadded to this list. Specifically, the De-partments invite comments on whether thefollowing changes should result in ces-sation of grandfathered health plan statusfor a plan or health insurance coverage:(1) changes to plan structure (such asswitching from a health reimbursementarrangement to major medical coverage orfrom an insured product to a self-insuredproduct); (2) changes in a network plan’sprovider network, and if so, what magni-tude of changes would have to be made;(3) changes to a prescription drug formu-lary, and if so, what magnitude of changeswould have to be made; or (4) any othersubstantial change to the overall benefitdesign. In addition, the Departments in-vite comments on the specific standardsincluded in these interim final regulationson benefits, cost sharing, and employercontributions. The Departments specifi-cally invite comments on whether thesestandards should be drawn differently inlight of the fact that changes made by theAffordable Care Act may alter plan orissuer practices in the next several years.Any new standards published in the finalregulations that are more restrictive thanthese interim final regulations would onlyapply prospectively to changes to plans orhealth insurance coverage after the publi-cation of the final rules.

Moreover, the Departments may issue,as appropriate, additional administrativeguidance other than in the form of reg-ulations to clarify or interpret the rulescontained in these interim final regula-tions for maintaining grandfathered healthplan status prior to the issuance of finalregulations. The ability to issue prompt,clarifying guidance is especially importantgiven the uncertainty as to how plans orissuers will alter their plans or policies inresponse to these rules. This guidance canaddress unanticipated changes by plansand issuers to ensure that individuals ben-efit from the Affordable Care Act’s newhealth care protections while preservingthe ability to maintain the coverage indi-viduals had on the date of enactment.

III. Interim Final Regulations andRequest for Comments

Section 9833 of the Code, section 734of ERISA, and section 2792 of the PHS

Act authorize the Secretaries of the Trea-sury, Labor, and HHS (collectively, theSecretaries) to promulgate any interim fi-nal rules that they determine are appropri-ate to carry out the provisions of chapter100 of the Code, part 7 of subtitle B of ti-tle I of ERISA, and part A of title XXVII ofthe PHS Act, which include PHS Act sec-tions 2701 through 2728 and the incorpo-ration of those sections into ERISA section715 and Code section 9815. The rules setforth in these interim final regulations gov-ern the applicability of the requirements inthese sections and are therefore appropri-ate to carry them out. Therefore, the fore-going interim final rule authority applies tothese interim final regulations.

In addition, under Section 553(b) ofthe Administrative Procedure Act (APA)(5 U.S.C. 551 et seq.) a general noticeof proposed rulemaking is not requiredwhen an agency, for good cause, finds thatnotice and public comment thereon areimpracticable, unnecessary, or contraryto the public interest. The provisions ofthe APA that ordinarily require a noticeof proposed rulemaking do not apply herebecause of the specific authority grantedby section 9833 of the Code, section 734of ERISA, and section 2792 of the PHSAct. However, even if the APA were ap-plicable, the Secretaries have determinedthat it would be impracticable and con-trary to the public interest to delay puttingthe provisions in these interim final reg-ulations in place until a full public noticeand comment process was completed.As noted above, numerous provisions ofthe Affordable Care Act are applicablefor plan years (in the individual mar-ket, policy years) beginning on or afterSeptember 23, 2010, six months after dateof enactment. Grandfathered health plansare exempt from many of these provisionswhile group health plans and group andindividual health insurance coverage thatare not grandfathered health plans mustcomply with them. The determinationof whether a plan or health insurancecoverage is a grandfathered health plantherefore could substantially affect thedesign of the plan or health insurancecoverage.

The six-month period between the en-actment of the Affordable Care Act andthe applicability of many of the provisionsaffected by grandfather status would notallow sufficient time for the Departments

to draft and publish proposed regulations,receive and consider comments, and draftand publish final regulations. Moreover,regulations are needed well in advanceof the effective date of the requirementsof the Affordable Care Act. Many grouphealth plans and health insurance cov-erage that are not grandfathered healthplans must make significant changes intheir provisions to comply with the re-quirements of the Affordable Care Act.Moreover, plans and issuers consideringother modifications to their terms need toknow whether those modifications willaffect their status as grandfathered healthplans. Accordingly, in order to allowplans and health insurance coverage tobe designed and implemented on a timelybasis, regulations must be published andavailable to the public well in advance ofthe effective date of the requirements ofthe Affordable Care Act. It is not possibleto have a full notice and comment processand to publish final regulations in the brieftime between enactment of the Afford-able Care Act and the date regulations areneeded.

The Secretaries further find that is-suance of proposed regulations would notbe sufficient because the provisions of theAffordable Care Act protect significantrights of plan participants and beneficia-ries and individuals covered by individualhealth insurance policies and it is essentialthat participants, beneficiaries, insureds,plan sponsors, and issuers have certaintyabout their rights and responsibilities.Proposed regulations are not binding andcannot provide the necessary certainty.By contrast, the interim final regulationsprovide the public with an opportunity forcomment, but without delaying the effec-tive date of the regulations.

For the foregoing reasons, the Depart-ments have determined that it is imprac-ticable and contrary to the public interestto engage in full notice and comment rule-making before putting these regulationsinto effect, and that it is in the public inter-est to promulgate interim final regulations.

2010–29 I.R.B. 63 July 19, 2010

IV. Economic Impact and PaperworkBurden

A. Overview-Department of Laborand Department of Health and HumanServices

As stated earlier in this preamble, theseinterim final regulations implement sec-tion 1251 of the Affordable Care Act, asmodified by section 10103 of the Afford-able Care Act and section 2301 of the Rec-onciliation Act. Pursuant to section 1251,certain provisions of the Affordable CareAct do not apply to a group health plan orhealth insurance coverage in which an in-dividual was enrolled on March 23, 2010(a grandfathered health plan).8 The statuteand these interim final regulations allowfamily members of individuals already en-rolled in a grandfathered health plan to en-roll in the plan after March 23, 2010; insuch cases, the plan or coverage is alsoa grandfathered health plan with respectto the family members. New employees(whether newly hired or newly enrolled)and their families can enroll in a grandfa-thered group health plan after March 23,2010 without affecting status as a grandfa-thered health plan.9

As addressed earlier in this preamble,and further discussed below, these interimfinal regulations include rules for deter-mining whether changes to the terms of agrandfathered health plan made by issuersand plan sponsors allow the plan or healthinsurance coverage to remain a grandfa-thered health plan. These rules are the pri-mary focus of this regulatory impact anal-ysis.

The Departments have quantified theeffects where possible and provided a qual-itative discussion of the economic effectsand some of the transfers and costs thatmay result from these interim final regu-lations.

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

Under Executive Order 12866 (58 FR51735), “significant” regulatory actionsare subject to review by the Office ofManagement and Budget (OMB). Section3(f) of the Executive Order defines a “sig-nificant regulatory action” as an actionthat is likely to result in a rule (1) havingan annual effect on the economy of $100million or more in any one year, or ad-versely and materially affecting a sectorof the economy, productivity, competi-tion, jobs, the environment, public healthor safety, or State, local or tribal govern-ments or communities (also referred to as“economically significant”); (2) creatinga serious inconsistency or otherwise inter-fering with an action taken or planned byanother agency; (3) materially altering thebudgetary impacts of entitlement grants,user fees, or loan programs or the rightsand obligations of recipients thereof; or (4)raising novel legal or policy issues aris-ing out of legal mandates, the President’spriorities, or the principles set forth in theExecutive Order. OMB has determinedthat this regulation is economically signif-icant within the meaning of section 3(f)(1)of the Executive Order, because it is likelyto have an annual effect on the economy of$100 million in any one year. Accordingly,OMB has reviewed these rules pursuantto the Executive Order. The Departmentsprovide an assessment of the potentialcosts, benefits, and transfers associatedwith these interim final regulations below.The Departments invite comments on thisassessment and its conclusions.

1. Need for Regulatory Action

As discussed earlier in this preamble,Section 1251 of the Affordable Care Act,as modified by section 10103 of the Af-fordable Care Act and section 2301 of theReconciliation Act, provides that grand-fathered health plans are subject only tocertain provisions of the Affordable Care

Act. The statute, however, is silent re-garding changes plan sponsors and issuerscan make to plans and health insurancecoverage while retaining grandfather sta-tus. These interim final regulations arenecessary in order to provide rules thatplan sponsors and issuers can use to de-termine which changes they can make tothe terms of the plan or health insurancecoverage while retaining their grandfatherstatus, thus exempting them from certainprovisions of the Affordable Care Act andfulfilling a goal of the legislation, whichis to allow those that like their healthcareto keep it. These interim final regulationsare designed to allow individuals who wishto maintain their current health insuranceplan to do so, to reduce short term disrup-tions in the market, and to ease the transi-tion to market reforms that phase in overtime.

In drafting this rule, the Departments at-tempted to balance a number of competinginterests. For example, the Departmentssought to provide adequate flexibility toplan sponsors and issuers to ease transitionand mitigate potential premium increaseswhile avoiding excessive flexibility thatwould conflict with the goal of permit-ting individuals who like their healthcareto keep it and might lead to longer termmarket segmentation as the least costlyplans remain grandfathered the longest.In addition, the Departments recognizedthat many plan sponsors and issuers makechanges to the terms of plans or healthinsurance coverage on an annual basis:premiums fluctuate, provider networksand drug formularies change, employerand employee contributions and cost-shar-ing change, and covered items and servicesmay vary. Without some ability to makesome adjustments while retaining grand-father status, the ability of individuals tomaintain their current coverage would befrustrated, because most plans or healthinsurance coverage would quickly ceaseto be regarded as the same group healthplan or health insurance coverage in ex-istence on March 23, 2010. At the same

8 The Affordable Care Act adds section 715(a)(1) to ERISA and section 9815(a)(1) to the Code to incorporate the provisions of part A of title XXVII of the PHS Act into ERISA and the Code,and make them applicable to group health plans, and health insurance issuers providing health insurance coverage in connection with group health plans. The PHS Act sections incorporatedby this reference are sections 2701 through 2728. PHS Act sections 2701 through 2719A are substantially new, though they incorporate some provisions of prior law. PHS Act sections 2722through 2728 are sections of prior law renumbered, with some, mostly minor, changes. Section 1251 of the Affordable Care Act, as modified by section 10103 of the Affordable Care Act andsection 2301 of the Reconciliation Act, specifies that certain plans or coverage existing as of the date of enactment (that is, grandfathered health plans) are only subject to certain provisions.

9 For individuals who have coverage through an insured group health plans subject to a collective bargaining agreement ratified before March 23, 2010, an individual’s coverage is grandfa-thered at least until the date on which the last agreement relating to the coverage that was in effect on March 23, 2010, terminates. These collectively bargained plans may make any permissiblechanges to the benefit structure before the agreement terminates and remain grandfathered. After the termination date, grandfather status will be determined by comparing the plan, as it existedon March 23, 2010 to the changes that the plan made before termination under the rules established by these interim final regulations.

July 19, 2010 64 2010–29 I.R.B.

time, allowing unfettered changes whileretaining grandfather status would alsobe inconsistent with Congress’s intent topreserve coverage that was in effect onMarch 23, 2010.

Therefore, as further discussed be-low, these interim final regulations aredesigned, among other things, to takeinto account reasonable changes routinelymade by plan sponsors or issuers withoutthe plan or health insurance coverage re-linquishing its grandfather status so thatindividuals can retain the ability to remainenrolled in the coverage in which theywere enrolled on March 23, 2010. Thus,for example, these interim final regula-tions generally permit plan sponsors andissuers to make voluntary changes to in-crease benefits, to conform to requiredlegal changes, and to adopt voluntarilyother consumer protections in the Afford-able Care Act.

2. Regulatory Alternatives

Section 6(a)(3)(C)(iii) of Executive Or-der 12866 requires an economically sig-nificant regulation to include an assess-ment of the costs and benefits of poten-tially effective and reasonable alternativesto the planned regulation, and an explana-tion of why the planned regulatory actionis preferable to the potential alternatives.The alternatives considered by the Depart-ments fall into two general categories: per-missible changes to cost sharing and ben-efits. The discussion below addresses theconsidered alternatives in each category.

The Departments considered allowinglooser cost-sharing requirements, such as25 percent plus medical inflation. How-ever, the data analysis led the Departmentsto believe that the cost-sharing windowsprovided in these interim final regula-tions permit enough flexibility to enable asmooth transition in the group market overtime, and further widening this windowwas not necessary and could conflict withthe goal of allowing those who like theirhealthcare to keep it.

Another alternative the Departmentsconsidered was an annual allowance forcost-sharing increases above medicalinflation, as opposed to the one-time al-lowance of 15 percent above medicalinflation. An annual margin of 15 per-cent above medical inflation, for example,would permit plans to increase cost sharing

by medical inflation plus 15 percent everyyear. The Departments concluded thatthe effect of the one-time allowance (15percent of the original, date-of-enactmentlevel plus medical inflation) would dimin-ish over time insofar as it would representa diminishing fraction of the total level ofcost sharing with the cumulative effectsof medical inflation over time. Accord-ingly, the one-time allowance would betterreflect (i) the potential need of grandfa-thered health plans to make adjustmentsin the near term to reflect the requirementthat they comply with the market reformsthat apply to grandfathered health plans inthe near term as well as (ii) the prospectthat, for many plans and health insurancecoverage, the need to recover the costs ofcompliance in other ways will diminishin the medium term, in part because ofthe changes that will become effective in2014 and in part because of the additionaltime plan sponsors and issuers will haveto make gradual adjustments that take intoaccount the market reforms that are due totake effect in later years.

The Departments considered establish-ing an overall prohibition against changesthat, in the aggregate, or cumulatively overtime, render the plan or coverage substan-tially different than the plan or coveragethat existed on March 23, 2010, or furtherdelineating other examples of changes thatcould cause a plan to relinquish grandfa-ther status. This kind of “substantially dif-ferent” standard would have captured sig-nificant changes not anticipated in the in-terim final regulation. However, it wouldrely on a “facts and circumstances” anal-ysis in defining “substantially different”or “significant changes,” which would beless transparent and result in greater un-certainty about the status of a health plan.That, in turn, could hinder plan sponsor orissuer decisions as well as enrollee under-standing of what protections apply to theircoverage.

An actuarial equivalency standard wasanother considered option. Such a stan-dard would allow a plan or health insur-ance coverage to retain status as a grandfa-thered health plan if the actuarial value ofthe coverage remains in approximately thesame range as it was on March 23, 2010.However, under such a standard, a plancould make fundamental changes to thebenefit design, potentially conflicting withthe goal of allowing those who like their

healthcare to keep it, and still retain grand-father status. Moreover, the complexity in-volved in defining and determining actuar-ial value for these purposes, the likelihoodof varying methodologies for determiningsuch value unless the Departments pro-mulgated very detailed prescriptive rules,and the costs of administering and ensur-ing compliance with such rules led the De-partments to reject that approach.

Another alternative was a requirementthat employers continue to contribute thesame dollar amount they were contributingfor the period including March 23, 2010,plus an inflation component. However,the Departments were concerned that thisapproach would not provide enough flex-ibility to accommodate the year-to-yearvolatility in premiums that can result fromchanges in some plans’ covered popula-tions or other factors.

The Departments also consideredwhether a change in third party administra-tor by a self-insured plan should cause theplan to relinquish grandfather status. TheDepartments decided that such a changewould not necessarily cause the plan tobe so different from the plan in effect onMarch 23, 2010 that it should be requiredto relinquish grandfather status.

After careful consideration, the De-partments opted against rules that wouldrequire a plan sponsor or issuer to re-linquish its grandfather status if onlyrelatively small changes are made to theplan. The Departments concluded thatplan sponsors and issuers of grandfatheredhealth plans should be permitted to takesteps within the boundaries of the grandfa-ther definition to control costs, includinglimited increases in cost-sharing and otherplan changes not prohibited by these in-terim final regulations. As noted earlier,deciding to relinquish grandfather statusis a one-way sorting process: after someperiod of time, more plans will relinquishtheir grandfather status. These interimfinal regulations will likely influence plansponsors’ decisions to relinquish grandfa-ther status.

3. Discussion of Regulatory Provisions

As discussed earlier in this preamble,these interim final regulations provide thata group health plan or health insurancecoverage no longer will be considered a

2010–29 I.R.B. 65 July 19, 2010

grandfathered health plan if a plan spon-sor or an issuer:

• Eliminates all or substantially all ben-efits to diagnose or treat a particularcondition. The elimination of benefitsfor any necessary element to diagnoseor treat a condition is considered theelimination of all or substantially allbenefits to diagnose or treat a particu-lar condition;

• Increases a percentage cost-sharing re-quirement (such as coinsurance) abovethe level at which it was on March 23,2010;

• Increases fixed-amount cost-sharingrequirements other than copayments,such as a $500 deductible or a $2,500out-of-pocket limit, by a total percent-age measured from March 23, 2010that is more than the sum of medicalinflation and 15 percentage points.10

• Increases copayments by an amountthat exceeds the greater of: a totalpercentage measured from March 23,

2010 that is more than the sum of medi-cal inflation plus 15 percentage points,or $5 increased by medical inflationmeasured from March 23, 2010;

• For a group health plan or group healthinsurance coverage, an employer oremployee organization decreases itscontribution rate by more than fivepercentage points below the contribu-tion rate on March 23, 2010; or

• With respect to annual limits (1) agroup health plan, or group or indi-vidual health insurance coverage, that,on March 23, 2010, did not impose anoverall annual or lifetime limit on thedollar value of all benefits imposes anoverall annual limit on the dollar valueof benefits; (2) a group health plan, orgroup or individual health insurancecoverage, that, on March 23, 2010,imposed an overall lifetime limit onthe dollar value of all benefits but nooverall annual limit on the dollar valueof all benefits adopts an overall annuallimit at a dollar value that is lower than

the dollar value of the lifetime limit onMarch 23, 2010; or (3) a group healthplan, or group or individual health in-surance coverage, that, on March 23,2010, imposed an overall annual limiton the dollar value of all benefits de-creases the dollar value of the annuallimit (regardless of whether the planor health insurance coverage also im-poses an overall lifetime limit on thedollar value of all benefits).

Table 1, in section II.D of this preamble,lists the relevant Affordable Care Act pro-visions that apply to grandfathered healthplans.

In accordance with OMB CircularA–4,11 Table 2 below depicts an account-ing statement showing the Departments’assessment of the benefits, costs, andtransfers associated with this regulatoryaction. In accordance with Executive Or-der 12866, the Departments believe thatthe benefits of this regulatory action jus-tify the costs.

TABLE 2.—Accounting Table

BenefitsQualitative: These interim final regulations provide plans with guidance about the requirements for retaining grandfather status.Non-grandfathered plans are required to offer coverage with minimum benefit standards and patient protections as required bythe Affordable Care Act, while grandfathered plans are required only to comply with certain provisions. The existence ofgrandfathered health plans will provide individuals with the benefits of plan continuity, which may have a high value to some. Inaddition, grandfathering could potentially slow the rate of premium growth, depending on the extent to which their current plandoes not include the benefits and protections of the new law. It could also provide incentives to employers to continue coverage,potentially reducing new Medicaid enrollment and spending and lowering the number of uninsured individuals. These interimfinal regulations also provide greater certainty for plans and issuers about what changes they can make without affecting theirgrandfather status. As compared with alternative approaches, these regulations provide significant economic and noneconomicbenefits to both issuers and beneficiaries, though these benefits cannot be quantified at this time.

CostsLow-endEstimate

Mid-rangeEstimate

High-endEstimate

YearDollar

DiscountRate

PeriodCovered

Annualized 22.0 25.6 27.9 2010 7% 2011–2013

Monetized

($millions/year) 21.2 24.7 26.9 2010 3% 2011–2013

Monetized costs are due to a requirement to notify participants and beneficiaries of a plan’s grandfather status and maintain plandocuments to verify compliance with these interim final regulation’s requirements to retain grandfather status.Qualitative: Limitations on cost-sharing increases imposed by these interim final regulations could result in the cost of somegrandfathered health plans increasing more (or decreasing less) than they otherwise would. This increased cost may encouragesome sponsors and issuers to replace their grandfathered health plans with new, non-grandfathered ones. Market segmentation(adverse selection) due to the decision of higher risk plans to relinquish grandfathering could cause premiums in the exchanges tobe higher than they would have been absent grandfathering.

10 Medical inflation is defined in these interim regulations by reference to the overall medical care component of the CPI.

11 Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.

July 19, 2010 66 2010–29 I.R.B.

TransfersQualitative: Limits on the changes to cost-sharing in grandfathered plans and the elimination of cost-sharing for some services innon-grandfathered plans, leads to transfers of wealth from premium payers overall to individuals using covered services. Oncepre-existing conditions are fully prohibited and other insurance reforms take effect, the extent to which individuals are enrolled ingrandfathered plans could affect adverse selection, as higher risk plans relinquish grandfather status to gain new protections whilelower risk grandfathered plans retain their grandfather status. This could result in a transfer of wealth from non-grandfatheredplans to grandfathered health plans.

4. Discussion of Economic Impacts ofRetaining or Relinquishing GrandfatherStatus

The economic effects of these interimfinal regulations will depend on decisionsby plan sponsors and issuers, as well asby those covered under these plans andhealth insurance coverage. The collectivedecisions of plan sponsors and issuers overtime can be viewed as a one-way sort-ing process in which these parties decidewhether, and when, to relinquish status asa grandfathered health plan.

Plan sponsors and issuers can decide to:

1. Continue offering the plan or cover-age in effect on March 23, 2010 withlimited changes, and thereby retaingrandfather status;

2. Significantly change the terms of theplan or coverage and comply withAffordable Care Act provisions fromwhich grandfathered health plans areexcepted; or

3. In the case of a plan sponsor, cease tooffer any plan.

For a plan sponsor or issuer, the po-tential economic impact of the applicationof the provisions in the Affordable CareAct may be one consideration in makingits decisions. To determine the value ofretaining the health plan’s grandfatherstatus, each plan sponsor or issuer mustdetermine whether the rules applicable tograndfathered health plans are more orless favorable than the rules applicableto non-grandfathered health plans. Thisdetermination will depend on such factorsas the respective prices of grandfatheredand non-grandfathered health plans, aswell as on the preferences of grandfa-thered health plans’ covered populationsand their willingness to pay for benefits

and patient protections available undernon-grandfathered health plans. In mak-ing its decisions about grandfather status,a plan sponsor or issuer is also likely toconsider the market segment (because dif-ferent rules apply to the large and smallgroup market segments), and the utiliza-tion pattern of its covered population.

In deciding whether to change a plan’sbenefits or cost sharing, a plan sponsor orissuer will examine its short-run businessrequirements. These requirements areregularly altered by, among other things,rising costs that result from factors such astechnological changes, changes in risk sta-tus of the enrolled population, and changesin utilization and provider prices. Asshown below, changes in benefits and costsharing are typical in insurance markets.Decisions about the extent of changes willdetermine whether a plan retains its grand-father status. Ultimately, these decisionswill involve a comparison by the plansponsor or issuer of the long run value ofgrandfather status to the short-run need ofthat plan sponsor or issuer to adjust planstructure in order to control premium costsor achieve other business objectives.

Decisions by plan sponsors and issuersmay be significantly affected by the pref-erences and behavior of the enrollees, es-pecially a tendency among many towardsinertia and resistance to change. Thereis limited research that has directly exam-ined what drives this tendency — whetherindividuals remain with health plans be-cause of simple inertia and procrastina-tion, a lack of relevant information, or be-cause they want to avoid risk associatedwith switching to new plans. One studythat examined the extent to which pre-mium changes influenced plan switchingdetermined that younger low-risk employ-ees were the most price-sensitive to pre-mium changes; older, high-risk employees

were the least price-sensitive. This find-ing suggests that, in particular, individu-als with substantial health needs may bemore apt to remain with a plan becauseof inertia as such or uncertainties associ-ated with plan switching rather than qual-ity per se — a phenomenon some behav-ioral economists have called “status quobias,”12 which can be found when peoplestick with the status quo even though achange would have higher expected value.

Even when an enrollee could reap aneconomic or other advantage from chang-ing plans, that enrollee may not make thechange because of inertia, a lack of rel-evant information, or because of the costand effort involved in examining new op-tions and uncertainty about the alterna-tives. Consistent with well-known find-ings in behavioral economics, studies ofprivate insurance demonstrate the substan-tial effect of inertia in the behavior of theinsured. One survey found that approxi-mately 83 percent of privately insured in-dividuals stuck with their plans in the yearprior to the survey.13 Among those whodid change plans, well over half sought thesame type of plan they had before. Thosewho switched plans also tended to do sofor reasons other than preferring their newplans. For example, many switched be-cause they changed jobs or their employerchanged insurance offerings, compellingthem to switch.

Medicare beneficiaries display similarplan loyalties. On average, only seven per-cent of the 17 million seniors on Medicaredrug plans switch plans each year, accord-ing to the Centers for Medicare and Med-icaid Services.14 Researchers have foundthis comparatively low rate of switchingis maintained whether or not those insuredhave higher quality information about planchoices, and that switching has little effect

12 http://www.nber.org/reporter/summer06/buchmueller.html “Consumer Demand for Health Insurance” The National Bureau of Economic Research (Buchmueller, 2006)

13 http://content.healthaffairs.org/cgi/reprint/19/3/158.pdf “Health Plan Switching: Choice Or Circumstance?” (Cunnigham and Kohn, 2000).

14 http://www.kaiserhealthnews.org/Stories/2009/December/01/Medicare-Drug-Plan.aspx “Seniors Often Reluctant To Switch Medicare Drug Plans” (2009, Kaiser Health News/WashingtonPost).

2010–29 I.R.B. 67 July 19, 2010

on the satisfaction of the insured with theirhealth plans.15

The incentives to change are differentfor people insured in the individual marketthan they are for those covered by grouphealth plans or group health insurance cov-erage. The median length of coverage forpeople entering the individual market iseight months.16 In part, this “churn” stemsfrom the individual market’s function asa stopping place for people between jobswith employer-sponsored or other types ofhealth insurance, but in part, the churn isdue to the behavior of issuers. Evidencesuggests that issuers often make policychanges such as raising deductibles as ameans of attracting new, healthy enrolleeswho have few medical costs and so arelittle-concerned about such deductibles.There is also evidence that issuers use suchchanges to sort out high-cost enrolleesfrom low-cost ones.17

Decisions about the value of retainingor relinquishing status as a grandfatheredhealth plan are complex, and the wide ar-ray of factors affecting issuers, plan spon-sors, and enrollees poses difficult chal-lenges for the Departments as they try toestimate how large the presence of grand-fathered health plans will be in the fu-ture and what the economic effects of theirpresence will be. As one example, theseinterim final regulations limit the extent towhich plan sponsors and issuers can in-crease cost sharing and still remain grand-fathered. The increases that are allowedprovide plans and issuers with substan-tial flexibility in attempting to control ex-penditure increases. However, there arelikely to be some plans and issuers thatwould, in the absence of these regulations,choose to make even larger increases incost sharing than are specified here. Suchplans will need to decide whether the ben-efits of maintaining grandfather status out-weigh those expected from increasing costsharing above the levels permitted in theinterim final regulations.

A similar analysis applies to the pro-vision that an employer’s or employeeorganization’s share of the total premiumof a group health plan cannot be reduced

by more than 5 percentage points from theshare it was paying on March 23, 2010without that plan or health insurance cov-erage relinquishing its grandfather status.Employers and employee organizationssponsoring group health plans or healthinsurance coverage may be faced witheconomic circumstances that would leadthem to reduce their premium contribu-tions. But reductions of greater than 5percentage points would cause them torelinquish the grandfather status of theirplans. These plan sponsors must decidewhether the benefit of such premiumreductions outweigh those of retaininggrandfather status.

Market dynamics affecting these deci-sions change in 2014, when the Afford-able Care Act limits variation in premiumrates for individual and small group poli-cies. Small groups for this purpose in-clude employers with up to 100 employees(States may limit this threshold to 50 em-ployees until 2016). The Affordable CareAct rating rules will not apply to grand-fathered health plans, but such plans willremain subject to State rating rules, whichvary widely and typically apply to employ-ers with up to 50 employees. Based on thecurrent State rating rules, it is likely that,in many States, no rating rules will applyto group health insurance policies that aregrandfathered health plans covering em-ployers with 51 to 100 employees.18

The interaction of the Affordable CareAct and State rating rules implies that,beginning in 2014, premiums can varymore widely for grandfathered plans thanfor non-grandfathered plans for employerswith up to 100 employees in many States.This could encourage both plan spon-sors and issuers to continue grandfatheredhealth plans that cover lower-risk groups,because these groups will be isolated fromthe larger, higher-risk, non-grandfatheredrisk pool. On the other hand, this scenariolikely will encourage plan sponsors andissuers that cover higher-risk groups toend grandfathered health plans, becausethe group would be folded into the larger,lower-risk non-grandfathered pool. De-pending on the size of the grandfathered

health plan market, such adverse selec-tion by grandfathered health plans againstnon-grandfathered plans could cause pre-miums in the exchanges to be higher thanthey would have been absent grandfa-thering. To accommodate these changesin market dynamics in 2014, the Depart-ments have structured a cost-sharing rulewhose parameters enable greater flexibil-ity in early years and less over time. It islikely that few plans will delay for manyyears before making changes that exceedmedical inflation. This is because thecumulative increase in copayments fromMarch 23, 2010 is compared to a maxi-mum percentage increase that includes afixed amount — 15 percentage points —that does not increase annually with anytype of inflator. This should help mitigateadverse selection and require plans andissuers that seek to maintain grandfatherstatus to find ways other than increasedcopayments to limit cost growth. As dis-cussed in the preamble, the Departmentsare also soliciting comments to make anyadjustments needed for the final rule priorto 2014. Therefore it is premature toestimate the economic effects describedabove in 2014 and beyond. In the fol-lowing section, the Departments providea range of estimates of how issuers andsponsors might respond to these interimfinal regulations, with the caveat thatthere is substantial uncertainty about ac-tual outcomes, especially considering thatavailable data are historical and so do notaccount for behavioral changes in plansand the insured as a result of enactment ofthe Affordable Care Act.

5. Estimates of Number of Plans andEmployees Affected

The Affordable Care Act applies togroup health plans and health insurance is-suers in the group and individual markets.The large and small group markets will bediscussed first, followed by a discussionof impacts on the individual market. TheDepartments have defined a large grouphealth plan as a plan at an employer with100 or more workers and a small groupplan as a plan at an employer with less than

15 http://www.ncbi.nlm.nih.gov/pubmed/16704882 “The effect of quality information on consumer health plan switching: evidence from the Buyers Health Care Action Group.” (Abraham,Feldman, Carlin, and Christianson, 2006)

16 Erika C. Ziller, Andrew F. Coburn, Timothy D. McBride, and Courtney Andrews. Patterns of Individual Health Insurance Coverage, 1996–2000. Health Affairs Nov/Dec 2004: 210–221.

17 Melinda Beeuwkes Bustin, M. Susan Marquis, and Jill M. Yegian. The Role of the Individual Health Insurance Market and Prospects for Change. Health Affairs 2004; 23(6): 79–90.

18 Kaiser Family Foundation State Health Facts (2010), http://www.statehealthfacts.org/comparetable.jsp?ind=351&cat=7.

July 19, 2010 68 2010–29 I.R.B.

100 workers. Using data from the 2008Medical Expenditure Survey — InsuranceComponent, the Departments estimatedthat there are approximately 72,000 largeERISA-covered health plans and 2.8 mil-lion small group health plans with anestimated 97.0 million participants andbeneficiaries19 in large group plans and40.9 million participants and beneficiariesin small group plans. The Departments es-timate that there are 126,000 governmentalplans20 with 36.1 million participants inlarge plans and 2.3 million participants insmall plans. The Departments estimatethere are 16.7 million individuals underage 65 covered by individually purchasedpolicies.

a. Methodology for analyzing planchanges over time in the group market

For the large and small group markets,the Departments analyzed three years ofKaiser-HRET data to assess the changesthat plans made between plan years 2007to 2008 and 2008 to 2009. Specifically,the Departments examined changes madeto deductibles, out-of-pocket maximums,copayments, coinsurance, and the em-ployer’s share of the premium or costof coverage. The Departments also esti-mated the number of fully-insured plansthat changed issuers.21 The distribution ofchanges made within the two time periodswere nearly identical and ultimately the2008–2009 changes were used as a basisfor the analyses.

As discussed previously, plans willneed to make decisions that balance thevalue they (and their enrollees) placeon maintaining grandfather status withthe need to meet short run objectives bychanging plan features including the vari-ous cost sharing requirements that are thesubject of this rule. The 2008–2009 datareflect changes in plan benefit design thatwere made under very different marketconditions and expectations than will existin 2011 and beyond. Therefore, there isa significant degree of uncertainty asso-ciated with using the 2008–2009 data to

project the number of plans whose grand-father status may be affected in the nextfew years. Because the level of uncertaintybecomes substantially greater when tryingto use this data to predict outcomes oncethe full range of reforms takes effect in2014 and the exchanges begin operating,substantially changing market dynamicsthe Departments restrict our estimates tothe 2011–2013 period and use the existingdata and a range of assumptions to esti-mate possible outcomes based on a rangeof assumptions concerning how plans’behavior regarding cost sharing changesmay change relative to what is reflected inthe 2008–2009 data.

Deriving projections of the number ofplans that could retain grandfather statusunder the requirements of these interim fi-nal regulations required several steps:

• Using Kaiser/HRET data for2008–2009, estimates were generatedof the number of plans in the largeand small group markets that madechanges in employer premium shareor any of the cost-sharing parametersthat were larger than permitted for aplan to retain grandfather status underthese interim final regulations;

• In order to account for a range ofuncertainty with regard to changesin plan behavior toward cost sharingchanges, the Departments assumedthat many plans will want to main-tain grandfather status and will lookfor ways to achieve short run costcontrol and still maintain that status.One plausible assumption is that planswould look to a broader range of costsharing strategies in order to achievecost containment and other objectivesthan they had in the past. In order toexamine this possibility, the Depart-ments carefully analyzed those plansthat would have relinquished grand-father status based on a change theymade from 2008–2009. The Depart-ments then estimated the proportion ofthese plans that could have achievedsimilar cost control by using one or

more other cost-sharing changes inaddition to the one they made in amanner that would not have exceededthe limits set by these interim finalregulations for qualifying as a grand-fathered health plan. For example,if a plan was estimated to relinquishgrandfather status because it increasedits deductible by more than the allowed15 percentage points plus medicalinflation, the Departments analyzewhether the plan could have achievedthe same cost control objectives witha smaller change in deductible, butlarger changes (within the limits setforth in these interim final regulations)in copayments, out-of-pocket maxi-mums, and employer contributions tothe premium or cost of coverage.

• Finally, the Departments examinedthe impact of alternative assumptionsabout sponsor behavior. For example,it is possible that some sponsors whomade changes from 2008–2009 in planparameters that were so large that theywould have relinquished their grand-father status would not make similarchanges in 2011–2013. It is also pos-sible that even though a sponsor couldmake an equivalent change that con-forms to the rules established in theseinterim final regulations to maintaingrandfather status, it would decide notto.

The estimates in this example relyon several other assumptions. Amongthem: (1) the annual proportion of plansrelinquishing grandfather status is thesame throughout the period; (2) all grouphealth plans existing at the beginning of2010 qualify for grandfather status; (3) allchanges during 2010 occur after March23, 2010; (4) annual medical inflation is4 percent (based on the average annualchange in the medical CPI between 2000and 2009); and (5) firms for which theKaiser-HRET survey has data for both2008 and 2009 are representative of all

19 All participant counts and the estimates of individual policies are from the 2009 Current Population Survey (CPS).

20 Estimate is from the 2007 Census of Government.

21 Under the Affordable Care Act and these interim final regulations, if a plan that is not a collectively bargained plan changes issuers after March 23, 2010, it is no longer a grandfatheredhealth plan.

2010–29 I.R.B. 69 July 19, 2010

firms.22 The assumption used for estimat-ing the effects of the limits on copaymentincreases does not take into account thegreater flexibility in the near term thanin the long term; the estimated increasein firms losing their grandfather statusover time reflects cumulative effects ofa constant policy. To the extent that thedata reflect plans that are more likelyto make frequent changes in cost shar-ing, the assumption that a constant shareof plans relinquishing grandfather statusthroughout the period may underestimatethe number of plans that will retain grand-father status through 2013. In addition,data on substantial benefit changes werenot available and thus not included in theanalysis. The survey data is limited, inthat it covers only one year of changes inhealthcare plans. The Departments’ anal-ysis employed data only on PPO plans,the predominant type of plan. In addition,the difficulties of forecasting behavior inresponse to this rule create uncertaintiesfor quantitative evaluation. However, theanalysis presented here is illustrative ofthe rule’s goal of balancing flexibility withmaintaining current coverage.

b. Impacts on the group market resultingfrom changes from 2008 to 2009

The Departments first estimated thepercentage of plans that had a percentchange in the dollar value of deductibles,copayments, or out-of-pocket maximumsthat exceeded 19 percent (the sum of med-ical inflation (assumed in these analysesto be four percent) plus 15 percentagepoints measured from March 23, 2010.Plans making copayment changes of fivedollars or less were considered to havesatisfied the copayment limit, even if thatchange exceeded 19 percent.23 The De-partments also estimated the number ofplans for whom the percentage of total

premium paid by the employer declinedby more than 5 percentage points. Forfully-insured plans only, estimates weremade of the proportion that switched to adifferent issuer.24 This estimate does nottake into account collectively bargainedplans, which can change issuers during theperiod of the collective bargaining agree-ment without a loss of grandfather status,because the Departments could not quan-tify this category of plans. Accordingly,this estimate represents an upper bound.

Using the Kaiser/HRET data, the De-partments estimated that 55 percent ofsmall employers and 36 percent of largeemployers made at least one change incost-sharing parameters above the thresh-olds provided in these interim final reg-ulations. Similarly, 33 percent of smallemployers and 21 percent of large em-ployers decreased the employer’s shareof premium by more than five percentagepoints. In total, approximately 66 percentof small employers and 48 percent of largeemployers made a change in either costsharing or premium contribution during2009 that would require them to relinquishgrandfather status if the same change weremade in 2011.25

The changes made by employers from2008 to 2009 were possibly made in an-ticipation of the recession. As discussedpreviously, analysis of changes from 2007to 2008 suggests that the 2007–08 changeswere not much different from the 2008–09changes. Nevertheless, as a result of im-provements in economic conditions, itmakes sense to think that the pressure onemployers to reduce their contributions tohealth insurance will be smaller in 2011than they were in 2009, and that the De-partment’s analysis of changes in 2009may overestimate the changes that shouldbe expected in 2011.26

As discussed previously, it is highlyunlikely that plans would continue to ex-

hibit the same behavior in 2011 to 2013as in 2008 to 2009. In order to guidethe choice of behavioral assumptions, theDepartments conducted further analysesof the 2008–2009 data. Many employ-ers who made changes between 2008 and2009 that would have caused them to re-linquish grandfather status did so based onexceeding one of the cost-sharing limits.Assuming that the sponsor’s major objec-tive in implementing these changes was torestrain employer costs or overall premi-ums, the Departments examined whetherthe sponsor could have achieved the samenet effect on employer cost or premiumsby spreading cost sharing over two ormore changes without exceeding the limitson any of these changes. For example,an employer that increased its deductibleby 30 percent would have relinquishedgrandfather status. However, it is possiblethat the employer could have achieved thesame cost control objectives by limitingthe deductible increase to 19 percent, and,also increasing the out-of-pocket maxi-mum or copayments, or decreasing theemployer share of the premium.

The Departments estimate that ap-proximately two-thirds of the employersthat made changes in 2009 that wouldhave exceeded the threshold implementedby this rule could have achieved thesame cost-control objective and remainedgrandfathered by making changes in othercost-sharing parameters or in the employershare of the premium. Only 24 percent ofsmall employers and 16 percent of largeemployers could not have reconfiguredthe cost-sharing parameters or employercontributions in such a manner that wouldhave allowed them to stay grandfathered.If benefit changes that are allowed withinthe grandfathered health plan definitionwere also taken into account (not possiblewith available data), these percentageswould be even lower.

22 The analysis is limited to firms that responded to the Kaiser/HRET survey in both 2008 and 2009. Large firms are overrepresented in the analytic sample. New firms and firms that wentout of business in 2008 or 2009 are underrepresented. The Departments present results separately for large firms and small firms, and weight the results to the number of employees in eachfirm-size category. Results are presented for PPO plans. The Kaiser/HRET survey gathers information about the PPO with the most enrollment in each year. If enrollment at a given employershifted from one PPO to a different PPO between 2008 and 2009, then the PPO with the most enrollment in 2009 may be different than the PPO with the most enrollment in 2008. To theextent this occurred, the estimates presented here may overestimate the fraction of plans that will relinquish grandfather status. However, given the behavioral assumptions of the analysis andthe need to present a range of results, the Departments believe that such overestimation will not have a noticeable effect on estimates presented here.

23 The regulation allows plans to increase fixed-amount copayments by an amount that does not exceed $5 increased by medical inflation. In this analysis, the Departments used a thresholdof $5, rather than the threshold of approximately $5.20 that would be allowed by these interim final regulations. There would have been no difference in the results if the Departments hadused $5.20 rather than $5 as the threshold.

24 In contrast, for self-insured plans, a change in third party administrator in and of itself does not cause a group health plan to cease to be a grandfathered health plan, provided changes donot exceed the limits of paragraph (g)(1) of these interim final regulations.

25 Some employers made changes which exceeded at least one cost-sharing threshold and decreased the employer’s share of contribution by more than five percent.

26 Employers who offer plans on a calendar year basis generally make decisions about health plan offerings during the preceding summer. Thus, decisions for calendar 2009 were generallymade during the summer of 2008. At that time, the depth of the coming recession was not yet clear to most observers.

July 19, 2010 70 2010–29 I.R.B.

For fully insured group health plans, an-other change that would require a plan torelinquish grandfather status is a change inissuer. Between 2008 and 2009, 15 per-cent of small employers and four percentof large employers changed insurance car-riers.27 However, it is likely that the in-centive to stay grandfathered would leadsome of these employers to continue withthe same issuer, making the actual share offirms relinquishing grandfather status as aresult of an issuer change lower than thepercentage that switched in 2009. Thereappears to be no empirical evidence to pro-vide guidance on the proportion of em-ployers that would choose to remain withtheir issuer rather than relinquish grandfa-ther status. That being so, an assumptionwas made that 50 percent of employers thatchanged issuers in 2009 would not havemade a similar change in 2011 in order toretain grandfather status. It is likely thatfewer employers will elect to change car-riers than in recent years given that somewill prefer to retain grandfather status. Butit is also likely that many employers willprefer to switch carriers given a change inthe issuer’s network or other factors. Be-cause there is little empirical evidence re-garding the fraction of firms that wouldelect to switch in response to the changein regulations, we take the midpoint of theplausible range of no switching carriers atone extreme and all switching carriers atthe other extreme. We therefore assumethat 50 percent of employers that changedissuers in 2009 would not make a similarchange in 2011 to retain grandfather sta-tus.

Combining the estimates of the percent-age of employers that would relinquishgrandfather status because they chose tomake cost-sharing, benefit or employercontribution changes beyond the permit-ted parameters with the estimates of thepercentage that would relinquish grand-father status because they change issuers,the Departments estimate that approx-imately 31 percent of small employersand 18 percent of large employers wouldmake changes that would require them torelinquish grandfather status in 2011. TheDepartments use these estimates as ourmid-range scenario.

c. Sensitivity analysis: assuming thatemployers will be willing to absorb apremium increase in order to remaingrandfathered

To the extent that a large number ofplans placed a high value on remaininggrandfathered, it is reasonable to assumethat some would consider other measuresto maintain that status. In addition to theadjustments that employers could rela-tively easily make by simply adjusting thefull set of cost-sharing parameters ratherthan focusing changes on a single param-eter, the Departments expect that furtherbehavioral changes in response to the in-centives created by the Affordable CareAct and these interim final regulations ispossible. For instance, plans could alterother benefits or could decide to accepta slight increase in plan premium or inpremium contribution. All of these op-tions would further lower the percentageof firms that would relinquish grandfatherstatus. There is substantial uncertainty,however, about how many firms wouldutilize these other avenues.

To examine the impact of this type ofbehavior on the estimates on the numberof plans that would not maintain grand-father status, the Departments examinedthe magnitude of additional premium in-creases plans would need to implementif they were to modify their cost-sharingchanges to stay within the allowable lim-its. Among the 24 percent of small firmsthat would have relinquished grandfatherstatus based on the changes they made in2009, 31 percent would have needed to in-crease premiums by 3 percent or less inorder to maintain grandfather status. Theanalogous statistic for the 16 percent oflarge firms that would have relinquishedgrandfather status is 41 percent. It is rea-sonable to think that employers that arefacing only a relatively small premium in-crease might choose to remain grandfa-thered.

Using these estimates, if employersvalue grandfathering enough that they arewilling to allow premiums to increaseby three percent more than their other-wise intended level (or can make changesto benefits other than cost-sharing thatachieve a similar result), then 14 percentof small employers and 11 percent of large

employers would relinquish grandfatherstatus if they made the same changes in2011 as they had in 2009. Adding in theemployers who would relinquish grand-father status because they change issuers,the Departments’ lower bound estimateis that approximately 21 percent of smallemployers and 13 percentof large employ-ers will relinquish grandfather status in2011.

d. Sensitivity analysis: incompleteflexibility to substitute one cost-sharingmechanism for another

Although economic conditions maycause more plans to remain grandfatheredin 2011 than might be expected fromanalysis of the 2009 data, there are otherfactors that may cause the Departments’estimates of the fraction of plans retaininggrandfather status to be overestimates ofthe fraction that will retain grandfatherstatus. The estimates are based on theassumption that all plans that could ac-commodate the 2009 change they madein a single cost-sharing parameter byspreading out those changes over mul-tiple parameters would actually do so.However, some plans and sponsors maybe concerned about the labor relationsconsequences of reducing the employercontribution to premium. For example, if aplan increases its out-of-pocket maximumfrom $3,000 to $5,000 in 2009, it couldchoose to remain grandfathered by limit-ing the out-of-pocket maximum to $3,570,reducing the employer contribution andincreasing the employee contribution topremium. It is not clear, however, thatall plan sponsors would do so — somemay see the costs in negative employeerelations as larger than the benefits fromremaining grandfathered. Moreover, be-cause some plans may already nearlycomply with all provisions of the Afford-able Care Act, or because enrollees areof average to less favorable health status,some employers may place less value onretaining grandfather status.

With this in mind, the Departmentsreplicated the analysis, but assumed thatone-half of the employers who made achange in cost-sharing parameter thatcould not be accommodated without re-ducing the employer contribution will be

27 Among the 76 percent of small employers and 84 percent of large employers who could have accommodated the cost-sharing changes they desired to make within the parameters of theseinterim final regulations, 13 percent of the small employers and three percent of the large employers changed issuers.

2010–29 I.R.B. 71 July 19, 2010

unwilling to reduce the employer contri-bution as a share of premium. Under thisassumption, the 24 percent and 16 percentestimates of the proportion of employersrelinquishing grandfather status increasesto approximately 37 percent and 28 per-cent among small and large employers,respectively. Adding in the number ofemployers that it is estimated will changeissuers, the Departments’ high-end esti-mate for the proportion that will relinquishgrandfather status in 2011 is approxi-mately 42 percent for small employers and29 percent for large employers.

e. Estimates for 2011–2013

Estimates are provided above for thepercentage of employers that will retaingrandfather status in 2011. These es-timates are extended through 2013 byassuming that the identical percentage ofplan sponsors will relinquish grandfather-ing in each year. Again, to the extent thatthe 2008–2009 data reflect plans that aremore likely to make frequent changes incost sharing, this assumption will overes-timate the number of plans relinquishinggrandfather status in 2012 and 2013.

Under this assumption, the Depart-ments’ mid-range estimate is that 66percent of small employer plans and 45percent of large employer plans will relin-quish their grandfather status by the endof 2013. The low-end estimates are for49 percent and 34 percent of small andlarge employer plans, respectively, to haverelinquished grandfather status, and thehigh-end estimates are 80 percent and 64percent, respectively.

TABLE 3.—Estimates of the Cumulative Percentage of Employer Plans Relinquishing Their Grandfathered Status, 2011–2013

2011 2012 2013

Low-end EstimateSmall Employer Plans 20% 36% 49%Large Employer Plans 13% 24% 34%All Employer Plans 15% 28% 39%

Mid-range EstimateSmall Employer Plans 30% 51% 66%Large Employer Plans 18% 33% 45%All Employer Plans 22% 38% 51%

High-end EstimateSmall Employer Plans 42% 66% 80%Large Employer Plans 29% 50% 64%All Employer Plans 33% 55% 69%

Notes: Represents full-time employees. Small Employers=3 to 99 employees; Large Employers=100+ employees. All threescenarios assume that two percent of all large employer plans and six percent of small employer plans would relinquishgrandfathered status due to a change in issuer. Estimates are based on enrollment in PPOs.Source: Kaiser/RHET Employer Survey, 2008–2009

f. Impacts on the Individual Market

The market for individual insurance issignificantly different than that for groupcoverage. This affects estimates of the pro-portion of plans that will remain grandfa-thered until 2014. As mentioned previ-ously, the individual market is a residualmarket for those who need insurance butdo not have group coverage available anddo not qualify for public coverage. Formany, the market is transitional, provid-ing a bridge between other types of cov-erage. One study found a high percent-age of individual insurance policies beganand ended with employer-sponsored cov-

erage.28 More importantly, coverage onparticular policies tends to be for short pe-riods of time. Reliable data are scant, buta variety of studies indicate that between40 percent and 67 percent of policies arein effect for less than one year.29 Althoughdata on changes in benefit packages com-parable to that for the group market isnot readily available, the high turnoverrates described here would dominate ben-efit changes as the chief source of changesin grandfather status.

While a substantial fraction of individ-ual policies are in force for less than oneyear, a small group of individuals main-tain their policies over longer time periods.

One study found that 17 percent of indi-viduals maintained their policies for morethan two years,30 while another found thatnearly 30 percent maintained policies formore than three years.31

Using these turnover estimates, a rea-sonable range for the percentage of indi-vidual policies that would terminate, andtherefore relinquish their grandfather sta-tus, is 40 percent to 67 percent. These es-timates assume that the policies that termi-nate are replaced by new individual poli-cies, and that these new policies are not, bydefinition, grandfathered. In addition, thecoverage that some individuals maintainfor long periods might lose its grandfather

28 Adele M. Kirk. The Individual Insurance Market: A Building Block for Health Care Reform? Health Care Financing Organization Research Synthesis. May 2008.

29 Ibid.

30 http://content.healthaffairs.org/cgi/content/full/23/6/210#R14 “Patterns of Individual Health Insurance Coverage” Health Affairs (Ziller et al, 2004).

31 http://content.healthaffairs.org/cgi/content/full/hlthaff.25.w226v1/DC1 “Consumer Decision Making in the Individual Health Insurance Market” Health Affairs (Marquis et al, 2006).

July 19, 2010 72 2010–29 I.R.B.

status because the cost-sharing parametersin policies change by more than the limitsspecified in these interim final regulations.The frequency of this outcome cannot begauged due to lack of data, but as a resultof it, the Departments estimate that the per-centage of individual market policies los-ing grandfather status in a given year ex-ceeds the 40 percent to 67 percent rangethat is estimated based on the fraction ofindividual policies that turn over from oneyear to the next.

g. Application to extension of dependentcoverage to age 26

One way to assess the impact of theseinterim final regulations is to assesshow they interact with other AffordableCare Act provisions. One such pro-vision is the requirement that, in planyears on or after September 23, 2010, butprior to January 1, 2014, grandfatheredgroup health plans are required to offerdependent coverage to a child underthe age of 26 who is not eligible foremployer-sponsored insurance. In theRegulatory Impact Assessment (RIA) forthe regulation that was issued on May 13,2010 (75 FR 27122), the Departmentsestimated that there were 5.3 millionyoung adults age 19–25 who werecovered by employer-sponsored coverage(ESI) and whose parents were coveredby employer-sponsored insurance, andan additional 480,000 young adultswho were uninsured, were offered ESI,and whose parents were covered byESI. In that impact assessment, theDepartments assumed that all parentswith employer-sponsored insurancewould be in grandfathered health plans,and that none of their 19–25 year olddependents with their own offer ofemployer-sponsored insurance would gaincoverage as a result of that regulation.

As estimated here, approximately 80percent of the parents with ESI are likelyto be in grandfathered health plans in2011, leaving approximately 20 percent ofthese parents in non-grandfathered healthplans. Young adults under 26 with em-ployer-sponsored insurance or with anoffer of such coverage whose parents are innon-grandfathered plans potentially couldenroll in their parents’ coverage. The De-partments assume that a large percentageof the young adults who are uninsured

will enroll in their parents’ coverage whengiven the opportunity. It is more difficultto model the choices of young adults withan offer of employer-sponsored insurancewhose parents also have group cover-age. One assumes these young adults willcompare the amount that they must payfor their own employer’s coverage withthe amount that they (or their parents)would pay if they were covered undertheir parents’ policies. Such a decisionwill incorporate the type of plan that theparent has, since if the parent already has afamily plan whose premium does not varyby number of dependents, the adult childcould switch at no additional cost to theparents. A very rough estimate thereforeis that approximately 25 percent of youngadults with ESI will switch to their parents’coverage when their parents’ coverageis not grandfathered. The Departmentsassume that 15 percent of young adultswho are offered ESI but are uninsured andwhose parents have non-grandfatheredhealth plans will switch to their parents’plan. This latter estimate roughly cor-responds to the assumption made in thelow-take up rate scenario in the RIA fordependent coverage for young adults whoare uninsured.

These assumptions imply that an addi-tional approximately 414,000 young adultswhose parents have non-grandfatheredESI will be covered by their parents’ healthcoverage in 2011, of whom 14,000 wouldhave been uninsured, compared with thedependent coverage regulation impactanalysis that assumed that all existingplans would have remained grandfatheredand none of these adult children wouldhave been eligible for coverage under theirparents’ plans. By 2013, an estimated698,000 additional young adults with ESIor an offer of ESI will be covered by theirparent’s non-grandfathered health policy,of which 36,000 would have been unin-sured.

6. Grandfathered Health Plan DocumentRetention and Disclosure Requirements

To maintain grandfathered health planstatus under these interim final regulations,a plan or issuer must maintain recordsthat document the plan or policy terms inconnection with the coverage in effect onMarch 23, 2010, and any other documentsnecessary to verify, explain or clarify is

status as a grandfathered health plan. Therecords must be made available for ex-amination by participants, beneficiaries,individual policy subscribers, or a State orFederal agency official.

Plans or health insurance coverage thatintend to be a grandfathered health plan,also must include a statement, in any planmaterials provided to participants or ben-eficiaries (in the individual market, pri-mary subscriber) describing the benefitsprovided under the plan or health insur-ance coverage, and that the plan or cover-age is intended to be a grandfathered healthplan within the meaning of section 1251 ofthe Affordable Care Act. In these interimfinal regulations, the Departments providea model statement plans and issuers mayuse to satisfy the disclosure requirement.The Department’s estimate that the onetime cost to plans and insurance issuersof preparing and distributing the grandfa-thered health plan disclosure is $39.6 mil-lion in 2011. The one time cost to plansand insurance issuers for the record reten-tion requirement is estimated to be $32.2million in 2011. For a discussion of thegrandfathered health plan document reten-tion and disclosure requirements, see thePaperwork Reduction Act section later inthis preamble.

C. Regulatory FlexibilityAct—Department of Labor andDepartment of Health and HumanServices

The Regulatory Flexibility Act(5 U.S.C. 601 et seq.) (RFA) imposescertain requirements with respect tofederal rules that are subject to the noticeand comment requirements of section553(b) of the APA (5 U.S.C. 551 et seq.)and that are likely to have a significanteconomic impact on a substantial numberof small entities. Under Section 553(b)of the APA, a general notice of proposedrulemaking is not required when anagency, for good cause, finds thatnotice and public comment thereon areimpracticable, unnecessary, or contraryto the public interest. These interim finalregulations are exempt from the APA,because the Departments made a goodcause finding that a general notice ofproposed rulemaking is not necessaryearlier in this preamble. Therefore, theRFA does not apply and the Departments

2010–29 I.R.B. 73 July 19, 2010

are not required to either certify that theregulations would not have a significanteconomic impact on a substantial numberof small entities or conduct a regulatoryflexibility analysis.

Nevertheless, the Departments care-fully considered the likely impact of theregulations on small entities in connectionwith their assessment under Executive Or-der 12866. Consistent with the policy ofthe RFA, the Departments encourage thepublic to submit comments that suggestalternative rules that accomplish the statedpurpose of section 1251 of the Afford-able Care Act and minimize the impact onsmall entities.

D. Special Analyses-Department of theTreasury

Notwithstanding the determinations ofthe Department of Labor and Departmentof Health and Human Services, for pur-poses of the Department of the Treasury, ithas been determined that this Treasury de-cision is not a significant regulatory actionfor purposes of Executive Order 12866.Therefore, a regulatory assessment is notrequired. It has also been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to these regulations. For the appli-cability of the RFA, refer to the SpecialAnalyses section in the preamble to thecross-referencing notice of proposed rule-making published elsewhere in this issueof the Bulletin. Pursuant to section 7805(f)of the Code, these temporary regulationshave been submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on their impacton small businesses.

E. Paperwork Reduction Act

1. Department of Labor and Departmentof Treasury: Affordable Care ActGrandfathered Plan Disclosure andRecord Retention Requirements

As part of their continuing efforts toreduce paperwork and respondent burden,the Departments conduct a preclearanceconsultation program to provide the gen-eral public and federal agencies with anopportunity to comment on proposedand continuing collections of information

in accordance with the Paperwork Re-duction Act of 1995 (PRA) (44 U.S.C.3506(c)(2)(A)). This helps to ensure thatrequested data can be provided in the de-sired format, reporting burden (time andfinancial resources) is minimized, collec-tion requirements on respondents can beproperly assessed.

As discussed earlier in this preamble,if a plan or health insurance coverage in-tends to be a grandfathered health plan,it must include a statement in any planmaterials provided to participants or ben-eficiaries (in the individual market, pri-mary subscriber) describing the benefitsprovided under the plan or health insur-ance coverage, and that the plan or cover-age is intended to be grandfathered healthplan within the meaning of section 1251 ofthe Affordable Care Act (“grandfatheredhealth plan disclosure”). Model languagehas been provided in these interim finalregulations, the use of which will satisfythis disclosure requirement

To maintain status as a grandfatheredhealth plan under these interim final reg-ulations, a plan or issuer must maintainrecords documenting the plan or policyterms in connection with the coverage ineffect on March 23, 2010, and any otherdocuments necessary to verify, explain, orclarify its status as a grandfathered healthplan (“recordkeeping requirement”). Inaddition, the plan or issuer must make suchrecords available for examination. Ac-cordingly, a participant, beneficiary, indi-vidual policy subscriber, or State or Fed-eral agency official would be able to in-spect such documents to verify the statusof the plan or health insurance coverage asa grandfathered health plan.

As discussed earlier in this preamble,grandfathered health plans are not requiredto comply with certain Affordable CareAct provisions. These interim regulationsdefine for plans and issuers the scope ofchanges that they can make to their grand-fathered health plans and policies underthe Affordable Care Act while retainingtheir grandfathered health plan status.

The Affordable Care Act grandfatheredhealth plan disclosure and recordkeepingrequirements are information collectionrequests (ICR) subject to the PRA. Cur-rently, the Departments are solicitingpublic comments for 60 days concerningthese disclosures. The Departments have

submitted a copy of these interim finalregulations to OMB in accordance with44 U.S.C. 3507(d) for review of the in-formation collections. The Departmentsand OMB are particularly interested incomments that:

• Evaluate whether the collection of in-formation is necessary for the properperformance of the functions of theagency, including whether the infor-mation will have practical utility;

• Evaluate the accuracy of the agency’sestimate of the burden of the collectionof information, including the validityof the methodology and assumptionsused;

• Enhance the quality, utility, and clarityof the information to be collected; and

• Minimize the burden of the collectionof information on those who are to re-spond, including through the use ofappropriate automated, electronic, me-chanical, or other technological collec-tion techniques or other forms of in-formation technology, for example, bypermitting electronic submission of re-sponses.

Comments should be sent to the Officeof Information and Regulatory Affairs,Attention: Desk Officer for the EmployeeBenefits Security Administration eitherby fax to (202)395–7285 or by email tooira_submission@omb.eop.gov. A copyof the ICR may be obtained by contact-ing the PRA addressee: G. ChristopherCosby, Office of Policy and Research,U.S. Department of Labor, EmployeeBenefits Security Administration, 200Constitution Avenue, NW, Room N–5718,Washington, DC 20210. Telephone:(202) 693–8410; Fax: (202) 219–2745.These are not toll-free numbers. E-mail:ebsa.opr@dol.gov. ICRs submitted toOMB also are available at reginfo.gov(http://www.reginfo.gov/public/do/PRA-Main).

a. Grandfathered health plan disclosure

In order to satisfy the interim finalregulations’ grandfathered health plandisclosure requirement, the Departmentsestimate that 2.2 million ERISA-coveredplans will need to notify an estimated56.3 million policy holders of their plans’

July 19, 2010 74 2010–29 I.R.B.

grandfathered health plan status.32 Thefollowing estimates, except where noted,are based on the mid-range estimates ofthe percent of plans retaining grandfatherstatus. Because the interim final regu-lations provide model language for thispurpose, the Departments estimate thatfive minutes of clerical time (with a laborrate of $26.14/hour) will be required toincorporate the required language into theplan document and ten minutes of an hu-man resource professional’s time (with alabor rate of $89.12/hour) will be requiredto review the modified language.33 Afterplans first satisfy the grandfathered healthplan disclosure requirement in 2011, anyadditional burden should be de minimis ifa plan wants to maintain its grandfatherstatus in future years. The Departmentsalso expect the cost of removing the noticefrom plan documents as plans relinquishtheir grandfather status to be de minimisand therefore is not estimated. Therefore,the Departments estimate that plans willincur a one-time hour burden of 538,000hours with an equivalent cost of $36.6 mil-lion to meet the disclosure requirement.

The Departments assume that onlyprinting and material costs are associ-ated with the disclosure requirement, be-cause the interim final regulations providemodel language that can be incorporatedinto existing plan documents, such as asummary plan description (SPD). TheDepartments estimate that the notice willrequire one-half of a page, five cents perpage printing and material cost will beincurred, and 38 percent of the notices willbe delivered electronically. This resultsin a cost burden of $873,000 ($0.05 perpage*1/2 pages per notice * 34.9 millionnotices*0.62).

b. Record-Keeping requirement

The Departments assume that most ofthe documents required to be retained tosatisfy recordkeeping requirement of theseinterim final regulations already are re-

tained by plans for tax purposes, to sat-isfy ERISA’s record retention and statuteof limitations requirements, and for otherbusiness reasons. Therefore, the Depart-ments estimate that the recordkeeping bur-den imposed by this ICR will require fiveminutes of a legal professional’s time (witha rate of $119.03/hour) to determine therelevant plan documents that must be re-tained and ten minutes of clerical staff time(with a labor rate of $26.14/hour) to orga-nize and file the required documents to en-sure that they are accessible to participants,beneficiaries, and Federal and State gov-ernmental agency officials.

With an estimated 2.2 million grand-fathered plans in 2011, the Departmentsestimate an hour burden of approximately538,000 hours with equivalent costs of$30.7 million. The Departments have es-timated this as a one-time cost incurred in2011, because after the first year, the De-partments anticipate that any future costswill be de minimis.

Overall, for both the grandfathering no-tice and the recordkeeping requirement,the Departments expect there to be a totalhour burden of 1.1 million hours and a costburden of $291,000.

The Departments note that persons arenot required to respond to, and generallyare not subject to any penalty for failing tocomply with, an ICR unless the ICR has avalid OMB control number.

These paperwork burden estimates aresummarized as follows:

Type of Review: New CollectionAgencies: Employee Benefits Security

Administration, Department of Labor; In-ternal Revenue Service, U.S. Departmentof Treasury.

Title: Disclosure and RecordkeepingRequirements for Grandfathered HealthPlans under the Affordable Care Act.

OMB Number: 1210–0140;1545–2178

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

Total Respondents: 2,151,000.

Total Responses: 56,347,000.Frequency of Response: One timeEstimated Total Annual Burden Hours:

538,000 (Employee Benefits Security Ad-ministration); 538,000 (Internal RevenueService).

Estimated Total Annual Burden Cost:$437,000 (Employee Benefits SecurityAdministration); $437,000 (Internal Rev-enue Service).

2. Department of Health and HumanServices: Affordable Care ActGrandfathered Plan Disclosure andRecord Retention Requirements

As discussed above in the Departmentof Labor and Department of the TreasuryPRA section, these interim final regula-tions contain a record retention and disclo-sure requirement for grandfathered healthplans. These requirements are informationcollection requirements under the PRA.

a. Grandfathered health plan disclosure

In order to satisfy the interim finalregulations’ grandfathered health plandisclosure requirement, the Departmentestimates that 98,000 state and local gov-ernmental plans will need to notify ap-proximately 16.2 million policy holders oftheir plans’ status as a grandfathered healthplan. The following estimates exceptwhere noted are based on the mid-rangeestimates of the percent of plans retaininggrandfather status. An estimated 490 in-surers providing coverage in the individualmarket will need to notify an estimated 4.3million policy holders of their policies’status as a grandfathered health plan.34

Because the interim final regulationsprovide model language for this pur-pose, the Department estimates that fiveminute of clerical time (with a labor rateof $26.14/hour) will be required to incor-porate the required language into the plandocument and ten minutes of a humanresource professional’s time (with a labor

32 The Departments’ estimate of the number of ERISA-covered health plans was obtained from the 2008 Medical Expenditure Panel Survey’s Insurance component. The estimate of thenumber of policy holders was obtained from the 2009 Current Population Survey. The methodology used to estimate the percentage of plans that will retain their grandfathered plans wasdiscussed above.

33 EBSA estimates of labor rates include wages, other benefits, and overhead based on the National Occupational Employment Survey (May 2008, Bureau of Labor Statistics) and the Em-ployment Cost Index June 2009, Bureau of Labor Statistics).

34 The Department’s estimate of the number of state and local governmental health plans was obtained from the 2007 Census of Governments. The estimate of the number of policy holders inthe individual market were obtained from the 2009 Current Population Survey. The methodology used to estimate the percentage of state and local governmental plans and individual marketpolicies that will retain their grandfathered health plan status was discussed above.

2010–29 I.R.B. 75 July 19, 2010

rate of $89.12/hour) will be required to re-view the modified language.35 After plansfirst satisfy the grandfathered health plandisclosure requirement in 2011, any ad-ditional burden should be de minimis if aplan wants to maintain its grandfather sta-tus in future years. The Department alsoexpects the cost of removing the noticefrom plan documents as plans relinquishtheir grandfather status to be de minimisand therefore is not estimated. Therefore,the Department estimates that plans andinsurers will incur a one-time hour burdenof 26,000 hours with an equivalent costof $1.8 million to meet the disclosure re-quirement.

The Department assumes that onlyprinting and material costs are associatedwith the disclosure requirement, becausethe interim final regulations provide modellanguage that can be incorporated intoexisting plan documents, such as an SPD.The Department estimates that the noticewill require one-half of a page, five centsper page printing and material cost will beincurred, and 38 percent of the notices willbe delivered electronically. This resultsin a cost burden of $318,000 ($0.05 perpage*1/2 pages per notice * 12.7 millionnotices*0.62).

b. Record-Keeping requirement

The Department assumes that mostof the documents required to be retainedto satisfy the Affordable Care Act’srecordkeeping requirement already areretained by plans for tax purpose, to sat-isfy ERISA’s record retention and statuteof limitations requirements, and for otherbusiness reasons. Therefore, the Depart-ment estimates that the recordkeepingburden imposed by this ICR will requirefive minutes of a legal professional’s time(with a rate of $119.03/hour) to determinethe relevant plan documents that must beretained and ten minutes of clerical stafftime (with a labor rate of $26.14/hour) toorganize and file the required documentsto ensure that they are accessible to par-ticipants, beneficiaries, and Federal andState governmental agency officials.

With an estimated 98,000 grandfa-thered plans and 7,400 grandfathered

individual insurance products36 in 2011,the Department estimates an hour bur-den of approximately 26,000 hours withequivalent costs of $1.5 million. TheDepartment’s have estimated this as aone-time cost incurred in 2011, becauseafter the first year, the Department as-sumes any future costs will be de minimis.

Overall, for both the grandfathering no-tice and the recordkeeping requirement,the Department expects there to be a to-tal hour burden of 53,000 hours and a costburden of $318,000.

The Department notes that persons arenot required to respond to, and generallyare not subject to any penalty for failing tocomply with, an ICR unless the ICR has avalid OMB control number.

These paperwork burden estimates aresummarized as follows:

Type of Review: New collection.Agency: Department of Health and Hu-

man Services.Title: Disclosure and Recordkeeping

Requirements for Grandfathered HealthPlans under the Affordable Care Act.

OMB Number: 0938–1093.Affected Public: Business; State, Local,

or Tribal Governments.Respondents: 105,000.Responses: 20,508,000.Frequency of Response: One-time.Estimated Total Annual Burden Hours:

53,000 hours.Estimated Total Annual Burden Cost:

$318,000.If you comment on this information col-

lection and recordkeeping requirements,please do either of the following:

1. Submit your comments electroni-cally as specified in the ADDRESSES sec-tion of this proposed rule; or

2. Submit your comments to the Officeof Information and Regulatory Affairs, Of-fice of Management and Budget,

Attention: OCIIO Desk Officer,OCIIO–9991–IFC

Fax: (202) 395–6974; orEmail:

OIRA_submission@omb.eop.gov

F. Congressional Review Act

These interim final regulations aresubject to the Congressional Review Actprovisions of the Small Business Reg-ulatory Enforcement Fairness Act of1996 (5 U.S.C. 801 et seq.) and havebeen transmitted to Congress and theComptroller General for review.

G. Unfunded Mandates Reform Act

The Unfunded Mandates Reform Act of1995 (Public Law 104–4) requires agen-cies to prepare several analytic statementsbefore proposing any rules that may re-sult in annual expenditures of $100 mil-lion (as adjusted for inflation) by State, lo-cal and tribal governments or the privatesector. These interim final regulations arenot subject to the Unfunded Mandates Re-form Act, because they are being issuedas an interim final regulation. However,consistent with the policy embodied in theUnfunded Mandates Reform Act, these in-terim final regulations have been designedto be the least burdensome alternative forState, local and tribal governments, and theprivate sector, while achieving the objec-tives of the Affordable Care Act.

H. Federalism Statement—Departmentof Labor and Department of Health andHuman Services

Executive Order 13132 outlines fun-damental principles of federalism, andrequires the adherence to specific criteriaby federal agencies in the process of theirformulation and implementation of poli-cies that have ’’substantial direct effects’’on the States, the relationship between thenational government and States, or on thedistribution of power and responsibilitiesamong the various levels of government.Federal agencies promulgating regulationsthat have these federalism implicationsmust consult with State and local officials,and describe the extent of their consulta-tion and the nature of the concerns of Stateand local officials in the preamble to theregulation.

In the Departments’ view, this regula-tion has federalism implications, because

35 EBSA estimates of labor rates include wages, other benefits, and overhead based on the National Occupational Employment Survey (May 2008, Bureau of Labor Statistics) and the Em-ployment Cost Index June 2009, Bureau of Labor Statistics).

36 The Department is not certain on the number of products offered in the individual market and requests comments. After reviewing the number of products offered by various insurers inthe individual market the Department used an estimate of 15 which it believes is a high estimate.

July 19, 2010 76 2010–29 I.R.B.

it has direct effects on the States, the rela-tionship between the national governmentand States, or on the distribution of powerand responsibilities among various levelsof government. However, in the Depart-ments’ view, the federalism implicationsof the regulation is substantially mitigatedbecause, with respect to health insuranceissuers, the Departments expect that themajority of States will enact laws or takeother appropriate action resulting in theirmeeting or exceeding the federal standard.

In general, through section 514, ERISAsupersedes State laws to the extent thatthey relate to any covered employeebenefit plan, and preserves State lawsthat regulate insurance, banking, or se-curities. While ERISA prohibits Statesfrom regulating a plan as an insuranceor investment company or bank, the pre-emption provisions of ERISA section731 and PHS Act section 2724 (im-plemented in 29 CFR 2590.731(a) and45 CFR 146.143(a)) apply so that theHIPAA requirements (including those ofthe Affordable Care Act) are not to be’’construed to supersede any provision ofState law which establishes, implements,or continues in effect any standard orrequirement solely relating to healthinsurance issuers in connection with grouphealth insurance coverage except to theextent that such standard or requirementprevents the application of a requirement’’of a federal standard. The conferencereport accompanying HIPAA indicatesthat this is intended to be the ’’narrowest’’preemption of State laws. (See HouseConf. Rep. No. 104–736, at 205, reprintedin 1996 U.S. Code Cong. & Admin.News 2018.) States may continue toapply State law requirements except tothe extent that such requirements preventthe application of the Affordable CareAct requirements that are the subject ofthis rulemaking. State insurance lawsthat are more stringent than the federalrequirements are unlikely to ’’preventthe application of’’ the Affordable CareAct, and be preempted. Accordingly,States have significant latitude to imposerequirements on health insurance issuersthat are more restrictive than the federallaw.

In compliance with the requirement ofExecutive Order 13132 that agencies ex-amine closely any policies that may havefederalism implications or limit the policy

making discretion of the States, the De-partments have engaged in efforts to con-sult with and work cooperatively with af-fected State and local officials, includingattending conferences of the National As-sociation of Insurance Commissioners andconsulting with State insurance officials onan individual basis. It is expected that theDepartments will act in a similar fashion inenforcing the Affordable Care Act require-ments. Throughout the process of devel-oping these regulations, to the extent fea-sible within the specific preemption pro-visions of HIPAA as it applies to the Af-fordable Care Act, the Departments haveattempted to balance the States’ interestsin regulating health insurance issuers, andCongress’ intent to provide uniform min-imum protections to consumers in everyState. By doing so, it is the Departments’view that they have complied with the re-quirements of Executive Order 13132.

Pursuant to the requirements set forthin section 8(a) of Executive Order 13132,and by the signatures affixed to these reg-ulations, the Departments certify that theEmployee Benefits Security Administra-tion and the Office of Consumer Informa-tion and Insurance Oversight have com-plied with the requirements of ExecutiveOrder 13132 for the attached regulation ina meaningful and timely manner.

V. Statutory Authority

The Department of the Treasury tem-porary regulations are adopted pursuant tothe authority contained in sections 7805and 9833 of the Code.

The Department of Labor interim finalregulations are adopted pursuant to theauthority contained in 29 U.S.C. 1027,1059, 1135, 1161–1168, 1169, 1181–1183,1181 note, 1185, 1185a, 1185b, 1191,1191a, 1191b, and 1191c; sec. 101(g),Pub. L.104–191, 110 Stat. 1936; sec.401(b), Pub. L. 105–200, 112 Stat. 645(42 U.S.C. 651 note); sec. 512(d), Pub. L.110–343, 122 Stat. 3881; sec. 1001, 1201,and 1562(e), Pub. L. 111–148, 124 Stat.119, as amended by Pub. L. 111–152, 124Stat. 1029; Secretary of Labor’s Order6–2009, 74 FR 21524 (May 7, 2009).

The Department of Health and Hu-man Services interim final regulations areadopted pursuant to the authority con-tained in sections 2701 through 2763,2791, and 2792 of the PHS Act (42 USC

300gg through 300gg–63, 300gg–91, and300gg–92), as amended.

* * * * *Health care, Health insurance, Report-

ing and recordkeeping requirements, andState regulation of health insurance.

Steven T. Miller,Deputy Commissioner for

Services and Enforcement,Internal Revenue Service.

Approved June 10, 2010.

Michael F. Mundaca,Assistant Secretary

of the Treasury (Tax Policy).

Signed this 4th day of June, 2010.

Phyllis C. Borzi,Assistant SecretaryEmployee Benefits

Security AdministrationDepartment of Labor

OCIIO–9991–IFC

Approved: June 8, 2010.

Jay Angoff,Director,

Office of Consumer Informationand Insurance Oversight.

Approved: June 9, 2010.

Kathleen Sebelius,Secretary.

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Chapter I

Accordingly, 26 CFR Parts 54 and 602are amended as follows:

PART 54—PENSION EXCISE TAXES

1. The authority citation for part54 is amended by adding entries for§§54.9815–1251T and 54.9815–2714T innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805. * * *Section 54.9815–1251T also issued un-

der 26 U.S.C. 9833.Section 54.9815–2714T also issued un-

der 26 U.S.C. 9833. * * *2. Section 54.9815–1251T is added to

read as follows:

2010–29 I.R.B. 77 July 19, 2010

§54.9815–1251T Preservation of right tomaintain existing coverage (temporary).

(a) Definition of grandfathered healthplan coverage—(1) In general—(i)Grandfathered health plan coveragemeans coverage provided by a grouphealth plan, or a health insurance issuer,in which an individual was enrolled onMarch 23, 2010 (for as long as it main-tains that status under the rules of thissection). A group health plan or grouphealth insurance coverage does not ceaseto be grandfathered health plan coveragemerely because one or more (or even all)individuals enrolled on March 23, 2010cease to be covered, provided that theplan or group health insurance coveragehas continuously covered someone sinceMarch 23, 2010 (not necessarily the sameperson, but at all times at least one per-son). For purposes of this section, a planor health insurance coverage that providesgrandfathered health plan coverage is re-ferred to as a grandfathered health plan.The rules of this section apply separatelyto each benefit package made availableunder a group health plan or health insur-ance coverage.

(ii) Subject to the rules of paragraph (f)of this section for collectively bargainedplans, if an employer or employee organi-zation enters into a new policy, certificate,or contract of insurance after March 23,2010 (because, for example, any previouspolicy, certificate, or contract of insuranceis not being renewed), then that policy, cer-tificate, or contract of insurance is not agrandfathered health plan with respect tothe individuals in the group health plan.

(2) Disclosure of grandfather sta-tus—(i) To maintain status as a grand-fathered health plan, a plan or healthinsurance coverage must include a state-ment, in any plan materials provided to aparticipant or beneficiary describing thebenefits provided under the plan or healthinsurance coverage, that the plan or cov-erage believes it is a grandfathered healthplan within the meaning of section 1251 ofthe Patient Protection and Affordable CareAct and must provide contact informationfor questions and complaints.

(ii) The following model language canbe used to satisfy this disclosure require-ment:

This [group health plan or healthinsurance issuer] believes this [plan or

coverage] is a “grandfathered healthplan” under the Patient Protection andAffordable Care Act (the AffordableCare Act). As permitted by the Af-fordable Care Act, a grandfatheredhealth plan can preserve certain basichealth coverage that was already ineffect when that law was enacted. Be-ing a grandfathered health plan meansthat your [plan or policy] may not in-clude certain consumer protections ofthe Affordable Care Act that apply toother plans, for example, the require-ment for the provision of preventivehealth services without any cost shar-ing. However, grandfathered healthplans must comply with certain otherconsumer protections in the AffordableCare Act, for example, the eliminationof lifetime limits on benefits.

Questions regarding which protec-tions apply and which protections donot apply to a grandfathered health planand what might cause a plan to changefrom grandfathered health plan statuscan be directed to the plan adminis-trator at [insert contact information].[For ERISA plans, insert: You mayalso contact the Employee BenefitsSecurity Administration, U.S. Depart-ment of Labor at 1–866–444–3272or www.dol.gov/ebsa/healthreform.This website has a table summariz-ing which protections do and do notapply to grandfathered health plans.][For individual market policies andnonfederal governmental plans, insert:You may also contact the U.S. Depart-ment of Health and Human Services atwww.healthreform.gov.](3) Documentation of plan or policy

terms on March 23, 2010. To maintain sta-tus as a grandfathered health plan, a grouphealth plan, or group health insurance cov-erage, must, for as long as the plan orhealth insurance coverage takes the posi-tion that it is a grandfathered health plan—

(i) Maintain records documenting theterms of the plan or health insurance cov-erage in connection with the coverage ineffect on March 23, 2010, and any otherdocuments necessary to verify, explain, orclarify its status as a grandfathered healthplan; and

(ii) Make such records available for ex-amination upon request.

(4) Family members enrolling afterMarch 23, 2010. With respect to an indi-vidual who is enrolled in a group healthplan or health insurance coverage onMarch 23, 2010, grandfathered healthplan coverage includes coverage of fam-ily members of the individual who enrollafter March 23, 2010 in the grandfatheredhealth plan coverage of the individual.

(5) Examples. The rules of this para-graph (a) are illustrated by the followingexamples:

Example 1. (i) Facts. A group health plan notmaintained pursuant to a collective bargaining agree-ment provides coverage through a group health insur-ance policy from Issuer X on March 23, 2010. For theplan year beginning January 1, 2012, the plan entersinto a new policy with Issuer Z.

(ii) Conclusion. In this Example 1, for the planyear beginning January 1, 2012, the group health in-surance coverage issued by Z is not a grandfatheredhealth plan under the rules of paragraph (a)(1)(ii) ofthis section because the policy issued by Z did notprovide coverage on March 23, 2010.

Example 2. (i) Facts. A group health plan notmaintained pursuant to a collective bargaining agree-ment offers three benefit packages on March 23,2010. Option F is a self-insured option. Options Gand H are insured options. Beginning July 1, 2013,the plan replaces the issuer for Option H with a newissuer.

(ii) Conclusion. In this Example 2, the coverageunder Option H is not grandfathered health plan cov-erage as of July 1, 2013, consistent with the rule inparagraph (a)(1)(ii) of this section. Whether the cov-erage under Options F and G is grandfathered healthplan coverage is determined under the rules of thissection, including paragraph (g) of this section. Ifthe plan enters into a new policy, certificate, or con-tract of insurance for Option G, Option G’s status asa grandfathered health plan would cease under para-graph (a)(1)(ii) of this section.

(b) Allowance for new employees tojoin current plan—(1) In general. Subjectto paragraph (b)(2) of this section, a grouphealth plan (including health insurancecoverage provided in connection with thegroup health plan) that provided cover-age on March 23, 2010 and has retainedits status as a grandfathered health plan(consistent with the rules of this section,including paragraph (g) of this section)is grandfathered health plan coverage fornew employees (whether newly hired ornewly enrolled) and their families en-rolling in the plan after March 23, 2010.

(2) Anti-abuse rules—(i) Mergers andacquisitions. If the principal purpose ofa merger, acquisition, or similar businessrestructuring is to cover new individualsunder a grandfathered health plan, the planceases to be a grandfathered health plan.

July 19, 2010 78 2010–29 I.R.B.

(ii) Change in plan eligibility. A grouphealth plan or health insurance coverage(including a benefit package under a grouphealth plan) ceases to be a grandfatheredhealth plan if —

(A) Employees are transferred into theplan or health insurance coverage (thetransferee plan) from a plan or healthinsurance coverage under which the em-ployees were covered on March 23, 2010(the transferor plan);

(B) Comparing the terms of the trans-feree plan with those of the transferor plan(as in effect on March 23, 2010) and treat-ing the transferee plan as if it were anamendment of the transferor plan wouldcause a loss of grandfather status under theprovisions of paragraph (g)(1) of this sec-tion; and

(C) There was no bona fide employ-ment-based reason to transfer the employ-ees into the transferee plan. For this pur-pose, changing the terms or cost of cover-age is not a bona fide employment-basedreason.

(3) Examples. The rules of this para-graph (b) are illustrated by the followingexamples:

Example 1. (i) Facts. A group health plan offerstwo benefit packages on March 23, 2010, Options Fand G. During a subsequent open enrollment period,some of the employees enrolled in Option F onMarch 23, 2010 switch to Option G.

(ii) Conclusion. In this Example 1, the grouphealth coverage provided under Option G remainsa grandfathered health plan under the rules of para-graph (b)(1) of this section because employees pre-viously enrolled in Option F are allowed to enroll inOption G as new employees.

Example 2. (i) Facts. Same facts as Example 1,except that the plan sponsor eliminates Option F be-cause of its high cost and transfers employees coveredunder Option F to Option G. If instead of transferringemployees from Option F to Option G, Option F wasamended to match the terms of Option G, then OptionF would cease to be a grandfathered health plan.

(ii) Conclusion. In this Example 2, the plandid not have a bona fide employment-based reasonto transfer employees from Option F to Option G.Therefore, Option G ceases to be a grandfatheredhealth plan with respect to all employees. (However,any other benefit package maintained by the plansponsor is analyzed separately under the rules of thissection.)

Example 3. (i) Facts. A group health plan offerstwo benefit packages on March 23, 2010, Options Hand I. On March 23, 2010, Option H provides cover-age only for employees in one manufacturing plant.Subsequently, the plant is closed, and some employ-ees in the closed plant are moved to another plant.The employer eliminates Option H and the employeesthat are moved are transferred to Option I. If insteadof transferring employees from Option H to Option I,Option H was amended to match the terms of Option

I, then Option H would cease to be a grandfatheredhealth plan.

(ii) Conclusion. In this Example 3, the plan hasa bona fide employment-based reason to transfer em-ployees from Option H to Option I. Therefore, OptionI does not cease to be a grandfathered health plan.

(c) General grandfathering rule—(1)Except as provided in paragraphs (d) and(e) of this section, subtitles A and C oftitle I of the Patient Protection and Af-fordable Care Act (and the amendmentsmade by those subtitles, and the incorpo-ration of those amendments into section9815 and ERISA section 715) do not ap-ply to grandfathered health plan coverage.Accordingly, the provisions of PHS Actsections 2701, 2702, 2703, 2705, 2706,2707, 2709 (relating to coverage for in-dividuals participating in approved clini-cal trials, as added by section 10103 ofthe Patient Protection and Affordable CareAct), 2713, 2715A, 2716, 2717, 2719, and2719A, as added or amended by the PatientProtection and Affordable Care Act, do notapply to grandfathered health plans. (Inaddition, see 45 CFR 147.140(c), whichprovides that the provisions of PHS Actsection 2704, and PHS Act section 2711insofar as it relates to annual limits, do notapply to grandfathered health plans that areindividual health insurance coverage.)

(2) To the extent not inconsistent withthe rules applicable to a grandfatheredhealth plan, a grandfathered health planmust comply with the requirements of theCode, the PHS Act, and ERISA applicableprior to the changes enacted by the PatientProtection and Affordable Care Act.

(d) Provisions applicable to all grand-fathered health plans. The provisions ofPHS Act section 2711 insofar as it re-lates to lifetime limits, and the provisionsof PHS Act sections 2712, 2714, 2715,and 2718, apply to grandfathered healthplans for plan years beginning on or af-ter September 23, 2010. The provisionsof PHS Act section 2708 apply to grand-fathered health plans for plan years begin-ning on or after January 1, 2014.

(e) Applicability of PHS Act sections2704, 2711, and 2714 to grandfatheredgroup health plans and group health in-surance coverage—(1) The provisions ofPHS Act section 2704 as it applies withrespect to enrollees who are under 19 yearsof age, and the provisions of PHS Act sec-tion 2711 insofar as it relates to annual lim-its, apply to grandfathered health plans that

are group health plans (including grouphealth insurance coverage) for plan yearsbeginning on or after September 23, 2010.The provisions of PHS Act section 2704apply generally to grandfathered healthplans that are group health plans (includinggroup health insurance coverage) for planyears beginning on or after January 1,2014.

(2) For plan years beginning before Jan-uary 1, 2014, the provisions of PHS Actsection 2714 apply in the case of an adultchild with respect to a grandfathered healthplan that is a group health plan only if theadult child is not eligible to enroll in an el-igible employer-sponsored health plan (asdefined in section 5000A(f)(2)) other thana grandfathered health plan of a parent.For plan years beginning on or after Jan-uary 1, 2014, the provisions of PHS Actsection 2714 apply with respect to a grand-fathered health plan that is a group healthplan without regard to whether an adultchild is eligible to enroll in any other cov-erage.

(f) Effect on collectively bargainedplans—(1) In general. In the case ofhealth insurance coverage maintained pur-suant to one or more collective bargainingagreements between employee represen-tatives and one or more employers thatwas ratified before March 23, 2010, thecoverage is grandfathered health plan cov-erage at least until the date on which thelast of the collective bargaining agree-ments relating to the coverage that wasin effect on March 23, 2010 terminates.Any coverage amendment made pursuantto a collective bargaining agreement re-lating to the coverage that amends thecoverage solely to conform to any require-ment added by subtitles A and C of titleI of the Patient Protection and AffordableCare Act (and the amendments made bythose subtitles, and the incorporation ofthose amendments into section 9815 andERISA section 715) is not treated as atermination of the collective bargainingagreement. After the date on which thelast of the collective bargaining agree-ments relating to the coverage that wasin effect on March 23, 2010 terminates,the determination of whether healthinsurance coverage maintained pursuantto a collective bargaining agreement isgrandfathered health plan coverage ismade under the rules of this section otherthan this paragraph (f) (comparing the

2010–29 I.R.B. 79 July 19, 2010

terms of the health insurance coverageafter the date the last collective bargainingagreement terminates with the terms ofthe health insurance coverage that werein effect on March 23, 2010) and, for anychanges in insurance coverage after thetermination of the collective bargainingagreement, under the rules of paragraph(a)(1)(ii) of this section.

(2) Examples. The rules of this para-graph (f) are illustrated by the followingexamples:

Example 1. (i) Facts. A group health plan main-tained pursuant to a collective bargaining agreementprovides coverage through a group health insurancepolicy from Issuer W on March 23, 2010. The col-lective bargaining agreement has not been amendedand will not expire before December 31, 2011. Thegroup health plan enters into a new group health in-surance policy with Issuer Y for the plan year startingon January 1, 2011.

(ii) Conclusion. In this Example 1, the grouphealth plan, and the group health insurance policyprovided by Y, remains a grandfathered health planwith respect to existing employees and new employ-ees and their families because the coverage is main-tained pursuant to a collective bargaining agreementratified prior to March 23, 2010 that has not termi-nated.

Example 2. (i) Facts. Same facts as Example 1,except the coverage with Y is renewed under a newcollective bargaining agreement effective January 1,2012, with the only changes since March 23, 2010being changes that do not cause the plan to cease tobe a grandfathered health plan under the rules of thissection, including paragraph (g) of this section.

(ii) Conclusion. In this Example 2, the grouphealth plan remains a grandfathered health planpursuant to the rules of this section. Moreover, thegroup health insurance policy provided by Y remainsa grandfathered health plan under the rules of thissection, including paragraph (g) of this section.

(g) Maintenance of grandfather sta-tus—(1) Changes causing cessation ofgrandfather status. Subject to paragraph(g)(2) of this section, the rules of this para-graph (g)(1) describe situations in which agroup health plan or health insurance cov-erage ceases to be a grandfathered healthplan.

(i) Elimination of benefits. The elim-ination of all or substantially all benefitsto diagnose or treat a particular conditioncauses a group health plan or health in-surance coverage to cease to be a grand-fathered health plan. For this purpose, theelimination of benefits for any necessaryelement to diagnose or treat a condition isconsidered the elimination of all or sub-stantially all benefits to diagnose or treata particular condition.

(ii) Increase in percentage cost-shar-ing requirement. Any increase, measured

from March 23, 2010, in a percentage cost-sharing requirement (such as an individ-ual’s coinsurance requirement) causes agroup health plan or health insurance cov-erage to cease to be a grandfathered healthplan.

(iii) Increase in a fixed-amount cost-sharing requirement other than a copay-ment. Any increase in a fixed-amountcost-sharing requirement other than a co-payment (for example, deductible or out-of-pocket limit), determined as of the ef-fective date of the increase, causes a grouphealth plan or health insurance coverage tocease to be a grandfathered health plan, ifthe total percentage increase in the cost-sharing requirement measured from March23, 2010 exceeds the maximum percentageincrease (as defined in paragraph (g)(3)(ii)of this section).

(iv) Increase in a fixed-amount copay-ment. Any increase in a fixed-amount co-payment, determined as of the effectivedate of the increase, causes a group healthplan or health insurance coverage to ceaseto be a grandfathered health plan, if thetotal increase in the copayment measuredfrom March 23, 2010 exceeds the greaterof:

(A) An amount equal to $5 increased bymedical inflation, as defined in paragraph(g)(3)(i) of this section (that is, $5 timesmedical inflation, plus $5), or

(B) The maximum percentage increase(as defined in paragraph (g)(3)(ii) of thissection), determined by expressing the to-tal increase in the copayment as a percent-age.

(v) Decrease in contribution rate by em-ployers and employee organizations—(A)Contribution rate based on cost of cover-age. A group health plan or group healthinsurance coverage ceases to be a grandfa-thered health plan if the employer or em-ployee organization decreases its contri-bution rate based on cost of coverage (asdefined in paragraph (g)(3)(iii)(A) of thissection) towards the cost of any tier of cov-erage for any class of similarly situated in-dividuals (as described in §54.9802–1(d))by more than 5 percentage points belowthe contribution rate for the coverage pe-riod that includes March 23, 2010.

(B) Contribution rate based on a for-mula. A group health plan or group healthinsurance coverage ceases to be a grandfa-thered health plan if the employer or em-ployee organization decreases its contribu-

tion rate based on a formula (as definedin paragraph (g)(3)(iii)(B) of this section)towards the cost of any tier of coveragefor any class of similarly situated individ-uals (as described in §54.9802–1(d)) bymore than 5 percent below the contributionrate for the coverage period that includesMarch 23, 2010.

(vi) Changes in annual limits—(A) Ad-dition of an annual limit. A group healthplan, or group health insurance coverage,that, on March 23, 2010, did not imposean overall annual or lifetime limit on thedollar value of all benefits ceases to bea grandfathered health plan if the planor health insurance coverage imposes anoverall annual limit on the dollar value ofbenefits.

(B) Decrease in limit for a plan or cov-erage with only a lifetime limit. A grouphealth plan, or group health insurance cov-erage, that, on March 23, 2010, imposed anoverall lifetime limit on the dollar value ofall benefits but no overall annual limit onthe dollar value of all benefits ceases to bea grandfathered health plan if the plan orhealth insurance coverage adopts an over-all annual limit at a dollar value that islower than the dollar value of the lifetimelimit on March 23, 2010.

(C) Decrease in limit for a plan orcoverage with an annual limit. A grouphealth plan, or group health insurance cov-erage, that, on March 23, 2010, imposedan overall annual limit on the dollar valueof all benefits ceases to be a grandfatheredhealth plan if the plan or health insurancecoverage decreases the dollar value of theannual limit (regardless of whether theplan or health insurance coverage also im-posed an overall lifetime limit on March23, 2010 on the dollar value of all bene-fits).

(2) Transitional rules—(i) Changesmade prior to March 23, 2010. If a grouphealth plan or health insurance issuermakes the following changes to the termsof the plan or health insurance coverage,the changes are considered part of theterms of the plan or health insurance cov-erage on March 23, 2010 even thoughthey were not effective at that time andsuch changes do not cause a plan or healthinsurance coverage to cease to be a grand-fathered health plan:

(A) Changes effective after March 23,2010 pursuant to a legally binding contractentered into on or before March 23, 2010;

July 19, 2010 80 2010–29 I.R.B.

(B) Changes effective after March 23,2010 pursuant to a filing on or beforeMarch 23, 2010 with a State insurancedepartment; or

(C) Changes effective after March 23,2010 pursuant to written amendments toa plan that were adopted on or beforeMarch 23, 2010.

(ii) Changes made after March 23,2010 and adopted prior to issuance ofregulations. If, after March 23, 2010, agroup health plan or health insurance is-suer makes changes to the terms of theplan or health insurance coverage andthe changes are adopted prior to June 14,2010, the changes will not cause the planor health insurance coverage to cease to bea grandfathered health plan if the changesare revoked or modified effective as ofthe first day of the first plan year (in theindividual market, policy year) beginningon or after September 23, 2010, and theterms of the plan or health insurance cov-erage on that date, as modified, would notcause the plan or coverage to cease to be agrandfathered health plan under the rulesof this section, including paragraph (g)(1)of this section. For this purpose, changeswill be considered to have been adoptedprior to June 14, 2010 if:

(A) The changes are effective beforethat date;

(B) The changes are effective on or af-ter that date pursuant to a legally bindingcontract entered into before that date;

(C) The changes are effective on or afterthat date pursuant to a filing before thatdate with a State insurance department; or

(D) The changes are effective on or af-ter that date pursuant to written amend-ments to a plan that were adopted beforethat date.

(3) Definitions—(i) Medical inflationdefined. For purposes of this paragraph(g), the term medical inflation means theincrease since March 2010 in the overallmedical care component of the ConsumerPrice Index for All Urban Consumers(CPI-U) (unadjusted) published by the De-partment of Labor using the 1982 — 1984base of 100. For this purpose, the increasein the overall medical care componentis computed by subtracting 387.142 (theoverall medical care component of theCPI-U (unadjusted) published by the De-partment of Labor for March 2010, usingthe 1982 — 1984 base of 100) from theindex amount for any month in the 12

months before the new change is to takeeffect and then dividing that amount by387.142.

(ii) Maximum percentage increase de-fined. For purposes of this paragraph (g),the term maximum percentage increasemeans medical inflation (as defined inparagraph (g)(3)(i) of this section), ex-pressed as a percentage, plus 15 percent-age points.

(iii) Contribution rate defined. For pur-poses of paragraph (g)(1)(v) of this sec-tion:

(A) Contribution rate based on costof coverage. The term contribution ratebased on cost of coverage means theamount of contributions made by an em-ployer or employee organization comparedto the total cost of coverage, expressed asa percentage. The total cost of coverage isdetermined in the same manner as the ap-plicable premium is calculated under theCOBRA continuation provisions of sec-tion 4980B(f)(4), section 604 of ERISA,and section 2204 of the PHS Act. In thecase of a self-insured plan, contributionsby an employer or employee organizationare equal to the total cost of coverage mi-nus the employee contributions towardsthe total cost of coverage.

(B) Contribution rate based on a for-mula. The term contribution rate basedon a formula means, for plans that, onMarch 23, 2010, made contributions basedon a formula (such as hours worked or tonsof coal mined), the formula.

(4) Examples. The rules of this para-graph (g) are illustrated by the followingexamples:

Example 1. (i) Facts. On March 23, 2010, agrandfathered health plan has a coinsurance require-ment of 20% for inpatient surgery. The plan is subse-quently amended to increase the coinsurance require-ment to 25%.

(ii) Conclusion. In this Example 1, the increase inthe coinsurance requirement from 20% to 25% causesthe plan to cease to be a grandfathered health plan.

Example 2. (i) Facts. Before March 23, 2010, theterms of a group health plan provide benefits for aparticular mental health condition, the treatment forwhich is a combination of counseling and prescrip-tion drugs. Subsequently, the plan eliminates benefitsfor counseling.

(ii) Conclusion. In this Example 2, the plan ceasesto be a grandfathered health plan because counselingis an element that is necessary to treat the condition.Thus the plan is considered to have eliminated sub-stantially all benefits for the treatment of the condi-tion.

Example 3. (i) Facts. On March 23, 2010, agrandfathered health plan has a copayment require-

ment of $30 per office visit for specialists. The plan issubsequently amended to increase the copayment re-quirement to $40. Within the 12-month period beforethe $40 copayment takes effect, the greatest value ofthe overall medical care component of the CPI-U (un-adjusted) is 475.

(ii) Conclusion. In this Example 3, the increase inthe copayment from $30 to $40, expressed as a per-centage, is 33.33% (40 - 30 = 10; 10 ÷ 30 = 0.3333;0.3333 = 33.33%). Medical inflation (as defined inparagraph (g)(3)(i) of this section) from March 2010is 0.2269 (475 - 387.142 = 87.858; 87.858 ÷ 387.142= 0.2269). The maximum percentage increase per-mitted is 37.69% (0.2269 = 22.69%; 22.69% + 15% =37.69%). Because 33.33% does not exceed 37.69%,the change in the copayment requirement at that timedoes not cause the plan to cease to be a grandfatheredhealth plan.

Example 4. (i) Facts. Same facts as Example 3,except the grandfathered health plan subsequently in-creases the $40 copayment requirement to $45 for alater plan year. Within the 12-month period beforethe $45 copayment takes effect, the greatest value ofthe overall medical care component of the CPI-U (un-adjusted) is 485.

(ii) Conclusion. In this Example 4, the increasein the copayment from $30 (the copayment that wasin effect on March 23, 2010) to $45, expressed as apercentage, is 50% (45 - 30 = 15; 15 ÷ 30 = 0.5; 0.5= 50%). Medical inflation (as defined in paragraph(g)(3)(i) of this section) from March 2010 is 0.2527(485 - 387.142 = 97.858; 97.858 ÷ 387.142 = 0.2527).The increase that would cause a plan to cease to be agrandfathered health plan under paragraph (g)(1)(iv)of this section is the greater of the maximum percent-age increase of 40.27% (0.2527 = 25.27%; 25.27% +15% = 40.27%), or $6.26 ($5 x 0.2527 = $1.26; $1.26+ $5 = $6.26).

Because 50% exceeds 40.27% and $15 exceeds$6.26, the change in the copayment requirement atthat time causes the plan to cease to be a grandfa-thered health plan.

Example 5. (i) Facts. On March 23, 2010, agrandfathered health plan has a copayment of $10 peroffice visit for primary care providers. The plan issubsequently amended to increase the copayment re-quirement to $15. Within the 12-month period beforethe $15 copayment takes effect, the greatest value ofthe overall medical care component of the CPI-U (un-adjusted) is 415.

(ii) Conclusion. In this Example 5, the increasein the copayment, expressed as a percentage, is 50%(15 - 10 = 5; 5 ÷ 10 = 0.5; 0.5 = 50%). Medicalinflation (as defined in paragraph (g)(3) of this sec-tion) from March 2010 is 0.0720 (415.0 - 387.142 =27.858; 27.858 ÷ 387.142 = 0.0720). The increasethat would cause a plan to cease to be a grandfatheredhealth plan under paragraph (g)(1)(iv) of this sectionis the greater of the maximum percentage increase of22.20% (0.0720 = 7.20%; 7.20% + 15% = 22.20), or$5.36 ($5 x 0.0720 = $0.36; $0.36 + $5 = $5.36). The$5 increase in copayment in this Example 5 wouldnot cause the plan to cease to be a grandfatheredhealth plan pursuant to paragraph (g)(1)(iv)this sec-tion, which would permit an increase in the copay-ment of up to $5.36.

Example 6. (i) Facts. The same facts as Exam-ple 5, except on March 23, 2010, the grandfatheredhealth plan has no copayment ($0) for office visits

2010–29 I.R.B. 81 July 19, 2010

for primary care providers. The plan is subsequentlyamended to increase the copayment requirement to$5.

(ii) Conclusion. In this Example 6, medical in-flation (as defined in paragraph (g)(3)(i) of this sec-tion) from March 2010 is 0.0720 (415.0 - 387.142 =27.858; 27.858 ÷ 387.142 = 0.0720). The increasethat would cause a plan to cease to be a grandfatheredhealth plan under paragraph (g)(1)(iv)(A) of this sec-tion is $5.36 ($5 x 0.0720 = $0.36; $0.36 + $5 =$5.36). The $5 increase in copayment in this Example6 is less than the amount calculated pursuant to para-graph (g)(1)(iv)(A) of this section of $5.36. Thus, the$5 increase in copayment does not cause the plan tocease to be a grandfathered health plan.

Example 7. (i) Facts. On March 23, 2010, aself-insured group health plan provides two tiers ofcoverage — self-only and family. The employer con-tributes 80% of the total cost of coverage for self-onlyand 60% of the total cost of coverage for family. Sub-sequently, the employer reduces the contribution to50% for family coverage, but keeps the same contri-bution rate for self-only coverage.

(ii) Conclusion. In this Example 7, the decreaseof 10 percentage points for family coverage in thecontribution rate based on cost of coverage causes theplan to cease to be a grandfathered health plan. Thefact that the contribution rate for self-only coverageremains the same does not change the result.

Example 8. (i) Facts. On March 23, 2010, aself-insured grandfathered health plan has a COBRApremium for the 2010 plan year of $5000 for self-only coverage and $12,000 for family coverage. Therequired employee contribution for the coverage is$1000 for self-only coverage and $4000 for familycoverage. Thus, the contribution rate based on cost

of coverage for 2010 is 80% ((5000 - 1000)/5000) forself-only coverage and 67% ((12,000 - 4000)/12,000)for family coverage. For a subsequent plan year, theCOBRA premium is $6000 for self-only coverageand $15,000 for family coverage. The employee con-tributions for that plan year are $1200 for self-onlycoverage and $5000 for family coverage. Thus, thecontribution rate based on cost of coverage is 80%((6000 - 1200)/6000) for self-only coverage and 67%((15,000 - 5000)/15,000) for family coverage.

(ii) Conclusion. In this Example 8, because thereis no change in the contribution rate based on cost ofcoverage, the plan retains its status as a grandfatheredhealth plan. The result would be the same if all orpart of the employee contribution was made pre-taxthrough a cafeteria plan under section 125 of the In-ternal Revenue Code.

Example 9. (i) Facts. Before March 23, 2010,Employer W and Individual B enter into a legallybinding employment contract that promises B life-time health coverage upon termination. Prior to ter-mination, B is covered by W’s self-insured grandfa-thered group health plan. B is terminated after March23, 2010 and W purchases a new health insurance pol-icy providing coverage to B, consistent with the termsof the employment contract.

(ii) Conclusion. In this Example 9, because noindividual is enrolled in the health insurance policyon March 23, 2010, it is not a grandfathered healthplan.

(h) Expiration date. This section ex-pires on or before June 14, 2013.

3. Section 54.9815–2714T is amendedby revising paragraphs (h) and (i) to readas follows:

* * * * *(h) Applicability date. The provisions

of this section apply for plan years begin-ning on or after September 23, 2010. See§54.9815–1251T for determining the ap-plication of this section to grandfatheredhealth plans.

(i) Expiration date. This section expireson or before May 10, 2013.

PART 602—OMB CONTROLNUMBERS UNDER THE PAPERWORKREDUCTION ACT

4. The authority citation for part 602continues to read in part as follows:

Authority: 26 U.S.C. 7805. * * *5. Section 602.101(b) is amended by

adding the following entry in numericalorder to the table to read as follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

CFR part or section whereidentified and described

Current OMBcontrol No.

* * * * *54.9815–1251T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–2178

* * * * *

(Filed by the Office of the Federal Register on June 14, 2010,11:15 a.m., and published in the issue of the Federal Registerfor June 17, 2010, 75 F.R. 34537)

July 19, 2010 82 2010–29 I.R.B.

Part III. Administrative, Procedural, and MiscellaneousInformation Reporting Underthe Amendments to Section6041 for Payments toCorporations and Paymentsof Gross Proceeds and WithRespect to Property

Notice 2010–51

PURPOSE

This notice invites public commentsregarding guidance to be provided con-cerning new requirements with respectto the reporting of payments made in thecourse of the payor’s trade or business.The new reporting requirements are insection 6041 of the Internal Revenue Code(the Code), which was amended by sec-tion 9006 of the Patient Protection andAffordable Care Act of 2010, Pub. L. No.111–148, 124 Stat. 119 (the Act). Verygenerally, these amendments expand ex-isting information reporting requirementsto apply to payments made to corporationsand to include certain payments of grossproceeds and with respect to property. Thenew reporting requirements under theseamendments apply to payments made afterDecember 31, 2011.

BACKGROUND

Section 6041 generally requires infor-mation returns to be made by every per-son (payor) engaged in a trade or businesswho makes payments, as defined in sec-tion 6041(a), aggregating $600 or more inany taxable year to another person (payee)in the course of the payor’s trade or busi-ness. The information returns must befiled with the Internal Revenue Serviceand corresponding statements must be sentto each payee. Form 1099–MISC, Mis-cellaneous Income, is generally used forthis purpose, although Form W–2, Wageand Tax Statement, is generally used forpayments to employees. See Treas. Reg.§1.6041–1(a)(2).

The Act amended section 6041(a) toadd payments of “amounts in considera-tion for property” and “gross proceeds” tothe list of payments subject to reporting.However, the Act retained existing ex-ceptions in section 6041(a) for “payments

to which section 6042(a)(1), 6044(a)(1),6047(e), 6049(a), or 6050N(a) applies,”and “payments with respect to which astatement is required under the author-ity of section 6042(a)(2), 6044(a)(2), or6045.” These excepted payments includemost interest, dividends, royalties, andsecurities and broker transactions.

The Act also added new section 6041(h)regarding the application of section 6041to payments made to corporations. Exist-ing regulations under section 6041 gener-ally except payments to corporations, ex-empt organizations, governmental entities,international organizations, and retirementplans from reporting under section 6041.See Treas. Reg. §1.6041–3(p). New sec-tion 6041(h) provides that, notwithstand-ing any regulation prescribed by the Secre-tary before the date of enactment, for pur-poses of section 6041, the term “person”includes any corporation that is not an or-ganization exempt from tax under section501(a). Thus, under new section 6041(h),payments to corporations that are not tax-exempt may be subject to information re-porting.

Finally, the Act added new section6041(i) authorizing the Secretary to pre-scribe such regulations and other guidanceas may be appropriate or necessary to carryout the purposes of section 6041, includ-ing rules to prevent duplicative reportingof transactions. Also, section 6041(a) pro-vides generally that information returnsunder section 6041 shall be furnished un-der such regulations and in such form andmanner, and to such extent, as may beprescribed by the Secretary.

REQUEST FOR PUBLIC COMMENTS

The Treasury Department and the Inter-nal Revenue Service intend to issue guid-ance that will implement these changes tosection 6041 in a manner that minimizesburden and avoids duplicative reporting.This notice requests comments regardingpossible approaches to the section 6041guidance that will assist in achieving thosegoals.

For example, the Treasury Departmentand the Internal Revenue Service have al-ready issued a proposed regulation thatwould allow a broad exception from sec-tion 6041 information reporting for pay-

ment card transactions that would other-wise be reportable under section 6050Wof the Code, effective for payments begin-ning in 2011. This proposed regulation isexpected to be finalized later this summer.Thus, business purchases made with pay-ment cards will be exempt from informa-tion reporting under section 6041.

The Treasury Department and the Inter-nal Revenue Service request comments onadditional circumstances in which duplica-tive reporting might otherwise occur un-der section 6041 and another Code section,such as section 3402(t), and on rules thatwould prevent such duplicative reporting.Specific comments are also requested re-garding the burden associated with imple-menting the new reporting requirementsfor different types of taxpayers and busi-nesses.

Additional issues on which commentsare requested include:

1. The appropriate scope of the terms“gross proceeds” and “amounts in consid-eration for property” in section 6041(a), asamended, and how to interpret these termsin a manner that minimizes the reportingburden and avoids duplicative reporting.

2. Whether or how the expanded report-ing requirements should apply to paymentsbetween affiliated corporations, such aspayments related to intercompany transac-tions within the same consolidated group.

3. The appropriate time and mannerof reporting to the Service, and what, ifany, changes to existing practices for Form1099 information reporting to the Serviceare needed to minimize burden in compli-ance with the new reporting requirements.

4. What, if any, changes to Form W–9,Request for Taxpayer Identification Num-ber and Certification, and the existingrules for soliciting taxpayer identificationnumbers (TINs) are needed to minimizethe burden for payors to obtain TINs frompayees, what are the privacy concernswith respect to TINs, and what are otherconcerns regarding identifying payees.

5. How should the backup withholdingrequirements for missing TINs under theexpanded new reporting requirements beadministered in order to minimize burdenon payors.

Interested parties are invited tosubmit comments on this notice by

2010–29 I.R.B. 83 July 19, 2010

September 29, 2010. Written commentsshould be submitted to: Internal Rev-enue Service, CC:PA:LPD:PR (Notice2010–51), Room 5203, P.O. Box 7604,Ben Franklin Station, Washington, DC20044. Alternatively, comments maybe hand delivered between the hoursof 8:00 a.m. and 4:00 p.m. Mondayto Friday to CC:PA:LPD:PR (Notice

2010–51), Courier’s Desk, InternalRevenue Service, 1111 ConstitutionAvenue NW, Washington, D.C. Commentsmay also be transmitted electronicallyvia the following e-mail address:Notice.Comments@irscounsel.treas.gov.Please include “Notice 2010–51” inthe subject line of any electroniccommunications. All comments will

be available for public inspection andcopying.

The principal author of this notice isKeith Brau of the Office of AssociateChief Counsel (Procedure & Administra-tion). For further information regardingthis notice, please contact Keith Brau at(202) 622–4940 (not a toll-free call).

July 19, 2010 84 2010–29 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking byCross-Reference toTemporary Regulations

Group Health Plans andHealth Insurance CoverageRules Relating to Status asa Grandfathered Health Planunder the Patient Protectionand Affordable Care Act

REG–118412–10

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingby cross-reference to temporary regula-tions.

SUMMARY: Elsewhere in this issue of theBulletin, the IRS is issuing temporary reg-ulations (T.D. 9489) under the provisionsof the Patient Protection and AffordableCare Act (the Affordable Care Act) deal-ing with rules relating to status as a grand-fathered health plan. The IRS is issuingthe temporary regulations at the same timethat the Employee Benefits Security Ad-ministration of the U.S. Department of La-bor and the Office of Consumer Informa-tion and Insurance Oversight of the U.S.Department of Health and Human Servicesare issuing substantially similar interim fi-nal regulations with respect to group healthplans and health insurance coverage of-fered in connection with a group healthplan under the Employee Retirement In-come Security Act of 1974 and the Pub-lic Health Service Act. The temporaryregulations provide guidance to employ-ers, group health plans, and health insur-ance issuers providing group health insur-ance coverage. The text of those tempo-rary regulations also serves as the text ofthese proposed regulations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by September 15, 2010.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–118412–10),room 5205, Internal Revenue Service,

P.O. Box 7604, Ben Franklin Sta-tion, Washington, DC 20044. Sub-missions may be hand-delivered to:CC:PA:LPD:PR (REG–118412–10),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington DC 20224. Alternatively,taxpayers may submit comments elec-tronically via the Federal eRulemakingPortal at http://www.regulations.gov (IRSREG–118412–10).

FOR FURTHER INFORMATIONCONTACT: Concerning the regulations,Karen Levin at 202–622–6080; concern-ing submissions of comments or to requesta hearing, Regina Johnson, 202–622–7180(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information containedin this notice of proposed rulemaking hasbeen submitted to the Office of Manage-ment and Budget for review in accordancewith the Paperwork Reduction Act of 1995(44 U.S.C. 3507(d)). Comments on thecollection of information should be sent tothe Office of Management and Budget,Attn: Desk Officer for the Departmentof the Treasury, Office of Informationand Regulatory Affairs, Washington, DC20503, with copies to the Internal Rev-enue Service, Attn: IRS Reports Clear-ance Officer, SE:W:CAR:MP:T:T:SP,Washington, DC 20224. Comments onthe collection of information should bereceived by August 16, 2010. Commentsare specifically requested concerning:

• Whether the proposed collection ofinformation is necessary for the properperformance of the functions of theInternal Revenue Service, includingwhether the information will havepractical utility;

• The accuracy of the estimated burdensassociated with the proposed collec-tion of information (see the preambleto the temporary regulations publishedelsewhere in this issue of the Bulletin);

• How to enhance the quality, utility, andclarity of the information to be col-lected;

• How to minimize the burden of com-plying with the proposed collection ofinformation, including the applicationof automated collection techniques orother forms of information technology;and

• Estimates of capital or start-up costsand costs of operation, maintenance,and purchase of services to provide in-formation.

The collections of information are in§54.9815–1251T(a)(2) and (a)(3) (seethe temporary regulations published else-where in this issue of the Bulletin). Thetemporary regulations require any grouphealth plan or group health insurance cov-erage intended to be a grandfathered healthplan to include in any description of planbenefits provided to participants or bene-ficiaries a statement that the plan or issuerbelieves the plan or health insurance cov-erage is a grandfathered health plan undersection 1251 of the Affordable Care Act.The temporary regulations provide modellanguage for this purpose. The temporaryregulations also require any such plan orissuer to maintain records documentingthe terms of the plan or health insurancecoverage on March 23, 2010 and any otherdocuments necessary to verify, explain, orclarify its status as a grandfathered healthplan. The likely respondents to the col-lections of information requirements arebusiness or other for-profit institutions,and nonprofit institutions. Responses tothis collection of information are manda-tory if a plan or health insurance coverageis intended to be a grandfathered healthplan under the Affordable Care Act.

An agency may not conduct or sponsor,and a person is not required to respond to, acollection of information unless it displaysa valid control number assigned by the Of-fice of Management and Budget.

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally tax returns and tax returninformation are confidential, as requiredby 26 U.S.C. 6103.

2010–29 I.R.B. 85 July 19, 2010

Background

The temporary regulations publishedelsewhere in this issue of the Bulletin add§54.9815–1251T to the Miscellaneous Ex-cise Tax Regulations. The proposed andtemporary regulations are being publishedas part of a joint rulemaking with the De-partment of Labor and the Departmentof Health and Human Services (the jointrulemaking). The text of those temporaryregulations also serves as the text of theseproposed regulations. The preamble tothe temporary regulations explains thetemporary regulations and these proposedregulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It has also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to this proposed regu-lation. It is hereby certified that the collec-tions of information contained in this no-tice of proposed rulemaking will not havea significant impact on a substantial num-ber of small entities. Accordingly, a regu-latory flexibility analysis is not required.

The temporary regulations require anygroup health plan or group health insur-ance coverage intended to be a grand-fathered health plan to include in anydescription of plan benefits provided toparticipants or beneficiaries a statementthat the plan or issuer believes the planor health insurance coverage is a grandfa-thered health plan under section 1251 ofthe Affordable Care Act. The temporaryregulations provide model language forthis purpose. This disclosure requirementapplies only when the plan or issuer isotherwise distributing a description ofplan benefits. For group health plansmaintained by small entities, it is antici-pated that the health insurance issuer willprepare the description of plan benefitsin almost all cases. Thus, there will al-most always be no burden of statementpreparation imposed on small businessentities. Because the distribution is notrequired other than when a descriptionof plan benefits is otherwise provided,the distribution requirement will not add

any burden to plans maintained by smallbusiness entities. For this reason, theinformation collection requirement of pro-viding a statement, in descriptions of planbenefits, that the plan is intended to be agrandfathered health plan will not imposea significant impact on a substantial num-ber of small entities.

The temporary regulations also requireany plan or issuer intending the grouphealth plan or health insurance coverage tobe a grandfathered health plan to maintainrecords documenting the terms of the planor health insurance coverage on March 23,2010 and any other documents necessaryto verify, explain, or clarify its status asa grandfathered health plan. Under thetemporary regulations, if a sponsor of agroup health plan switches to an insurancepolicy under which none of its employ-ees was covered on March 23, 2010, theplan ceases to be a grandfathered healthplan. Thus, an insured plan can maintainits status as a grandfathered health planonly by renewing its contract with thesame health insurance issuer. Almostall plans maintained by small businessentities are insured plans, and the issuer isalso required to satisfy this recordkeepingrequirement for the health insurancecoverage to remain a grandfathered healthplan. It is anticipated that the issuerwill satisfy this recordkeeping obligationfor almost all small businesses. Forthis reason, this information collectionrequirement will not impose a significantimpact on a substantial number of smallentities.

For further information and for analy-ses relating to the joint rulemaking, see thepreamble to the joint rulemaking. Pursuantto section 7805(f) of the Internal RevenueCode, this regulation has been submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(a signed original and eight (8) copies)or electronic comments that are submittedtimely to the IRS. Comments are specifi-cally requested on the clarity of the pro-posed regulations and how they may be

made easier to understand. All commentswill be available for public inspection andcopying. A public hearing may be sched-uled if requested in writing by a personthat timely submits written comments. Ifa public hearing is scheduled, notice of thedate, time, and place for the hearing willbe published in the Federal Register.

Drafting Information

The principal author of these pro-posed regulations is Karen Levin, Officeof the Division Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities), IRS. The proposed regulations,as well as the temporary regulations,have been developed in coordination withpersonnel from the U.S. Department ofLabor and the U.S. Department of Healthand Human Services.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 54 is pro-posed to be amended as follows:

PART 54—PENSION EXCISE TAXES

Paragraph 1. The authority citation forpart 54 is amended by adding an entry innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 54.9815–1251 also issued un-

der 26 U.S.C. 9833. * * *Par. 2. Section 54.9815–1251 is added

to read as follows:

§54.9815–1251 Preservation of right tomaintain existing coverage.

[The text of proposed §54.9815–1251 isthe same as the text of §54.9815–1251Tpublished elsewhere in this issue of theBulletin].

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on June 14, 2010,11:15 a.m., and published in the issue of the Federal Registerfor June 17, 2010, 75 F.R. 34571)

July 19, 2010 86 2010–29 I.R.B.

Deletions From CumulativeList of OrganizationsContributions to Whichare Deductible Under Section170 of the Code

Announcement 2010–45

The Internal Revenue Service has re-voked its determination that the organi-zations listed below qualify as organiza-tions described in sections 501(c)(3) and170(c)(2) of the Internal Revenue Code of1986.

Generally, the Service will not disallowdeductions for contributions made to alisted organization on or before the dateof announcement in the Internal RevenueBulletin that an organization no longerqualifies. However, the Service is notprecluded from disallowing a deductionfor any contributions made after an or-ganization ceases to qualify under section170(c)(2) if the organization has not timelyfiled a suit for declaratory judgment undersection 7428 and if the contributor (1) hadknowledge of the revocation of the rulingor determination letter, (2) was aware thatsuch revocation was imminent, or (3) wasin part responsible for or was aware of theactivities or omissions of the organizationthat brought about this revocation.

If on the other hand a suit for declara-tory judgment has been timely filed, con-tributions from individuals and organiza-tions described in section 170(c)(2) thatare otherwise allowable will continue tobe deductible. Protection under section7428(c) would begin on July 12, and wouldend on the date the court first determinesthat the organization is not described insection 170(c)(2) as more particularly setforth in section 7428(c)(1). For individualcontributors, the maximum deduction pro-tected is $1,000, with a husband and wifetreated as one contributor. This benefit isnot extended to any individual, in wholeor in part, for the acts or omissions of theorganization that were the basis for revo-cation.

Baby Boomers and Beyond, Inc.Denham Springs, LA

Children’s Angelcare Aid International,Inc.San Diego, CA

Institute for Unpopular CultureSan Francisco, CA

Jolene’s Horse RescuePalmdale, CA

Military Order of the Cootie of the USTent # 20,Wellston, OK

Rochester Hills Dance & Arts SocietyRochester Hills, MI

City ClubDallas, TX

Four a Foundation an Integrated Auxiliaryof First Baptist ChurchGarland, TX

Georgian Community Services Program,Inc.Morrow, GA

TARU Gardens, IncCharlottesville, VA

UTAH Citizens AllianceSalt Lake City, UT

Notice of Disposition ofDeclaratory JudgmentProceedings under Section7428

Announcement 2010–46

This announcement serves notice todonors that on February 5, 2009, theUnited States Tax Court entered a stipu-lated decision that effective December 20,2000, the organization listed below is not

recognized as an organization described insection 501(c)(3), is not exempt from taxunder section 501(a), and is not eligible toreceive deductible charitable contributionsas an organization described in section170(c)(2).

Douglas and Valerie Wood CharitableSupporting OrganizationLatrobe, PA

DPA Alliance CorporationProvo, UT

After Bankruptcy Foundation, Inc.Fishers, IN

America’s Faith Centered Education, Inc.Sandy, UT

Airport Working Group of Orange CountyNewport Beach, CA

Bear Soldier IndustriesBismarck, ND

Chadwell-Townsend Private FoundationBellbrook, OH

Golden Age Benefits SocietyWestlake Village, CA

Jordan Ministries, Inc.Dover, FL

Newton Family FoundationWest Jordan, UT

United American Housing & EducationFoundationHouston, TX

2010–29 I.R.B. 87 July 19, 2010

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

July 19, 2010 i 2010–29 I.R.B.

Numerical Finding List1

Bulletins 2010–27 through 2010–29

Announcements:

2010-43, 2010-27 I.R.B. 42

2010-44, 2010-28 I.R.B. 54

2010-45, 2010-29 I.R.B. 87

2010-46, 2010-29 I.R.B. 87

Notices:

2010-48, 2010-27 I.R.B. 9

2010-49, 2010-27 I.R.B. 10

2010-50, 2010-27 I.R.B. 12

2010-51, 2010-29 I.R.B. 83

Proposed Regulations:

REG-112841-10, 2010-27 I.R.B. 41

REG-118412-10, 2010-29 I.R.B. 85

Revenue Procedures:

2010-25, 2010-27 I.R.B. 16

Revenue Rulings:

2010-18, 2010-27 I.R.B. 1

Treasury Decisions:

9486, 2010-27 I.R.B. 3

9487, 2010-28 I.R.B. 48

9488, 2010-28 I.R.B. 51

9489, 2010-29 I.R.B. 55

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2010–1 through 2010–26 is in Internal Revenue Bulletin2010–26, dated June 28, 2010.

2010–29 I.R.B. ii July 19, 2010

Finding List of Current Actions onPreviously Published Items1

Bulletins 2010–27 through 2010–29

Revenue Procedures:

2007-44

Modified by

Notice 2010-48, 2010-27 I.R.B. 9

2009-18

Obsoleted in part by

Rev. Proc. 2010-25, 2010-27 I.R.B. 16

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2010–1 through 2010–26 is in Internal Revenue Bulletin 2010–26, dated June 28, 2010.

July 19, 2010 iii 2010–29 I.R.B.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-tendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINSThe contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are

sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weeklyBulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of printand are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from theSuperintendent of Documents.

ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNETYou may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Select Businesses. Under Businesses Topics, select

More Topics. Then select Internal Revenue Bulletins.

INTERNAL REVENUE BULLETINS ON CD-ROMInternal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD-ROM). The CD-ROM can be

purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

HOW TO ORDERCheck the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,

detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two tosix weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE INTERNALREVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, wewould be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page (www.irs.gov)or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.

Internal Revenue ServiceWashington, DC 20224Official BusinessPenalty for Private Use, $300