Internal Revenue Bulletin 1999-8 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

INCOME TAX
T.D. 8812, page 19.
REG–121865–98, page 63.
Final and proposed regulations under section 4980B of the
Code relate to continuation coverage requirements applica-
ble to group health plans. A public hearing will be held on
June 8, 1999.
T.D. 8816, page 4.
Final regulations under section 408A of the Code relate to
Roth IRAs.
T.D. 8817, page 51.
Final regulations under section 6038B of the Code relate to
information reporting requirements for certain transfers of
property by United States persons to foreign partnerships
and relate to reporting requirements for certain transfers of
cash to foreign corporations.
REG–106902–98, page 57.
Proposed regulations under section 1502 of the Code relate
to consolidated return regulations relating to the treatment
of overall foreign losses and separate limitation losses in the
computation of the foreign tax credit limitation.
EMPLOYEE PLANS
Notice 99–11, page 56.
Weighted average interest rate update. Guidelines for
determining the weighted average interest rate for February
1999 the weighted average interest rate and the resulting
permissible range of interest rates used to calculate current
liability for purposes of the full funding limitation of section
412(c)(7) of the Code are set forth.
EXEMPT ORGANIZATIONS
Announcement 99–15, page 78.
The list is given of organizations now classified as private
foundations.
ADMINISTRATIVE
Announcement 99–16, page 80.
New Form 8866, Interest Computation Under the Look-Back
Method for Property Depreciated under the Income Forecast
Method, is now available.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1999–8
February 22, 1999
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page 82.

Mission of the Service
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
2
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to adminis-
ter the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provi-
sions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protect-
ing the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesi-
tate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.
Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, howev-
er, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consoli-
dated 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
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the 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
of the 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 Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
lative Bulletins.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin of the
succeeding quarterly and semiannual period, respectively.
3
Introduction
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.

Section 408A.—Roth IRAs
26 CFR 1.408A–1: Roth IRAs in general.
T.D. 8816
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Roth IRAs
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations
SUMMARY: This document contains
final regulations relating to Roth IRAs
under section 408A of the Internal Rev-
enue Code (Code). Roth IRAs were cre-
ated by the Taxpayer Relief Act of 1997
as a new type of IRA that individuals can
use beginning in 1998. Section 408A was
amended by the Internal Revenue Service
Restructuring and Reform Act of 1998.
On September 3, 1998, a notice of pro-
posed rulemaking (REG–115393–98
I.R.B. 34) was published in the Federal
Register(63 F.R. 46937) under Code sec-
tion 408A. Written comments were re-
ceived regarding the proposed regula-
tions. On December 10, 1998, a public
hearing was held on the proposed regula-
tions. The final regulations affect individ-
uals establishing Roth IRAs, beneficiaries
under Roth IRAs, and trustees, custodians
or issuers of Roth IRAs.
DATES:Effective date:The final regula-
tions are effective on February 3, 1999.
Applicability date:The final regula-
tions are applicable to taxable years be-
ginning on or after January 1, 1998, the
effective date for section 408A.
FOR FURTHER INFORMATION CON-
TACT: Cathy A. Vohs, (202) 622-6030
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in §§1.408A–2, 1.408A–4,
1.408A–5, and 1.408A–7 of the final reg-
ulations have been reviewed and ap-
proved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-
1616. Responses to this collection of in-
formation are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Estimated average annual burden per
respondent/recordkeeper: 1 minute for
designating an IRA as a Roth IRA and 30
minutes for recharacterizing an IRA con-
tribution. The estimated burdens for the
other reporting/recordkeeping require-
ments in the these final regulations are re-
flected in the burden of Forms 8606,
1040, 5498, and 1099R.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Office of Management and Budget,
Attn: Desk Officer for the Department of
the Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal Rev-
enue Service,Attn: IRS Reports Clear-
ance Officer, OP:FS:FP, Washington, DC
20224.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On September 3, 1998, a notice of pro-
posed rulemaking was published in the
Federal Register(63 F.R. 46937) under
section 408A of the Internal Revenue
Code (Code). The proposed regulations
provide guidance on section 408A of the
Code, which was added by section 302 of
the Taxpayer Relief Act of 1997, Public
Law 105-34 (111 Stat. 788), and estab-
lished the Roth IRA as a new type of indi-
vidual retirement plan, effective for tax-
able years beginning on or after January
1, 1998. The provisions of section 408A
were amended by the Internal Revenue
Service Restructuring and Reform Act of
1998, Public Law 105-206 (112 Stat.
685). In addition, Notice 98–50 (1998–44
I.R.B. 10) provides guidance on recon-
verting an amount that had previously
been converted and recharacterized. This
notice solicited public comments con-
cerning reconversions.
Written comments were received on the
proposed regulations and Notice 98–50.
A public hearing was held on the pro-
posed regulations and Notice 98–50 on
December 10, 1998. After consideration
of all the comments, the proposed regula-
tions under section 408A are adopted as
revised by this Treasury decision.
Explanation of Provisions
Overview
A Roth IRA generally is treated under
the Code like a traditional IRA with sev-
eral significant exceptions. Similar to tra-
ditional IRAs, income on undistributed
amounts accumulated under Roth IRAs is
exempt from Federal income tax, and
contributions to Roth IRAs are subject to
specific limitations. Unlike traditional
IRAs, contributions to Roth IRAs cannot
be deducted from gross income, but quali-
fied distributions from Roth IRAs are ex-
cludable from gross income.
In general, comments received on the
proposed regulations did not request sig-
nificant changes. Thus, the final regula-
tions retain the general structure and sub-
stance of the proposed regulations.
General Provisions and Establishment of
Roth IRAs
Commentators asked for clarification
regarding whether a Roth IRA may be es-
tablished for the benefit of a minor child
or anyone else who lacks the legal capac-
ity to act on his or her own behalf. On
this point, the IRS and Treasury intend
that the rules for traditional IRAs also
apply to Roth IRAs. Thus, for example, a
parent or guardian of a minor child may
establish a Roth IRA on behalf of the
minor child. However, in the case of any
contribution to a Roth IRA established for
a minor child, the compensation of the
child for the taxable year for which the
contribution is made must satisfy the
February 22, 199941999–8 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

compensation requirements of section
408A(c) and §1.408A–3.
Regular Contributions
Several commentators requested clari-
fication of the treatment of excess Roth
IRA contributions under sections 4973,
408(d)(5), and 219(f)(6). Commentators
asked for clarification regarding the re-
moval of excess Roth IRA contributions
after the contributor’s Federal tax return
due date has passed. The final regulations
clarify that, pursuant to section 4973(f),
excess contributions may be applied, on a
year-by-year basis, against the annual
limit for regular contributions to the ex-
tent that the Roth IRA owner is eligible to
make regular Roth IRA contributions for
a taxable year but does not otherwise do
so. However, in response to several re-
quests for clarification, the IRS and Trea-
sury note that the rules under section
408(d)(5) for the tax- free distribution of
certain excess traditional IRA contribu-
tions after the IRA owner’s Federal in-
come tax return due date do not apply to
Roth IRAs because Roth IRA contribu-
tions are always tax-free on distribution
(except to the extent that they accelerate
income inclusion under the 4-year
spread). Similarly, section 219(f)(6),
which provides for the deductibility of ex-
cess traditional IRA contributions in sub-
sequent taxable years, has no application
to Roth IRAs because contributions to
Roth IRAs are never deductible.
Another commentator asked for clarifi-
cation whether contributions to education
IRAs are disregarded for purposes of ap-
plying the limitation on regular contribu-
tions to Roth IRAs. No change has been
made to the final regulations on this point
because the final regulations retain the de-
finition of an IRA provided in the pro-
posed regulations, which excludes an ed-
ucation IRA under section 530. Thus,
contributions to an education IRA are dis-
regarded in applying the Roth IRA contri-
bution limitation (and in applying the
contribution limitation for traditional
IRAs).
Conversions
In response to certain comments, the
final regulations clarify that conversions
and recharacterizations made with the
same trustee may be accomplished by re-
designating the account or annuity con-
tract, rather than by the opening of a new
account or the issuance of a new annuity
contract for each conversion or recharac-
terization.
As requested by commentators, the
final regulations provide that a change in
filing status or a divorce does not affect
the application of the 4-year spread for
1998 conversions. Thus, if a married
Roth IRA owner who is using the 4-year
spread files separately or divorces before
the full taxable conversion amount has
been included in gross income, the re-
mainder must be included in the Roth
IRA owner’s gross income over the re-
maining years in the 4-year period, or, if
applicable, in the year for which the re-
mainder is accelerated due to distribution
or death.
Two commentators questioned why the
proposed regulations require that a sur-
viving spouse be the sole beneficiary of
all a Roth IRA owner’s Roth IRAs in
order to elect to continue application of
the 4-year spread after the Roth IRA
owner’s death. The IRS and Treasury
view this result as compelled by the statu-
tory language of section 408A(d)(3)-
(E)(ii)(II). That section provides that the
surviving spouse must acquire the “entire
interest” in any Roth IRA to which a con-
version contribution to which the 4-year
spread applies is “properly allocable.”
Under the aggregation and ordering rules
of section 408A(d)(4), all a Roth IRA
owner’s Roth IRAs are treated as a single
Roth IRA, and a conversion contribution
is therefore allocable to all the owner’s
Roth IRAs. Thus, a surviving spouse
must be the sole beneficiary of all a Roth
IRA owner’s Roth IRAs in order to ac-
quire the entire interest in any Roth IRA
to which a 1998 conversion contribution
is properly allocable.
Commentators also asked the IRS and
Treasury to clarify whether Roth IRA dis-
tributions that are part of a series of sub-
stantially equal periodic payments begun
under a traditional IRA prior to conver-
sion to a Roth IRA are subject to income
acceleration during the 4-year spread pe-
riod and the 10-percent additional tax on
early distributions under section 72(t).
The final regulations clarify that those
distributions are subject to income accel-
eration to the extent allocable to a 1998
conversion contribution with respect to
which the 4-year spread applies. The
final regulations further clarify, however,
that the additional 10-percent tax under
section 72(t) will not apply, even if the
distributions are not qualified distri-
butions (as long as they are part of a
series of substantially equal periodic
payments).
Under the proposed regulations, if an
IRA owner has reached age 70
1
⁄
2
, any
amount distributed (or treated as distrib-
uted because of a conversion) from the
IRA for a year consists of the required
minimum distribution to the extent that an
amount equal to the required minimum
distribution for that year has not yet been
distributed (or treated as distributed); as a
required minimum distribution, that
amount cannot be converted to a Roth
IRA. Although one commentator re-
quested that this rule be retained in the
final regulations, other commentators ob-
jected to it. A number of commentators
asked the IRS and Treasury to adopt a rule
allowing an IRA owner who wishes to
convert a traditional IRA to a Roth IRA in
the year he or she turns 70
1
⁄
2
to leave the
amount of his or her required minimum
distribution with respect to such IRA in
the IRA until April 1 of the following
year, provided the conversion is accom-
plished by means of a trustee-to-trustee
transfer. The commentators note that this
rule applies in the case of trustee-to-
trustee transfers between traditional
IRAs. The final regulations retain the rule
that the required minimum distribution
amount is ineligible for rollover, includ-
ing such a distribution for the year that the
individual reaches age 70
1
⁄
2
, because, pur-
suant to section 408A(d)(3)(C), a conver-
sion is treated as a distribution regardless
of whether the conversion is accom-
plished by a trustee-to-trustee transfer.
Accordingly, the required minimum dis-
tribution amount is ineligible for rollover,
and as such, is also ineligible to be con-
verted to a Roth IRA.
Additionally, several commentators
suggested that the rule in the proposed
regulations is inconsistent with section
401(a)(9), which generally requires that
IRA distributions begin by April 1 of the
calendar year following the calendar year
in which the IRA owner reaches age 70
1
⁄
2
.
These commentators argued that, under
section 401(a)(9), distributions made dur-
ing the calendar year in which the IRA
1999–8 I.R.B.5February 22, 1999

owner reaches age 70
1
⁄
2
should not be con-
sidered required minimum distributions
under sections 401(a)(9) and 408(a)(6)
and (b)(3). However, the proposed regu-
lations under sections 401(a)(9) and
408(a)(6) and (b)(3) provide that the first
year for which distributions are required
under section 401(a)(9) is the year in
which the IRA owner reaches age 70
1
⁄
2
,
and that distributions made prior to April
1 of the following calendar year are
treated as made for that first year. The
regulations under section 402(c) and the
proposed regulations under sections
401(a)(9) and 408(a)(6) and (b)(3) pro-
vide that the first amount distributed dur-
ing a calendar year is treated as a required
minimum distribution to the extent that
the amount required to be distributed for
that calendar year under section 401(a)(9)
has not been distributed. For these rea-
sons, the final regulations retain the rule
of the proposed regulations.
Recharacterizations of IRA Contributions
The final regulations clarify that the
computation of net income under §1.408–
4(c)(2)(iii) in the case of a commingled
IRA may include net losses on the amount
to be recharacterized.
Commentators asked the IRS and Trea-
sury to clarify whether an amount con-
verted from a SEP IRA or SIMPLE IRA
to a Roth IRA may be recharacterized
back to the SEP IRA or SIMPLE IRA
from which the amount was converted.
The final regulations provide that Roth
IRA conversion contributions from a SEP
IRA or SIMPLE IRA may be recharacter-
ized to a SEP IRA or SIMPLE IRA (in-
cluding the original SEP IRA or SIMPLE
IRA). Another commentator also asked
for clarification whether it is necessary to
track the source of assets (i.e., as em-
ployer or employee contributions) con-
verted from a SEP IRA or SIMPLE IRA
to a Roth IRA for purposes of determining
whether such assets may be recharacter-
ized. The prohibition on recharacterizing
employer contributions to a SEP IRA or
SIMPLE IRA set forth in the final regula-
tions only applies to those contributions at
the time they are made to the SEP IRA or
SIMPLE IRA. Once such contributions
have been made to a SEP IRA or a SIM-
PLE IRA, the SEP IRA or SIMPLE IRA
may be converted to a Roth IRA and sub-
sequently recharacterized (provided, in
the case of a SIMPLE IRA, that the two-
year rule has been satisfied prior to the
conversion).
Commentators asked for clarification
regarding whether an election to recharac-
terize an IRA contribution may be made
on behalf of a deceased IRA owner. The
final regulations provide that the election
to recharacterize an IRA contribution may
be made by the executor, administrator, or
other person charged with the duty of fil-
ing the decedent’s final Federal income
tax return.
Commentators also asked whether an
excess contribution to an IRA made in a
prior year, and applied against the contri-
bution limits in the current year under
section 4973, may be recharacterized.
Only actual contributions may be rechar-
acterized; thus, excess contributions actu-
ally made for a prior year and deemed to
be current-year contributions for purposes
of section 4973, are not contributions that
are eligible to be recharacterized (unless
the recharacterization would still be
timely with respect to the taxable year for
which the contributions were actually
made). This rule applies to any excess
contribution, whether made to a tradi-
tional or a Roth IRA.
Commentators asked for clarification
regarding a conduit IRA that is converted
to a Roth IRA and subsequently recharac-
terized back to a traditional IRA. The
IRS and Treasury note that a conduit IRA
that is converted to a Roth IRA and subse-
quently recharacterized back to a tradi-
tional IRA retains its status as a conduit
IRA because the effect of the recharacteri-
zation is to treat the amount recharacter-
ized as though it had been transferred di-
rectly from the original conduit IRA into
another conduit IRA.
Commentators also asked whether a
recharacterization is subject to withhold-
ing. A recharacterization is not a desig-
nated distribution under section 3405 and,
therefore, is not subject to withholding.
The final regulations also provide rules
regarding the “reconversion” of an
amount that has been transferred from a
Roth IRA to a traditional IRA by means of
a recharacterization after having been ear-
lier converted from a traditional IRA to a
Roth IRA. After publication of the pro-
posed regulations, the IRS and Treasury
issued Notice 98–50, which provides in-
terim rules regarding Roth IRA reconver-
sions made during 1998 and 1999. Notice
98-50 stated that the interim rules were
intended to clarify and supplement the
proposed regulations and permitted tax-
payers to rely on those rules as if incorpo-
rated in the proposed regulations. Notice
98-50 noted that the IRS and Treasury
were considering whether the final regu-
lations should provide that a taxpayer is
not eligible to reconvert an amount before
the end of the taxable year in which the
amount was first converted (or the due
date for that taxable year), or that a tax-
payer who transfers a converted amount
back to a traditional IRA in a recharacteri-
zation must wait until the passage of a
fixed number of days before reconverting.
Although Notice 98-50 invited interested
parties to submit comments on those ap-
proaches, little comment was received on
that issue. The final regulations provide
reconversion rules for 2000 and subse-
quent years that generally differ from the
interim rules of Notice 98–50. However,
for 1998 and 1999, the final regulations
continue the interim rules of Notice
98–50.
Effective January 1, 2000, an IRA
owner who converts an amount from a
traditional IRA to a Roth IRA during any
taxable year and then transfers that
amount back to a traditional IRA by
means of a recharacterization may not re-
convert that amount from the traditional
IRA to a Roth IRA before the beginning
of the taxable year following the taxable
year in which the amount was converted
to a Roth IRA or, if later, the end of the
30-day period beginning on the day on
which the IRA owner transfers the
amount from the Roth IRA back to a tra-
ditional IRA by means of a recharacteri-
zation. As under Notice 98–50, any
amount previously converted is adjusted
for subsequent net income in determining
the amount subject to the limitation on
subsequent reconversions.
A reconversion made before the later of
the beginning of the next taxable year or
the end of the 30-day period that begins
on the day of the recharacterization is
treated as a “failed conversion” (a distrib-
ution from the traditional IRA and a regu-
lar contribution to the Roth IRA), subject
to correction through a recharacterization
back to a traditional IRA. For these pur-
poses, only a failed conversion resulting
from a failure to satisfy the statutory re-
February 22, 199961999–8 I.R.B.

1999–8 I.R.B.7February 22, 1999
quirements for a conversion (e.g., the
$100,000 modified adjusted gross income
limit) is treated as a conversion in deter-
mining when an IRA owner may make a
reconversion. Thus, an IRA owner whose
taxable year is the calendar year and who
converts an amount to a Roth IRA in 2000
and then transfers that amount back to a
traditional IRA on January 18, 2001 be-
cause his or her adjusted gross income for
2000 exceeds $100,000 cannot reconvert
that amount until February 17, 2001 (the
first day after the end of the 30-day period
beginning on the day of the recharacteri-
zation transfer) because the failed conver-
sion made in 2000 is treated as a conver-
sion for purposes of the reconversion
rules. However, if that IRA owner inad-
vertently attempts to reconvert that
amount before February 17, 2001, the at-
tempted reconversion is not treated as a
conversion for purposes of the reconver-
sion rules (although it is otherwise treated
as a failed conversion). Therefore, the
IRA owner could transfer the amount
back to a traditional IRA in a recharacteri-
zation and reconvert it at any time on or
after February 17, 2001. If the IRA owner
does reconvert the amount on or after
February 17, 2001, he or she cannot re-
convert that amount again until 2002.
As indicated above, the final regula-
tions continue the interim rules of Notice
98-50 applicable for 1998 and 1999.
Therefore, an IRA owner who converts an
amount from a traditional IRA to a Roth
IRA during 1998 and then transfers that
amount back to a traditional IRA by
means of a recharacterization may recon-
vert that amount once (but no more than
once) on or after November 1, 1998 and
on or before December 31, 1998; the IRA
owner may also reconvert that amount
once (but no more than once) during
1999. Similarly, an IRA owner who con-
verts an amount from a traditional IRA to
a Roth IRA during 1999 that has not been
converted before and then transfers that
amount back to a traditional IRA by
means of a recharacterization may recon-
vert that amount once (but no more than
once) on or before December 31, 1999.
In contrast to the rule for years after 1999,
a failed conversion is not treated as a con-
version for these 1998 and 1999 interim
rules.
As did Notice 98–50, the final regula-
tions provide that a reconversion made
during 1998 or 1999 for which the IRA
owner was not eligible is deemed to be an
“excess reconversion” and does not
change the IRA owner’s taxable conver-
sion amount. Instead, the excess recon-
version and the last preceding recharac-
terization are not taken into account for
purposes of determining the IRA owner’s
taxable conversion amount, and the IRA
owner’s taxable conversion amount is
based on the last reconversion that was
not an excess reconversion. An excess re-
conversion is otherwise treated as a valid
reconversion. The final regulations
grandfather conversions and reconver-
sions made before November 1, 1998.
Distributions
In response to concerns raised in the
comments regarding potential double tax-
ation, the final regulations clarify that a
nonqualified distribution from a Roth
IRA is taxed only to the extent that the
amount of the distribution, when added to
all previous distributions (whether or not
they were qualified distributions) and re-
duced by the taxable amount of such pre-
vious distributions, exceed the owner’s
contributions to all his or her Roth IRAs.
Commentators also asked for clarifica-
tion regarding whether a beneficiary may
aggregate his or her inherited Roth IRAs
with other Roth IRAs maintained by such
beneficiary. The final regulations provide
that a beneficiary’s inherited Roth IRA
may not be aggregated with any other
Roth IRA maintained by such beneficiary
(except for other Roth IRAs that the bene-
ficiary inherited from the same decedent),
unless the beneficiary, as the spouse of
the decedent and sole beneficiary of the
Roth IRA, elects to treat the Roth IRA as
his or her own.
In addition, commentators also asked
for clarification regarding whether the 5-
taxable year period for determining
whether a distribution is a qualified distri-
bution starts over for subsequent Roth
IRA contributions if the entire account
balance in a Roth IRA is distributed to the
Roth IRA owner before he or she makes
any other Roth IRA contributions. In
such a case, the 5-taxable-year period
does not start over. However, if an initial
Roth IRA contribution is made to a Roth
IRA that subsequently is revoked within 7
days, or if an initial Roth IRA contribu-
tion is recharacterized, the initial contri-
bution does not start the 5-year period.
The final regulations provide that an ex-
cess contribution that is distributed in ac-
cordance with section 408(d)(4) does not
start the 5-year period.
One commentator questioned the rule
in the proposed regulations providing that
a distribution allocable to a conversion
contribution is treated as made first from
the portion (if any) that was includible in
gross income as a result of the conver-
sion. The IRS and Treasury note that this
result is plainly compelled by section
408A(d)(4)(B)(ii). Another commentator
inquired about the treatment of all conver-
sions as designated distributions under
section 3405; the commentator suggested
that conversions effected by means of
trustee-to- trustee transfers should not be
treated as designated distributions subject
to withholding. However, section
408A(d)(3) treats all Roth IRA conver-
sions as distributions regardless of how
they are effected.
Reporting Requirements
The final regulations retain the report-
ing rules set forth in the proposed regula-
tions.
Effective Date
The final regulations are applicable to
taxable years beginning on or after Janu-
ary 1, 1998, the effective date for section
408A.
Special Analyses
It has been determined that the final
regulations are not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. Further, it is hereby certified, pur-
suant to sections 603(a) and 605(b) of the
Regulatory Flexibility Act, that the col-
lection of information in these regulations
will not have a significant economic im-
pact on a substantial number of small en-
tities. The cost of the collection of infor-
mation is insignificant because the
primary reporting burden is on the indi-
vidual and not the small entity. Therefore
the collection of information will not have

a substantial economic impact. There-
fore, a regulatory flexibility analysis
under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pur-
suant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal author of the final regula-
tions is Cathy A. Vohs, Office of Associ-
ate Chief Counsel (Employee Benefits
and Exempt Organizations). However,
other personnel from the IRS and Trea-
sury Department participated in their de-
velopment.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.408A–1 also issued under 26 U.S.C.
408A.
§1.408A–2 also issued under 26 U.S.C.
408A.
§1.408A–3 also issued under 26 U.S.C.
408A.
§1.408A–4 also issued under 26 U.S.C.
408A.
§1.408A–5 also issued under 26 U.S.C.
408A.
§1.408A–6 also issued under 26 U.S.C.
408A.
§1.408A–7 also issued under 26 U.S.C.
408A.
§1.408A–8 also issued under 26 U.S.C.
408A.
§1.408A–9 also issued under 26 U.S.C.
408A. * * *
Par. 2. Sections 1.408A–0 through
1.408A–9 are added to read as follows:
§1.408A–0 Roth IRAs; table of contents.
This table of contents lists the regula-
tions relating to Roth IRAs under section
408A of the Internal Revenue Code as fol-
lows:
§1.408A–1 Roth IRAs in general.
§1.408A–2 Establishing Roth IRAs.
§1.408A–3 Contributions to Roth IRAs.
§1.408A–4 Converting amounts to Roth
IRAs.
§1.408A–5 Recharacterized contribu-
tions.
§1.408A–6 Distributions.
§1.408A–7 Reporting.
§1.408A–8 Definitions.
§1.408A–9 Effective date.
§1.408A–1 Roth IRAs in general.
This section sets forth the following
questions and answers that discuss the
background and general features of Roth
IRAs:
Q-1 What is a Roth IRA?
A-1. (a) A Roth IRA is a new type of
individual retirement plan that individuals
can use, beginning in 1998. Roth IRAs
are described in section 408A, which was
added by the Taxpayer Relief Act of 1997
(TRA 97), Public Law 105-34 (111 Stat.
788).
(b) Roth IRAs are treated like tradi-
tional IRAs except where the Internal
Revenue Code specifies different treat-
ment. For example, aggregate contribu-
tions (other than by a conversion or other
rollover) to all an individual’s Roth IRAs
are not permitted to exceed $2,000 for a
taxable year. Further, income earned on
funds held in a Roth IRA is generally not
taxable. Similarly, the rules of section
408(e), such as the loss of exemption of
the account where the owner engages in a
prohibited transaction, apply to Roth
IRAs in the same manner as to traditional
IRAs.
Q-2. What are the significant differ-
ences between traditional IRAs and Roth
IRAs?
A-2. There are several significant dif-
ferences between traditional IRAs and
Roth IRAs under the Internal Revenue
Code. For example, eligibility to con-
tribute to a Roth IRA is subject to special
modified AGI (adjusted gross income)
limits; contributions to a Roth IRA are
never deductible; qualified distributions
from a Roth IRA are not includible in
gross income; the required minimum dis-
tribution rules under section 408(a)(6)
and (b)(3) (which generally incorporate
the provisions of section 401(a)(9)) do not
apply to a Roth IRA during the lifetime of
the owner; and contributions to a Roth
IRA can be made after the owner has at-
tained age 70
1
⁄
2
.
§1.408A–2 Establishing Roth IRAs.
This section sets forth the following
questions and answers that provide rules
applicable to establishing Roth IRAs:
Q-1. Who can establish a Roth IRA?
A-1. Except as provided in A-3 of this
section, only an individual can establish a
Roth IRA. In addition, in order to be eli-
gible to contribute to a Roth IRA for a
particular year, an individual must satisfy
certain compensation requirements and
adjusted gross income limits (see
§1.408A–3 A-3).
Q-2. How is a Roth IRA established?
A-2. A Roth IRA can be established
with any bank, insurance company, or
other person authorized in accordance
with §1.408-2(e) to serve as a trustee with
respect to IRAs. The document establish-
ing the Roth IRA must clearly designate
the IRA as a Roth IRA, and this designa-
tion cannot be changed at a later date.
Thus, an IRA that is designated as a Roth
IRA cannot later be treated as a traditional
IRA. However, see §1.408A–4 A-1(b)(3)
for certain rules for converting a tradi-
tional IRA to a Roth IRA with the same
trustee by redesignating the traditional
IRA as a Roth IRA, and see §1.408A–5
for rules for recharacterizing certain IRA
contributions.
Q-3. Can an employer or an association
of employees establish a Roth IRA to hold
contributions of employees or members?
A-3. Yes. Pursuant to section 408(c),
an employer or an association of employ-
ees can establish a trust to hold contribu-
tions of employees or members made
under a Roth IRA. Each employee’s or
member’s account in the trust is treated as
a separate Roth IRA that is subject to the
generally applicable Roth IRA rules. The
employer or association of employees
may do certain acts otherwise required by
an individual, for example, establishing
and designating a trust as a Roth IRA.
Q-4. What is the effect of a surviving
spouse of a Roth IRA owner treating an
IRA as his or her own?
A-4. If the surviving spouse of a Roth
IRA owner treats a Roth IRA as his or her
February 22, 199981999–8 I.R.B.

own as of a date, the Roth IRA is treated
from that date forward as though it were
established for the benefit of the surviving
spouse and not the original Roth IRA
owner. Thus, for example, the surviving
spouse is treated as the Roth IRA owner
for purposes of applying the minimum
distribution requirements under section
408(a)(6) and (b)(3). Similarly, the sur-
viving spouse is treated as the Roth IRA
owner rather than a beneficiary for pur-
poses of determining the amount of any
distribution from the Roth IRA that is in-
cludible in gross income and whether the
distribution is subject to the 10-percent
additional tax under section 72(t).
§1.408A–3 Contributions to Roth IRAs.
This section sets forth the following
questions and answers that provide rules
regarding contributions to Roth IRAs:
Q-1. What types of contributions are
permitted to be made to a Roth IRA?
A-1. There are two types of contribu-
tions that are permitted to be made to a
Roth IRA: regular contributions and qual-
ified rollover contributions (including
conversion contributions). The term reg-
ular contributions means contributions
other than qualified rollover contribu-
tions.
Q-2. When are contributions permitted
to be made to a Roth IRA?
A-2. (a) The provisions of section
408A are effective for taxable years be-
ginning on or after January 1, 1998.
Thus, the first taxable year for which con-
tributions are permitted to be made to a
Roth IRA by an individual is the individ-
ual’s taxable year beginning in 1998.
(b) Regular contributions for a particu-
lar taxable year must generally be con-
tributed by the due date (not including ex-
tensions) for filing a Federal income tax
return for that taxable year. (See
§1.408A–5 regarding recharacterization
of certain contributions.)
Q-3. What is the maximum aggregate
amount of regular contributions an indi-
vidual is eligible to contribute to a Roth
IRA for a taxable year?
A-3. (a) The maximum aggregate
amount that an individual is eligible to
contribute to all his or her Roth IRAs as a
regular contribution for a taxable year is
the same as the maximum for traditional
IRAs: $2,000 or, if less, that individual’s
compensation for the year.
(b) For Roth IRAs, the maximum
amount described in paragraph (a) of this
A-3 is phased out between certain levels
of modified AGI. For an individual who
is not married, the dollar amount is
phased out ratably between modified AGI
of $95,000 and $110,000; for a married
individual filing a joint return, between
modified AGI of $150,000 and $160,000;
and for a married individual filing sepa-
rately, between modified AGI of $0 and
$10,000. For this purpose, a married indi-
vidual who has lived apart from his or her
spouse for the entire taxable year and who
files separately is treated as not married.
Under section 408A(c)(3)(A), in applying
the phase-out, the maximum amount is
rounded up to the next higher multiple of
$10 and is not reduced below $200 until
completely phased out.
(c) If an individual makes regular con-
tributions to both traditional IRAs and
Roth IRAs for a taxable year, the maxi-
mum limit for the Roth IRA is the lesser
of—
(1) The amount described in paragraph
(a) of this A-3 reduced by the amount
contributed to traditional IRAs for the
taxable year; and
(2) The amount described in paragraph
(b) of this A-3. Employer contributions,
including elective deferrals, made under a
SEP or SIMPLE IRA Plan on behalf of an
individual (including a self-employed indi-
vidual) do not reduce the amount of the in-
dividual’s maximum regular contribution.
(d) The rules in this A-3 are illustrated
by the following examples:
Example 1. In 1998, unmarried, calendar-year
taxpayer B, age 60, has modified AGI of $40,000
and compensation of $5,000. For 1998, B can con-
tribute a maximum of $2,000 to a traditional IRA, a
Roth IRA or a combination of traditional and Roth
IRAs.
Example 2.The facts are the same as in Example
1.However, assume that B violates the maximum
regular contribution limit by contributing $2,000 to
a traditional IRA and $2,000 to a Roth IRA for 1998.
The $2,000 to B’s Roth IRA would be an excess
contribution to B’s Roth IRA for 1998 because an
individual’s contributions are applied first to a tradi-
tional IRA, then to a Roth IRA.
Example 3.The facts are the same as in Example
1,except that B’s compensation is $900. The maxi-
mum amount B can contribute to either a traditional
IRA or a Roth (or a combination of the two) for
1998 is $900.
Example 4. In 1998, unmarried, calendar-year
taxpayer C, age 60, has modified AGI of $100,000
and compensation of $5,000. For 1998, C con-
tributes $800 to a traditional IRA and $1,200 to a
Roth IRA. Because C’s $1,200 Roth IRA contribu-
tion does not exceed the phased-out maximum Roth
IRA contribution of $1,340 and because C’s total
IRA contributions do not exceed $2,000, C’s Roth
IRA contribution does not exceed the maximum per-
missible contribution.
Q-4. How is compensation defined for
purposes of the Roth IRA contribution
limit?
A-4. For purposes of the contribution
limit described in A-3 of this section, an
individual’s compensation is the same as
that used to determine the maximum con-
tribution an individual can make to a tra-
ditional IRA. This amount is defined in
section 219(f)(1) to include wages, com-
missions, professional fees, tips, and
other amounts received for personal ser-
vices, as well as taxable alimony and sep-
arate maintenance payments received
under a decree of divorce or separate
maintenance. Compensation also in-
cludes earned income as defined in sec-
tion 401(c)(2), but does not include any
amount received as a pension or annuity
or as deferred compensation. In addition,
under section 219(c), a married individual
filing a joint return is permitted to make
an IRA contribution by treating his or her
spouse’s higher compensation as his or
her own, but only to the extent that the
spouse’s compensation is not being used
for purposes of the spouse making a con-
tribution to a Roth IRA or a deductible
contribution to a traditional IRA.
Q-5. What is the significance of modi-
fied AGI and how is it determined?
A-5. Modified AGI is used for pur-
poses of the phase-out rules described in
A-3 of this section and for purposes of the
$100,000 modified AGI limitation de-
scribed in §1.408A–4 A-2(a) (relating to
eligibility for conversion). As defined in
section 408A(c)(3)(C)(i), modified AGI is
the same as adjusted gross income under
section 219(g)(3)(A) (used to determine
the amount of deductible contributions
that can be made to a traditional IRA by
an individual who is an active participant
in an employer-sponsored retirement
plan), except that any conversion is disre-
garded in determining modified AGI. For
example, the deduction for contributions
to an IRA is not taken into account for
purposes of determining adjusted gross
income under section 219 and thus does
not apply in determining modified AGI
for Roth IRA purposes.
1999–8 I.R.B.9February 22, 1999

Q-6. Is a required minimum distribu-
tion from an IRA for a year included in in-
come for purposes of determining modi-
fied AGI?
A-6. (a) Yes. For taxable years begin-
ning before January 1, 2005, any required
minimum distribution from an IRA under
section 408(a)(6) and (b)(3) (which gen-
erally incorporate the provisions of sec-
tion 401(a)(9)) is included in income for
purposes of determining modified AGI.
(b) For taxable years beginning after
December 31, 2004, and solely for pur-
poses of the $100,000 limitation applica-
ble to conversions, modified AGI does
not include any required minimum distri-
butions from an IRA under section
408(a)(6) and (b)(3).
Q-7. Does an excise tax apply if an in-
dividual exceeds the aggregate regular
contribution limits for Roth IRAs?
A-7. Yes. Section 4973 imposes an an-
nual 6-percent excise tax on aggregate
amounts contributed to Roth IRAs that
exceed the maximum contribution limits
described in A-3 of this section. Any con-
tribution that is distributed, together with
net income, from a Roth IRA on or before
the tax return due date (plus extensions)
for the taxable year of the contribution is
treated as not contributed. Net income
described in the previous sentence is in-
cludible in gross income for the taxable
year in which the contribution is made.
Aggregate excess contributions that are
not distributed from a Roth IRA on or be-
fore the tax return due date (with exten-
sions) for the taxable year of the contribu-
tions are reduced as a deemed Roth IRA
contribution for each subsequent taxable
year to the extent that the Roth IRA owner
does not actually make regular IRA con-
tributions for such years. Section 4973
applies separately to an individual’s Roth
IRAs and other types of IRAs.
§1.408A–4 Converting amounts to Roth
IRAs.
This section sets forth the following
questions and answers that provide rules
applicable to Roth IRA conversions:
Q-1. Can an individual convert an
amount in his or her traditional IRA to a
Roth IRA?
A-1. (a) Yes. An amount in a tradi-
tional IRA may be converted to an
amount in a Roth IRA if two requirements
are satisfied. First, the IRA owner must
satisfy the modified AGI limitation de-
scribed in A-2(a) of this section and, if
married, the joint filing requirement de-
scribed in A-2(b) of this section. Second,
the amount contributed to the Roth IRA
must satisfy the definition of a qualified
rollover contribution in section 408A(e)
(i.e., it must satisfy the requirements for a
rollover contribution as defined in section
408(d)(3), except that the one-rollover-
per-year limitation in section
408(d)(3)(B) does not apply).
(b) An amount can be converted by any
of three methods—
(1) An amount distributed from a tradi-
tional IRA is contributed (rolled over) to a
Roth IRA within the 60-day period de-
scribed in section 408(d)(3)(A)(i);
(2) An amount in a traditional IRA is
transferred in a trustee-to-trustee transfer
from the trustee of the traditional IRA to
the trustee of the Roth IRA; or
(3) An amount in a traditional IRA is
transferred to a Roth IRA maintained by
the same trustee. For purposes of sections
408 and 408A, redesignating a traditional
IRA as a Roth IRA is treated as a transfer
of the entire account balance from a tradi-
tional IRA to a Roth IRA.
(c) Any converted amount is treated as
a distribution from the traditional IRA and
a qualified rollover contribution to the
Roth IRA for purposes of section 408 and
section 408A, even if the conversion is
accomplished by means of a trustee-to-
trustee transfer or a transfer between
IRAs of the same trustee.
(d) A transaction that is treated as a
failed conversion under §1.408A–5
A–9(a)(1) is not a conversion.
Q-2. What are the modified AGI limi-
tation and joint filing requirements for
conversions?
A-2. (a) An individual with modified
AGI in excess of $100,000 for a taxable
year is not permitted to convert an amount
to a Roth IRA during that taxable year.
This $100,000 limitation applies to the
taxable year that the funds are paid from
the traditional IRA, rather than the year
they are contributed to the Roth IRA.
(b) If the individual is married, he or
she is permitted to convert an amount to a
Roth IRA during a taxable year only if the
individual and the individual’s spouse file
a joint return for the taxable year that the
funds are paid from the traditional IRA.
In this case, the modified AGI subject to
the $100,000 limit is the modified AGI
derived from the joint return using the
couple’s combined income. The only ex-
ception to this joint filing requirement is
for an individual who has lived apart from
his or her spouse for the entire taxable
year. If the married individual has lived
apart from his or her spouse for the entire
taxable year, then such individual can
treat himself or herself as not married for
purposes of this paragraph, file a separate
return and be subject to the $100,000
limit on his or her separate modified AGI.
In all other cases, a married individual fil-
ing a separate return is not permitted to
convert an amount to a Roth IRA, regard-
less of the individual’s modified AGI.
Q-3. Is a remedy available to an indi-
vidual who makes a failed conversion?
A-3. (a) Yes. See §1.408A–5 for rules
permitting a failed conversion amount to
be recharacterized as a contribution to a
traditional IRA. If the requirements in
§1.408A–5 are satisfied, the failed con-
version amount will be treated as having
been contributed to the traditional IRA
and not to the Roth IRA.
(b) If the contribution is not recharac-
terized in accordance with §1.408A–5,
the contribution will be treated as a regu-
lar contribution to the Roth IRA and, thus,
an excess contribution subject to the ex-
cise tax under section 4973 to the extent
that it exceeds the individual’s regular
contribution limit. This is the result re-
gardless of which of the three methods
described in A-1(b) of this section applies
to this transaction. Additionally, the dis-
tribution from the traditional IRA will not
be eligible for the 4-year spread and will
be subject to the additional tax under sec-
tion 72(t) (unless an exception under that
section applies).
Q-4. Do any special rules apply to a
conversion of an amount in an individ-
ual’s SEP IRA or SIMPLE IRA to a Roth
IRA?
A-4. (a) An amount in an individual’s
SEP IRA can be converted to a Roth IRA
on the same terms as an amount in any
other traditional IRA.
(b) An amount in an individual’s SIM-
PLE IRA can be converted to a Roth IRA
on the same terms as a conversion from a
traditional IRA, except that an amount
February 22, 1999101999–8 I.R.B.

distributed from a SIMPLE IRA during
the 2-year period described in section
72(t)(6), which begins on the date that the
individual first participated in any SIM-
PLE IRA Plan maintained by the individ-
ual’s employer, cannot be converted to a
Roth IRA. Pursuant to section 408(d)-
(3)(G), a distribution of an amount from
an individual’s SIMPLE IRA during this
2-year period is not eligible to be rolled
over into an IRA that is not a SIMPLE
IRA and thus cannot be a qualified
rollover contribution. This 2-year period
of section 408(d)(3)(G) applies separately
to the contributions of each of an individ-
ual’s employers maintaining a SIMPLE
IRA Plan.
(c) Once an amount in a SEP IRA or
SIMPLE IRA has been converted to a
Roth IRA, it is treated as a contribution to
a Roth IRA for all purposes. Future con-
tributions under the SEP or under the
SIMPLE IRA Plan may not be made to
the Roth IRA.
Q-5. Can amounts in other kinds of re-
tirement plans be converted to a Roth
IRA?
A-5. No. Only amounts in another
IRA can be converted to a Roth IRA. For
example, amounts in a qualified plan or
annuity plan described in section 401(a)
or 403(a) cannot be converted directly to
a Roth IRA. Also, amounts held in an an-
nuity contract or account described in sec-
tion 403(b) cannot be converted directly
to a Roth IRA.
Q-6. Can an individual who has at-
tained at least age 70
1
⁄
2
by the end of a cal-
endar year convert an amount distributed
from a traditional IRA during that year to
a Roth IRA before receiving his or her re-
quired minimum distribution with respect
to the traditional IRA for the year of the
conversion?
A-6. (a) No. In order to be eligible for
a conversion, an amount first must be eli-
gible to be rolled over. Section 408(d)(3)
prohibits the rollover of a required mini-
mum distribution. If a minimum distrib-
ution is required for a year with respect to
an IRA, the first dollars distributed dur-
ing that year are treated as consisting of
the required minimum distribution until
an amount equal to the required mini-
mum distribution for that year has been
distributed.
(b) As provided in A-1(c) of this sec-
tion, any amount converted is treated as a
distribution from a traditional IRA and a
rollover contribution to a Roth IRA and
not as a trustee-to-trustee transfer for pur-
poses of section 408 and section 408A.
Thus, in a year for which a minimum dis-
tribution is required (including the calen-
dar year in which the individual attains
age 70
1
⁄
2
), an individual may not convert
the assets of an IRA (or any portion of
those assets) to a Roth IRA to the extent
that the required minimum distribution
for the traditional IRA for the year has not
been distributed.
(c) If a required minimum distribution
is contributed to a Roth IRA, it is treated
as having been distributed, subject to the
normal rules under section 408(d)(1) and
(2), and then contributed as a regular con-
tribution to a Roth IRA. The amount of
the required minimum distribution is not a
conversion contribution.
Q-7. What are the tax consequences
when an amount is converted to a Roth
IRA?
A-7. (a) Any amount that is converted
to a Roth IRA is includible in gross in-
come as a distribution according to the
rules of section 408(d)(1) and (2) for the
taxable year in which the amount is dis-
tributed or transferred from the traditional
IRA. Thus, any portion of the distribution
or transfer that is treated as a return of
basis under section 408(d)(1) and (2) is
not includible in gross income as a result
of the conversion.
(b) The 10-percent additional tax under
section 72(t) generally does not apply to
the taxable conversion amount. But see
§1.408A–6 A-5 for circumstances under
which the taxable conversion amount
would be subject to the additional tax
under section 72(t).
(c) Pursuant to section 408A(e), a con-
version is not treated as a rollover for pur-
poses of the one-rollover-per-year rule of
section 408(d)(3)(B).
Q-8. Is there an exception to the in-
come-inclusion rule described in A-7 of
this section for 1998 conversions?
A-8. Yes. In the case of a distribution
(including a trustee-to-trustee transfer)
from a traditional IRA on or before De-
cember 31, 1998, that is converted to a
Roth IRA, instead of having the entire
taxable conversion amount includible in
income in 1998, an individual includes in
gross income for 1998 only one quarter of
that amount and one quarter of that
amount for each of the next 3 years. This
4-year spread also applies if the conver-
sion amount was distributed in 1998 and
contributed to the Roth IRA within the
60-day period described in section
408(d)(3)(A)(i), but after December 31,
1998. However, see §1.408A–6 A-6 for
special rules requiring acceleration of in-
clusion if an amount subject to the 4-year
spread is distributed from the Roth IRA
before 2001.
Q-9. Is the taxable conversion amount
included in income for all purposes?
A-9. Except as provided below, any
taxable conversion amount includible in
gross income for a year as a result of the
conversion (regardless of whether the in-
dividual is using a 4-year spread) is in-
cluded in income for all purposes. Thus,
for example, it is counted for purposes of
determining the taxable portion of social
security payments under section 86 and
for purposes of determining the phase-out
of the $25,000 exemption under section
469(i) relating to the disallowance of pas-
sive activity losses from rental real estate
activities. However, as provided in
§1.408A–3 A-5, the taxable conversion
amount (and any resulting change in other
elements of adjusted gross income) is dis-
regarded for purposes of determining
modified AGI for section 408A.
Q-10. Can an individual who makes a
1998 conversion elect not to have the 4-
year spread apply and instead have the
full taxable conversion amount includible
in gross income for 1998?
A-10. Yes. Instead of having the tax-
able conversion amount for a 1998 con-
version included over 4 years as provided
under
A-8 of this section, an individual can
elect to include the full taxable conver-
sion amount in income for 1998. The
election is made on Form 8606 and can-
not be made or changed after the due date
(including extensions) for filing the 1998
Federal income tax return.
Q-11. What happens when an individ-
ual who is using the 4-year spread dies,
files separately, or divorces before the full
taxable conversion amount has been in-
cluded in gross income?
A-11. (a) If an individual who is using
the 4-year spread described in A-8 of this
section dies before the full taxable con-
version amount has been included in
gross income, then the remainder must be
1999–8 I.R.B.11February 22, 1999

included in the individual’s gross income
for the taxable year that includes the date
of death.
(b) However, if the sole beneficiary of
all the decedent’s Roth IRAs is the dece-
dent’s spouse, then the spouse can elect to
continue the 4-year spread. Thus, the
spouse can elect to include in gross income
the same amount that the decedent would
have included in each of the remaining
years of the 4-year period. Where the
spouse makes such an election, the amount
includible under the 4-year spread for the
taxable year that includes the date of the
decedent’s death remains includible in the
decedent’s gross income and is reported on
the decedent’s final Federal income tax re-
turn. The election is made on either Form
8606 or Form 1040, in accordance with the
instructions to the applicable form, for the
taxable year that includes the decedent’s
date of death and cannot be changed after
the due date (including extensions) for fil-
ing the Federal income tax return for the
spouse’s taxable year that includes the
decedent’s date of death.
(c) If a Roth IRA owner who is using
the 4-year spread and who was married in
1998 subsequently files separately or di-
vorces before the full taxable conversion
amount has been included in gross in-
come, the remainder of the taxable con-
version amount must be included in the
Roth IRA owner’s gross income over the
remaining years in the 4-year period (un-
less accelerated because of distribution or
death).
Q-12. Can an individual convert a tra-
ditional IRA to a Roth IRA if he or she is
receiving substantially equal periodic
payments within the meaning of section
72(t)(2)(A)(iv) from that traditional IRA?
A-12. Yes. Not only is the conversion
amount itself not subject to the early dis-
tribution tax under section 72(t), but the
conversion amount is also not treated as a
distribution for purposes of determining
whether a modification within the mean-
ing of section 72(t)(4)(A) has occurred.
Distributions from the Roth IRA that are
part of the original series of substantially
equal periodic payments will be nonquali-
fied distributions from the Roth IRA until
they meet the requirements for being a
qualified distribution, described in
§1.408A–6 A-1(b). The additional 10-
percent tax under section 72(t) will not
apply to the extent that these nonqualified
distributions are part of a series of sub-
stantially equal periodic payments. Nev-
ertheless, to the extent that such distribu-
tions are allocable to a 1998 conversion
contribution with respect to which the 4-
year spread for the resultant income inclu-
sion applies (see A-8 of this section) and
are received during 1998, 1999, or 2000,
the special acceleration rules of
§1.408A–6 A-6 apply. However, if the
original series of substantially equal peri-
odic payments does not continue to be
distributed in substantially equal periodic
payments from the Roth IRA after the
conversion, the series of payments will
have been modified and, if this modifica-
tion occurs within 5 years of the first pay-
ment or prior to the individual becoming
disabled or attaining age 59
1
⁄
2
, the tax-
payer will be subject to the recapture tax
of section 72(t)(4)(A).
Q-13. Can a 1997 distribution from a
traditional IRA be converted to a Roth
IRA in 1998?
A-13. No. An amount distributed from
a traditional IRA in 1997 that is con-
tributed to a Roth IRA in 1998 would not
be a conversion contribution. See A-3 of
this section regarding the remedy for a
failed conversion.
§1.408A–5 Recharacterized
contributions.
This section sets forth the following
questions and answers that provide rules
regarding recharacterizing IRA contribu-
tions:
Q-1. Can an IRA owner recharacterize
certain contributions (i.e., treat a contri-
bution made to one type of IRA as made
to a different type of IRA) for a taxable
year?
A-1. (a) Yes. In accordance with sec-
tion 408A(d)(6), except as otherwise pro-
vided in this section, if an individual
makes a contribution to an IRA (the
FIRST IRA) for a taxable year and then
transfers the contribution (or a portion of
the contribution) in a trustee-to-trustee
transfer from the trustee of the FIRST
IRA to the trustee of another IRA (the
SECOND IRA), the individual can elect
to treat the contribution as having been
made to the SECOND IRA, instead of to
the FIRST IRA, for Federal tax purposes.
A transfer between the FIRST IRA and
the SECOND IRA will not fail to be a
trustee-to-trustee transfer merely because
both IRAs are maintained by the same
trustee. For purposes of section
408A(d)(6), redesignating the FIRST IRA
as the SECOND IRA will be treated as a
transfer of the entire account balance
from the FIRST IRA to the SECOND
IRA.
(b) This recharacterization election can
be made only if the trustee-to-trustee
transfer from the FIRST IRA to the SEC-
OND IRA is made on or before the due
date (including extensions) for filing the
individual’s Federal income tax return for
the taxable year for which the contribu-
tion was made to the FIRST IRA. For
purposes of this section, a conversion that
is accomplished through a rollover of a
distribution from a traditional IRA in a
taxable year that, 60 days after the distrib-
ution (as described in section 408(d)(3)-
(A)(i)), is contributed to a Roth IRA in the
next taxable year is treated as a contribu-
tion for the earlier taxable year.
Q-2. What is the proper treatment of the
net income attributable to the amount of a
contribution that is being recharacterized?
A-2. (a) The net income attributable to
the amount of a contribution that is being
recharacterized must be transferred to the
SECOND IRA along with the contribution.
(b) If the amount of the contribution
being recharacterized was contributed to a
separate IRA and no distributions or addi-
tional contributions have been made from
or to that IRA at any time, then the contri-
bution is recharacterized by the trustee of
the FIRST IRA transferring the entire ac-
count balance of the FIRST IRA to the
trustee of the SECOND IRA. In this case,
the net income (or loss) attributable to the
contribution being recharacterized is the
difference between the amount of the
original contribution and the amount
transferred.
(c) If paragraph (b) of this A-2 does not
apply, then the net income attributable to
the amount of a contribution is calculated
in the manner prescribed by §1.408–
4(c)(2)(ii) (disregarding the parenthetical
clause in §1.408–4(c)(2)(iii)).
Q-3. What is the effect of recharacter-
izing a contribution made to the FIRST
IRA as a contribution made to the SEC-
OND IRA?
A-3. The contribution that is being
recharacterized as a contribution to the
February 22, 1999121999–8 I.R.B.

SECOND IRA is treated as having been
originally contributed to the SECOND
IRA on the same date and (in the case of a
regular contribution) for the same taxable
year that the contribution was made to the
FIRST IRA. Thus, for example, no de-
duction would be allowed for a contribu-
tion to the FIRST IRA, and any net in-
come transferred with the recharacterized
contribution is treated as earned in the
SECOND IRA, and not the FIRST IRA.
Q-4. Can an amount contributed to an
IRA in a tax-free transfer be recharacter-
ized under A-1 of this section?
A-4. No. If an amount is contributed
to the FIRST IRA in a tax-free transfer,
the amount cannot be recharacterized as a
contribution to the SECOND IRA under
A-1 of this section. However, if an
amount is erroneously rolled over or
transferred from a traditional IRA to a
SIMPLE IRA, the contribution can subse-
quently be recharacterized as a contribu-
tion to another traditional IRA.
Q-5. Can an amount contributed by an
employer under a SIMPLE IRA Plan or a
SEP be recharacterized under A-1 of this
section?
A-5. No. Employer contributions (in-
cluding elective deferrals) under a SIM-
PLE IRA Plan or a SEP cannot be rechar-
acterized as contributions to another IRA
under A-1 of this section. However, an
amount converted from a SEP IRA or
SIMPLE IRA to a Roth IRA may be
recharacterized under A-1 of this section
as a contribution to a SEP IRA or SIM-
PLE IRA, including the original SEP IRA
or SIMPLE IRA.
Q-6. How does a taxpayer make the
election to recharacterize a contribution to
an IRA for a taxable year?
A-6. (a) An individual makes the elec-
tion described in this section by notifying,
on or before the date of the transfer, both
the trustee of the FIRST IRA and the
trustee of the SECOND IRA, that the in-
dividual has elected to treat the contribu-
tion as having been made to the SECOND
IRA, instead of the FIRST IRA, for Fed-
eral tax purposes. The notification of the
election must include the following infor-
mation: the type and amount of the con-
tribution to the FIRST IRA that is to be
recharacterized; the date on which the
contribution was made to the FIRST IRA
and the year for which it was made; a di-
rection to the trustee of the FIRST IRA to
transfer, in a trustee-to-trustee transfer,
the amount of the contribution and net in-
come allocable to the contribution to the
trustee of the SECOND IRA; and the
name of the trustee of the FIRST IRA and
the trustee of the SECOND IRA and any
additional information needed to make
the transfer.
(b) The election and the trustee-to-
trustee transfer must occur on or before
the due date (including extensions) for fil-
ing the individual’s Federal income tax
return for the taxable year for which the
recharacterized contribution was made to
the FIRST IRA, and the election cannot
be revoked after the transfer. An individ-
ual who makes this election must report
the recharacterization, and must treat the
contribution as having been made to the
SECOND IRA, instead of the FIRST
IRA, on the individual’s Federal income
tax return for the taxable year described in
the preceding sentence in accordance with
the applicable Federal tax forms and in-
structions.
(c) The election to recharacterize a con-
tribution described in this A-6 may be
made on behalf of a deceased IRA owner
by his or her executor, administrator, or
other person responsible for filing the
final Federal income tax return of the
decedent under section 6012(b)(1).
Q-7. If an amount is initially con-
tributed to an IRA for a taxable year, then
is moved (with net income attributable to
the contribution) in a tax-free transfer to
another IRA (the FIRST IRA for purposes
of A-1 of this section), can the tax-free
transfer be disregarded, so that the initial
contribution that is transferred from the
FIRST IRA to the SECOND IRA is
treated as a recharacterization of that ini-
tial contribution?
A-7. Yes. In applying section
408A(d)(6), tax-free transfers between
IRAs are disregarded. Thus, if a contribu-
tion to an IRA for a year is followed by
one or more tax-free transfers between
IRAs prior to the recharacterization, then
for purposes of section 408A(d)(6), the
contribution is treated as if it remained in
the initial IRA. Consequently, an individ-
ual may elect to recharacterize an initial
contribution made to the initial IRA that
was involved in a series of tax-free trans-
fers by making a trustee-to-trustee trans-
fer from the last IRA in the series to the
SECOND IRA. In this case the contribu-
tion to the SECOND IRA is treated as
made on the same date (and for the same
taxable year) as the date the contribution
being recharacterized was made to the ini-
tial IRA.
Q-8. If a contribution is recharacter-
ized, is the recharacterization treated as a
rollover for purposes of the one-rollover-
per-year limitation of section 408(d)-
(3)(B)?
A-8. No, recharacterizing a contribu-
tion under A-1 of this section is never
treated as a rollover for purposes of the
one-rollover-per-year limitation of section
408(d)(3)(B), even if the contribution
would have been treated as a rollover con-
tribution by the SECOND IRA if it had
been made directly to the SECOND IRA,
rather than as a result of a recharacteriza-
tion of a contribution to the FIRST IRA.
Q-9. If an IRA owner converts an
amount from a traditional IRA to a Roth
IRA and then transfers that amount back
to a traditional IRA in a recharacteriza-
tion, may the IRA owner subsequently re-
convert that amount from the traditional
IRA to a Roth IRA?
A-9. (a) (1) Except as otherwise pro-
vided in paragraph (b) of this A-9, an IRA
owner who converts an amount from a tra-
ditional IRA to a Roth IRA during any tax-
able year and then transfers that amount
back to a traditional IRA by means of a
recharacterization may not reconvert that
amount from the traditional IRA to a Roth
IRA before the beginning of the taxable
year following the taxable year in which
the amount was converted to a Roth IRA
or, if later, the end of the 30-day period be-
ginning on the day on which the IRA
owner transfers the amount from the Roth
IRA back to a traditional IRA by means of
a recharacterization (regardless of whether
the recharacterization occurs during the
taxable year in which the amount was con-
verted to a Roth IRA or the following tax-
able year). Thus, any attempted reconver-
sion of an amount prior to the time
permitted under this paragraph (a)(1) is a
failed conversion of that amount. How-
ever, see §1.408A–4 A-3 for a remedy
available to an individual who makes a
failed conversion.
(2) For purposes of paragraph (a)(1) of
this A-9, a failed conversion of an amount
resulting from a failure to satisfy the re-
quirements of §1.408A–4 A-1(a) is
treated as a conversion in determining
1999–8 I.R.B.13February 22, 1999

whether an IRA owner has previously
converted that amount.
(b) (1) An IRA owner who converts an
amount from a traditional IRA to a Roth
IRA during taxable year 1998 and then
transfers that amount back to a traditional
IRA by means of a recharacterization may
reconvert that amount once (but no more
than once) on or after November 1, 1998
and on or before December 31, 1998; the
IRA owner may also reconvert that
amount once (but no more than once) dur-
ing 1999. The rule set forth in the preced-
ing sentence applies without regard to
whether the IRA owner’s initial conver-
sion or recharacterization of the amount
occurred before, on, or after November 1,
1998. An IRA owner who converts an
amount from a traditional IRA to a Roth
IRA during taxable year 1999 that has not
been converted previously and then trans-
fers that amount back to a traditional IRA
by means of a recharacterization may re-
convert that amount once (but no more
than once) on or before December 31,
1999. For purposes of this paragraph
(b)(1), a failed conversion of an amount
resulting from a failure to satisfy the re-
quirements of §1.408A–4 A-1(a) is not
treated as a conversion in determining
whether an IRA owner has previously
converted that amount.
(2) A reconversion by an IRA owner
during 1998 or 1999 for which the IRA
owner is not eligible under paragraph
(b)(1) of this A-9 will be deemed an ex-
cess reconversion (rather than a failed
conversion) and will not change the IRA
owner’s taxable conversion amount. In-
stead, the excess reconversion and the last
preceding recharacterization will not be
taken into account for purposes of deter-
mining the IRA owner’s taxable conver-
sion amount, and the IRA owner’s taxable
conversion amount will be based on the
last reconversion that was not an excess
reconversion (unless, after the excess re-
conversion, the amount is transferred
back to a traditional IRA by means of a
recharacterization). An excess reconver-
sion will otherwise be treated as a valid
reconversion.
(3) For purposes of this paragraph (b),
any reconversion that an IRA owner made
before November 1, 1998 will not be
treated as an excess reconversion and will
not be taken into account in determining
whether any later reconversion is an ex-
cess reconversion.
(c) In determining the portion of any
amount held in a Roth IRA or a traditional
IRA that an IRA owner may not reconvert
under this A-9, any amount previously
converted (or reconverted) is adjusted for
subsequent net income thereon.
Q-10. Are there examples to illustrate
the rules in this section?
A-10. The rules in this section are il-
lustrated by the following examples:
Example 1.In 1998, Individual C converts the
entire amount in his traditional IRA to a Roth IRA.
Individual C thereafter determines that his modified
AGI for 1998 exceeded $100,000 so that he was in-
eligible to have made a conversion in that year. Ac-
cordingly, prior to the due date (plus extensions)
for filing the individual’s Federal income tax return
for 1998, he decides to recharacterize the conver-
sion contribution. He instructs the trustee of the
Roth IRA (FIRST IRA) to transfer in a trustee-to-
trustee transfer the amount of the contribution, plus
net income, to the trustee of a new traditional IRA
(SECOND IRA). The individual notifies the trustee
of the FIRST IRA and the trustee of the SECOND
IRA that he is recharacterizing his IRA contribution
(and provides the other information described in A-
6 of this section). On the individual’s Federal in-
come tax return for 1998, he treats the original
amount of the conversion as having been con-
tributed to the SECOND IRA and not the Roth IRA.
As a result, for Federal tax purposes, the contribu-
tion is treated as having been made to the SECOND
IRA and not to the Roth IRA. The result would be
the same if the conversion amount had been trans-
ferred in a tax-free transfer to another Roth IRA
prior to the recharacterization.
Example 2. In 1998, an individual makes a
$2,000 regular contribution for 1998 to his traditional
IRA (FIRST IRA). Prior to the due date (plus exten-
sions) for filing the individual’s Federal income tax
return for 1998, he decides that he would prefer to
contribute to a Roth IRA instead. The individual in-
structs the trustee of the FIRST IRA to transfer in a
trustee-to-trustee transfer the amount of the contribu-
tion, plus attributable net income, to the trustee of a
Roth IRA (SECOND IRA). The individual notifies
the trustee of the FIRST IRA and the trustee of the
SECOND IRA that he is recharacterizing his $2,000
contribution for 1998 (and provides the other infor-
mation described in A-6 of this section). On the indi-
vidual’s Federal income tax return for 1998, he treats
the $2,000 as having been contributed to the Roth
IRA for 1998 and not to the traditional IRA. As a re-
sult, for Federal tax purposes, the contribution is
treated as having been made to the Roth IRA for
1998 and not to the traditional IRA. The result
would be the same if the conversion amount had
been transferred in a tax-free transfer to another tra-
ditional IRA prior to the recharacterization.
Example 3.The facts are the same as in Example
2,except that the $2,000 regular contribution is ini-
tially made to a Roth IRA and the recharacterizing
transfer is made to a traditional IRA. On the indi-
vidual’s Federal income tax return for 1998, he
treats the $2,000 as having been contributed to the
traditional IRA for 1998 and not the Roth IRA. As a
result, for Federal tax purposes, the contribution is
treated as having been made to the traditional IRA
for 1998 and not the Roth IRA. The result would be
the same if the contribution had been transferred in a
tax-free transfer to another Roth IRA prior to the
recharacterization, except that the only Roth IRA
trustee the individual must notify is the one actually
making the recharacterization transfer.
Example 4. In 1998, an individual receives a dis-
tribution from traditional IRA 1 and contributes the
entire amount to traditional IRA 2 in a rollover con-
tribution described in section 408(d)(3). In this
case, the individual cannot elect to recharacterize the
contribution by transferring the contribution
amount, plus net income, to a Roth IRA, because an
amount contributed to an IRA in a tax-free transfer
cannot be recharacterized. However, the individual
may convert (other than by recharacterization) the
amount in traditional IRA 2 to a Roth IRA at any
time, provided the requirements of §1.408A–4 A-1
are satisfied.
§1.408A-6 Distributions.
This section sets forth the following
questions and answers that provide rules
regarding distributions from Roth IRAs:
Q-1. How are distributions from Roth
IRAs taxed?
A-1. (a) The taxability of a distribution
from a Roth IRA generally depends on
whether or not the distribution is a quali-
fied distribution. This A-1 provides rules
for qualified distributions and certain
other nontaxable distributions. A-4 of
this section provides rules for the taxabil-
ity of distributions that are not qualified
distributions.
(b) A distribution from a Roth IRA is
not includible in the owner’s gross in-
come if it is a qualified distribution or to
the extent that it is a return of the owner’s
contributions to the Roth IRA (deter-
mined in accordance with A-8 of this sec-
tion). A qualified distribution is one that
is both—
(1) Made after a 5-taxable-year period
(defined in A-2 of this section); and
(2) Made on or after the date on which
the owner attains age 59
1
⁄
2
, made to a ben-
eficiary or the estate of the owner on or
after the date of the owner’s death, attrib-
utable to the owner’s being disabled
within the meaning of section 72(m)(7),
or to which section 72(t)(2)(F) applies
(exception for first-time home purchase).
(c) An amount distributed from a Roth
IRA will not be included in gross income
to the extent it is rolled over to another
February 22, 1999141999–8 I.R.B.

Roth IRA on a tax-free basis under the
rules of sections 408(d)(3) and 408A(e).
(d) Contributions that are returned to
the Roth IRA owner in accordance with
section 408(d)(4) (corrective distribu-
tions) are not includible in gross income,
but any net income required to be distrib-
uted under section 408(d)(4) together
with the contributions is includible in
gross income for the taxable year in
which the contributions were made.
Q-2. When does the 5-taxable-year pe-
riod described in A-1 of this section (re-
lating to qualified distributions) begin and
end?
A-2. The 5-taxable-year period de-
scribed in A-1 of this section begins on the
first day of the individual’s taxable year
for which the first regular contribution is
made to any Roth IRA of the individual or,
if earlier, the first day of the individual’s
taxable year in which the first conversion
contribution is made to any Roth IRA of
the individual. The 5-taxable-year period
ends on the last day of the individual’s
fifth consecutive taxable year beginning
with the taxable year described in the pre-
ceding sentence. For example, if an indi-
vidual whose taxable year is the calendar
year makes a first-time regular Roth IRA
contribution any time between January 1,
1998, and April 15, 1999, for 1998, the 5-
taxable-year period begins on January 1,
1998. Thus, each Roth IRA owner has
only one 5-taxable-year period described
in A-1 of this section for all the Roth IRAs
of which he or she is the owner. Further,
because of the requirement of the 5-tax-
able-year period, no qualified distributions
can occur before taxable years beginning
in 2003. For purposes of this A-2, the
amount of any contribution distributed as
a corrective distribution under A-1(d) of
this section is treated as if it was never
contributed.
Q-3. If a distribution is made to an in-
dividual who is the sole beneficiary of his
or her deceased spouse’s Roth IRA and
the individual is treating the Roth IRA as
his or her own, can the distribution be a
qualified distribution based on being
made to a beneficiary on or after the
owner’s death?
A-3. No. If a distribution is made to
an individual who is the sole beneficiary
of his or her deceased spouse’s Roth IRA
and the individual is treating the Roth
IRA as his or her own, then, in accordance
with §1.408A-2 A-4, the distribution is
treated as coming from the individual’s
own Roth IRA and not the deceased
spouse’s Roth IRA. Therefore, for pur-
poses of determining whether the distrib-
ution is a qualified distribution, it is not
treated as made to a beneficiary on or
after the owner’s death.
Q-4. How is a distribution from a Roth
IRA taxed if it is not a qualified distribu-
tion?
A-4. A distribution that is not a quali-
fied distribution, and is neither con-
tributed to another Roth IRA in a quali-
fied rollover contribution nor constitutes a
corrective distribution, is includible in the
owner’s gross income to the extent that
the amount of the distribution, when
added to the amount of all prior distribu-
tions from the owner’s Roth IRAs
(whether or not they were qualified distri-
butions) and reduced by the amount of
those prior distributions previously in-
cludible in gross income, exceeds the
owner’s contributions to all his or her
Roth IRAs. For purposes of this A-4, any
amount distributed as a corrective distrib-
ution is treated as if it was never con-
tributed.
Q-5. Will the additional tax under 72(t)
apply to the amount of a distribution that
is not a qualified distribution?
A-5. (a) The 10-percent additional tax
under section 72(t) will apply (unless the
distribution is excepted under section
72(t)) to any distribution from a Roth IRA
includible in gross income.
(b) The 10-percent additional tax under
section 72(t) also applies to a nonquali-
fied distribution, even if it is not then in-
cludible in gross income, to the extent it is
allocable to a conversion contribution, if
the distribution is made within the 5-tax-
able-year period beginning with the first
day of the individual’s taxable year in
which the conversion contribution was
made. The 5-taxable-year period ends on
the last day of the individual’s fifth con-
secutive taxable year beginning with the
taxable year described in the preceding
sentence. For purposes of applying the
tax, only the amount of the conversion
contribution includible in gross income as
a result of the conversion is taken into ac-
count. The exceptions under section 72(t)
also apply to such a distribution.
(c) The 5-taxable-year period described
in this A-5 for purposes of determining
whether section 72(t) applies to a distribu-
tion allocable to a conversion contribution
is separately determined for each conver-
sion contribution, and need not be the
same as the 5-taxable-year period used for
purposes of determining whether a distri-
bution is a qualified distribution under A-
1(b) of this section. For example, if a cal-
endar-year taxpayer who received a
distribution from a traditional IRA on De-
cember 31, 1998, makes a conversion
contribution by contributing the distrib-
uted amount to a Roth IRA on February
25, 1999 in a qualifying rollover contribu-
tion and makes a regular contribution for
1998 on the same date, the 5-taxable-year
period for purposes of this A-5 begins on
January 1, 1999, while the 5-taxable-year
period for purposes of A-1(b) of this sec-
tion begins on January 1, 1998.
Q-6. Is there a special rule for taxing
distributions allocable to a 1998 conver-
sion?
A-6. Yes. In the case of a distribution
from a Roth IRA in 1998, 1999 or 2000 of
amounts allocable to a 1998 conversion
with respect to which the 4-year spread
for the resultant income inclusion applies
(see §1.408A–4 A-8), any income de-
ferred as a result of the election to years
after the year of the distribution is accel-
erated so that it is includible in gross in-
come in the year of the distribution up to
the amount of the distribution allocable to
the 1998 conversion (determined under
A-8 of this section). This amount is in ad-
dition to the amount otherwise includible
in the owner’s gross income for that tax-
able year as a result of the conversion.
However, this rule will not require the in-
clusion of any amount to the extent it ex-
ceeds the total amount of income required
to be included over the 4-year period.
The acceleration of income inclusion de-
scribed in this A-6 applies in the case of a
surviving spouse who elects to continue
the 4-year spread in accordance with
§1.408A–4 A-11(b).
Q-7. Is the 5-taxable-year period de-
scribed in A-1 of this section redeter-
mined when a Roth IRA owner dies?
A-7. (a) No. The beginning of the 5-
taxable-year period described in A-1 of
this section is not redetermined when the
Roth IRA owner dies. Thus, in determin-
ing the 5-taxable-year period, the period
the Roth IRA is held in the name of a ben-
eficiary, or in the name of a surviving
1999–8 I.R.B.15February 22, 1999

spouse who treats the decedent’s Roth
IRA as his or her own, includes the period
it was held by the decedent.
(b) The 5-taxable-year period for a
Roth IRA held by an individual as a bene-
ficiary of a deceased Roth IRA owner is
determined independently of the 5-tax-
able-year period for the beneficiary’s own
Roth IRA. However, if a surviving
spouse treats the Roth IRA as his or her
own, the 5-taxable-year period with re-
spect to any of the surviving spouse’s
Roth IRAs (including the one that the sur-
viving spouse treats as his or her own)
ends at the earlier of the end of either the
5-taxable-year period for the decedent or
the 5-taxable-year period applicable to the
spouse’s own Roth IRAs.
Q-8. How is it determined whether an
amount distributed from a Roth IRA is al-
located to regular contributions, conver-
sion contributions, or earnings?
A-8. (a) Any amount distributed from
an individual’s Roth IRA is treated as
made in the following order (determined
as of the end of a taxable year and ex-
hausting each category before moving to
the following category)—
(1) From regular contributions;
(2) From conversion contributions, on
a first-in-first-out basis; and
(3) From earnings.
(b) To the extent a distribution is
treated as made from a particular conver-
sion contribution, it is treated as made
first from the portion, if any, that was in-
cludible in gross income as a result of the
conversion.
Q-9. Are there special rules for deter-
mining the source of distributions under
A-8 of this section?
A-9. Yes. For purposes of determining
the source of distributions, the following
rules apply:
(a) All distributions from all an individ-
ual’s Roth IRAs made during a taxable
year are aggregated.
(b) All regular contributions made for
the same taxable year to all the individ-
ual’s Roth IRAs are aggregated and added
to the undistributed total regular contribu-
tions for prior taxable years. Regular
contributions for a taxable year include
contributions made in the following tax-
able year that are identified as made for
the taxable year in accordance with
§1.408A–3 A-2. For example, a regular
contribution made in 1999 for 1998 is ag-
gregated with the contributions made in
1998 for 1998.
(c) All conversion contributions re-
ceived during the same taxable year by all
the individual’s Roth IRAs are aggre-
gated. Notwithstanding the preceding
sentence, all conversion contributions
made by an individual during 1999 that
were distributed from a traditional IRA in
1998 and with respect to which the 4-year
spread applies are treated for purposes of
A-8(b) of this section as contributed to the
individual’s Roth IRAs prior to any other
conversion contributions made by the in-
dividual during 1999.
(d) A distribution from an individual’s
Roth IRA that is rolled over to another
Roth IRA of the individual in accordance
with section 408A(e) is disregarded for
purposes of determining the amount of
both contributions and distributions.
(e) Any amount distributed as a correc-
tive distribution (including net income),
as described in A-1(d) of this section, is
disregarded in determining the amount of
contributions, earnings, and distributions.
(f) If an individual recharacterizes a
contribution made to a traditional IRA
(FIRST IRA) by transferring the contribu-
tion to a Roth IRA (SECOND IRA) in ac-
cordance with §1.408A–5, then, pursuant
to §1.408A–5 A-3, the contribution to the
Roth IRA is taken into account for the
same taxable year for which it would have
been taken into account if the contribution
had originally been made to the Roth IRA
and had never been contributed to the tra-
ditional IRA. Thus, the contribution to
the Roth IRA is treated as contributed to
the Roth IRA on the same date and for the
same taxable year that the contribution
was made to the traditional IRA.
(g) If an individual recharacterizes a
regular or conversion contribution made
to a Roth IRA (FIRST IRA) by transfer-
ring the contribution to a traditional IRA
(SECOND IRA) in accordance with
§1.408A–5, then pursuant to §1.408A–5
A-3, the contribution to the Roth IRA and
the recharacterizing transfer are disre-
garded in determining the amount of both
contributions and distributions for the tax-
able year with respect to which the origi-
nal contribution was made to the Roth
IRA.
(h) Pursuant to §1.408A–5 A-3, the ef-
fect of income or loss (determined in ac-
cordance with §1.408A–5 A-2) occurring
after the contribution to the FIRST IRA is
disregarded in determining the amounts
described in paragraphs (f) and (g) of this
A-9. Thus, for purposes of paragraphs (f)
and (g), the amount of the contribution is
determined based on the original contri-
bution.
Q-10. Are there examples to illustrate
the ordering rules described in A-8 and A-
9 of this section?
A-10. Yes. The following examples il-
lustrate these ordering rules:
Example 1.In 1998, individual B converts
$80,000 in his traditional IRA to a Roth IRA. B has
a basis of $20,000 in the conversion amount and so
must include the remaining $60,000 in gross in-
come. He decides to spread the $60,000 income by
including $15,000 in each of the 4 years 1998-2001,
under the rules of §1.408A–4 A-8. B also makes a
regular contribution of $2,000 in 1998. If a distribu-
tion of $2,000 is made to B anytime in 1998, it will
be treated as made entirely from the regular contri-
butions, so there will be no Federal income tax con-
sequences as a result of the distribution.
Example 2. The facts are the same as in Example
1,except that the distribution made in 1998 is
$5,000. The distribution is treated as made from
$2,000 of regular contributions and $3,000 of con-
version contributions that were includible in gross
income. As a result, B must include $18,000 in
gross income for 1998: $3,000 as a result of the ac-
celeration of amounts that otherwise would have
been included in later years under the 4-year-spread
rule and $15,000 includible under the regular 4-
year-spread rule. In addition, because the $3,000 is
allocable to a conversion made within the previous 5
taxable years, the 10-percent additional tax under
section 72(t) would apply to this $3,000 distribution
for 1998, unless an exception applies. Under the 4-
year-spread rule, B would now include in gross in-
come $15,000 for 1999 and 2000, but only $12,000
for 2001, because of the accelerated inclusion of the
$3,000 distribution.
Example 3.The facts are the same as in Example
1,except that B makes an additional $2,000 regular
contribution in 1999 and he does not take a distribu-
tion in 1998. In 1999, the entire balance in the ac-
count, $90,000 ($84,000 of contributions and $6,000
of earnings), is distributed to B. The distribution is
treated as made from $4,000 of regular contribu-
tions, $60,000 of conversion contributions that were
includible in gross income, $20,000 of conversion
contributions that were not includible in gross in-
come, and $6,000 of earnings. Because a distribu-
tion has been made within the 4-year-spread period,
B must accelerate the income inclusion under the 4-
year-spread rule and must include in gross income
the $45,000 remaining under the 4-year-spread rule
in addition to the $6,000 of earnings. Because
$60,000 of the distribution is allocable to a conver-
sion made within the previous 5 taxable years, it is
subject to the 10-percent additional tax under sec-
tion 72(t) as if it were includible in gross income for
1999, unless an exception applies. The $6,000 allo-
cable to earnings would be subject to the tax under
section 72(t), unless an exception applies. Under the
February 22, 1999161999–8 I.R.B.

4-year-spread rule, no amount would be includible
in gross income for 2000 or 2001 because the entire
amount of the conversion that was includible in
gross income has already been included.
Example 4. The facts are the same as in Example
1,except that B also makes a $2,000 regular contri-
bution in each year 1999 through 2002 and he does
not take a distribution in 1998. A distribution of
$85,000 is made to B in 2002. The distribution is
treated as made from the $10,000 of regular contri-
butions (the total regular contributions made in the
years 1998-2002), $60,000 of conversion contribu-
tions that were includible in gross income, and
$15,000 of conversion contributions that were not
includible in gross income. As a result, no amount
of the distribution is includible in gross income;
however, because the distribution is allocable to a
conversion made within the previous 5 years, the
$60,000 is subject to the 10-percent additional tax
under section 72(t) as if it were includible in gross
income for 2002, unless an exception applies.
Example 5.The facts are the same as in Example
4,except no distribution occurs in 2002. In 2003,
the entire balance in the account, $170,000 ($90,000
of contributions and $80,000 of earnings), is distrib-
uted to B. The distribution is treated as made from
$10,000 of regular contributions, $60,000 of conver-
sion contributions that were includible in gross in-
come, $20,000 of conversion contributions that were
not includible in gross income, and $80,000 of earn-
ings. As a result, for 2003, B must include in gross
income the $80,000 allocable to earnings, unless the
distribution is a qualified distribution; and if it is not
a qualified distribution, the $80,000 would be sub-
ject to the 10-percent additional tax under section
72(t), unless an exception applies.
Example 6.Individual C converts $20,000 to a
Roth IRA in 1998 and $15,000 (in which amount C
had a basis of $2,000) to another Roth IRA in 1999.
No other contributions are made. In 2003, a $30,000
distribution, that is not a qualified distribution, is
made to C. The distribution is treated as made from
$20,000 of the 1998 conversion contribution and
$10,000 of the 1999 conversion contribution that
was includible in gross income. As a result, for
2003, no amount is includible in gross income; how-
ever, because $10,000 is allocable to a conversion
contribution made within the previous 5 taxable
years, that amount is subject to the 10-percent addi-
tional tax under section 72(t) as if the amount were
includible in gross income for 2003, unless an ex-
ception applies. The result would be the same
whichever of C’s Roth IRAs made the distribution.
Example 7. The facts are the same as in Example
6,except that the distribution is a qualified distribu-
tion. The result is the same as in Example 6, except
that no amount would be subject to the 10-percent
additional tax under section 72(t), because, to be a
qualified distribution, the distribution must be made
on or after the date on which the owner attains age
59
1
⁄
2
, made to a beneficiary or the estate of the owner
on or after the date of the owner’s death, attributable
to the owner’s being disabled within the meaning of
section 72(m)(7), or to which section 72(t)(2)(F) ap-
plies (exception for a first-time home purchase).
Under section 72(t)(2), each of these conditions is
also an exception to the tax under section 72(t).
Example 8. Individual D makes a $2,000 regular
contribution to a traditional IRA on January 1, 1999,
for 1998. On April 15, 1999, when the $2,000 has
increased to $2,500, D recharacterizes the contribu-
tion by transferring the $2,500 to a Roth IRA (pur-
suant to §1.408A–5 A-1). In this case, D’s regular
contribution to the Roth IRA for 1998 is $2,000.
The $500 of earnings is not treated as a contribution
to the Roth IRA. The results would be the same if
the $2,000 had decreased to $1,500 prior to the
recharacterization.
Example 9.In December 1998, individual E re-
ceives a distribution from his traditional IRA of
$300,000 and in January 1999 he contributes the
$300,000 to a Roth IRA as a conversion contribu-
tion. In April 1999, when the $300,000 has in-
creased to $350,000, E recharacterizes the conver-
sion contribution by transferring the $350,000 to a
traditional IRA. In this case, E’s conversion contri-
bution for 1998 is $0, because the $300,000 conver-
sion contribution and the earnings of $50,000 are
disregarded. The results would be the same if the
$300,000 had decreased to $250,000 prior to the
recharacterization. Further, since the conversion is
disregarded, the $300,000 is not includible in gross
income in 1998.
Q-11. If the owner of a Roth IRA dies
prior to the end of the 5-taxable-year pe-
riod described in A-1 of this section (re-
lating to qualified distributions) or prior
to the end of the 5-taxable-year period de-
scribed in A-5 of this section (relating to
conversions), how are different types of
contributions in the Roth IRA allocated to
multiple beneficiaries?
A-11. Each type of contribution is allo-
cated to each beneficiary on a pro-rata
basis. Thus, for example, if a Roth IRA
owner dies in 1999, when the Roth IRA
contains a regular contribution of $2,000,
a conversion contribution of $6,000 and
earnings of $1,000, and the owner leaves
his Roth IRA equally to four children,
each child will receive one quarter of each
type of contribution. Pursuant to the or-
dering rules in A-8 of this section, an im-
mediate distribution of $2,000 to one of
the children will be deemed to consist of
$500 of regular contributions and $1,500
of conversion contributions. A benefi-
ciary’s inherited Roth IRA may not be ag-
gregated with any other Roth IRA main-
tained by such beneficiary (except for
other Roth IRAs the beneficiary inherited
from the same decedent), unless the bene-
ficiary, as the spouse of the decedent and
sole beneficiary of the Roth IRA, elects to
treat the Roth IRA as his or her own (see
A-7 and A-14 of this section).
Q-12. How do the withholding rules
under section 3405 apply to Roth IRAs?
A-12. Distributions from a Roth IRA
are distributions from an individual retire-
ment plan for purposes of section 3405
and thus are designated distributions un-
less one of the exceptions in section
3405(e)(1) applies. Pursuant to section
3405(a) and (b), nonperiodic distributions
from a Roth IRA are subject to 10-percent
withholding by the payor and periodic
payments are subject to withholding as if
the payments were wages. However, an
individual can elect to have no amount
withheld in accordance with section
3405(a)(2) and (b)(2).
Q-13. Do the withholding rules under
section 3405 apply to conversions?
A-13. Yes. A conversion by any
method described in §1.408A–4 A-1 is
considered a designated distribution sub-
ject to section 3405. However, a conver-
sion occurring in 1998 by means of a
trustee-to-trustee transfer of an amount
from a traditional IRA to a Roth IRA es-
tablished with the same or a different
trustee is not required to be treated as a
designated distribution for purposes of
section 3405. Consequently, no withhold-
ing is required with respect to such a con-
version (without regard to whether or not
the individual elected to have no with-
holding).
Q-14. What minimum distribution
rules apply to a Roth IRA?
A-14. (a) No minimum distributions
are required to be made from a Roth IRA
under section 408(a)(6) and (b)(3) (which
generally incorporate the provisions of
section 401(a)(9)) while the owner is
alive. The post-death minimum distribu-
tion rules under section 401(a)(9)(B) that
apply to traditional IRAs, with the excep-
tion of the at-least-as-rapidly rule de-
scribed in section 401(a)(9)(B)(i), also
apply to Roth IRAs.
(b) The minimum distribution rules
apply to the Roth IRA as though the Roth
IRA owner died before his or her required
beginning date. Thus, generally, the en-
tire interest in the Roth IRA must be dis-
tributed by the end of the fifth calendar
year after the year of the owner’s death
unless the interest is payable to a desig-
nated beneficiary over a period not
greater than that beneficiary’s life ex-
pectancy and distribution commences be-
fore the end of the calendar year follow-
ing the year of death. If the sole
beneficiary is the decedent’s spouse, such
spouse may delay distributions until the
decedent would have attained age 70
1
⁄
2
or
may treat the Roth IRA as his or her own.
1999–8 I.R.B.17February 22, 1999

(c) Distributions to a beneficiary that
are not qualified distributions will be in-
cludible in the beneficiary’s gross income
according to the rules in A-4 of this sec-
tion.
Q-15. Does section 401(a)(9) apply
separately to Roth IRAs and individual
retirement plans that are not Roth IRAs?
A-15. Yes. An individual required to
receive minimum distributions from his
or her own traditional or SIMPLE IRA
cannot choose to take the amount of the
minimum distributions from any Roth
IRA. Similarly, an individual required to
receive minimum distributions from a
Roth IRA cannot choose to take the
amount of the minimum distributions
from a traditional or SIMPLE IRA. In ad-
dition, an individual required to receive
minimum distributions as a beneficiary
under a Roth IRA can only satisfy the
minimum distributions for one Roth IRA
by distributing from another Roth IRA if
the Roth IRAs were inherited from the
same decedent.
Q-16. How is the basis of property dis-
tributed from a Roth IRA determined for
purposes of a subsequent disposition?
A-16. The basis of property distributed
from a Roth IRA is its fair market value
(FMV) on the date of distribution,
whether or not the distribution is a quali-
fied distribution. Thus, for example, if a
distribution consists of a share of stock in
XYZ Corp. with an FMV of $40.00 on the
date of distribution, for purposes of deter-
mining gain or loss on the subsequent sale
of the share of XYZ Corp. stock, it has a
basis of $40.00.
Q-17. What is the effect of distributing
an amount from a Roth IRA and con-
tributing it to another type of retirement
plan other than a Roth IRA?
A-17. Any amount distributed from a
Roth IRA and contributed to another type
of retirement plan (other than a Roth IRA)
is treated as a distribution from the Roth
IRA that is neither a rollover contribution
for purposes of section 408(d)(3) nor a
qualified rollover contribution within the
meaning of section 408A(e) to the other
type of retirement plan. This treatment
also applies to any amount transferred
from a Roth IRA to any other type of re-
tirement plan unless the transfer is a
recharacterization described in §1.408A-5.
Q-18. Can an amount be transferred
directly from an education IRA to a Roth
IRA (or distributed from an education
IRA and rolled over to a Roth IRA)?
A-18. No amount may be transferred
directly from an education IRA to a Roth
IRA. A transfer of funds (or distribution
and rollover) from an education IRA to a
Roth IRA constitutes a distribution from
the education IRA and a regular contribu-
tion to the Roth IRA (rather than a quali-
fied rollover contribution to the Roth
IRA).
Q-19. What are the Federal income tax
consequences of a Roth IRA owner trans-
ferring his or her Roth IRA to another in-
dividual by gift?
A-19. A Roth IRA owner’s transfer of
his or her Roth IRA to another individual
by gift constitutes an assignment of the
owner’s rights under the Roth IRA. At
the time of the gift, the assets of the Roth
IRA are deemed to be distributed to the
owner and, accordingly, are treated as no
longer held in a Roth IRA. In the case of
any such gift of a Roth IRA made prior to
October 1, 1998, if the entire interest in
the Roth IRA is reconveyed to the Roth
IRA owner prior to January 1, 1999, the
Internal Revenue Service will treat the
gift and reconveyance as never having oc-
curred for estate tax, gift tax, and genera-
tion-skipping tax purposes and for pur-
poses of this A-19.
§1.408A–7 Reporting.
This section sets forth the following
questions and answers that relate to the
reporting requirements applicable to Roth
IRAs:
Q-1. What reporting requirements
apply to Roth IRAs?
A-1. Generally, the reporting require-
ments applicable to IRAs other than Roth
IRAs also apply to Roth IRAs, except
that, pursuant to section 408A(d)(3)(D),
the trustee of a Roth IRA must include on
Forms 1099-R and 5498 additional infor-
mation as described in the instructions
thereto. Any conversion of amounts from
an IRA other than a Roth IRA to a Roth
IRA is treated as a distribution for which a
Form 1099-R must be filed by the trustee
maintaining the non-Roth IRA. In addi-
tion, the owner of such IRAs must report
the conversion by completing Form 8606.
In the case of a recharacterization de-
scribed in §1.408A–5 A-1, IRA owners
must report such transactions in the man-
ner prescribed in the instructions to the
applicable Federal tax forms.
Q-2. Can a trustee rely on reasonable
representations of a Roth IRA contributor
or distributee for purposes of fulfilling re-
porting obligations?
A-2. A trustee maintaining a Roth IRA
is permitted to rely on reasonable repre-
sentations of a Roth IRA contributor or
distributee for purposes of fulfilling re-
porting obligations.
§1.408A–8 Definitions.
This section sets forth the following
question and answer that provides defini-
tions of terms used in the provisions of
§§1.408A–1 through 1.408A–7 and this
section:
Q-1. Are there any special definitions
that govern in applying the provisions of
§§1.408A–1 through 1.408A–7 and this
section?
A-1. Yes, the following definitions
govern in applying the provisions of
§§1.408A–1 through 1.408A–7 and this
section. Unless the context indicates oth-
erwise, the use of a particular term ex-
cludes the use of the other terms.
(a) Different types of IRAs—(1) IRA.
Sections 408(a) and (b), respectively, de-
scribe an individual retirement account
and an individual retirement annuity. The
term IRA means an IRA described in ei-
ther section 408(a) or (b), including each
IRA described in paragraphs (a)(2)
through (5) of this A-1. However, the
term IRA does not include an education
IRA described in section 530.
(2) Traditional IRA.The term tradi-
tional IRA means an individual retirement
account or individual retirement annuity
described in section 408(a) or (b), respec-
tively. This term includes a SEP IRA but
does not include a SIMPLE IRA or a Roth
IRA.
(3) SEP IRA.Section 408(k) describes
a simplified employee pension (SEP) as
an employer-sponsored plan under which
an employer can make contributions to
IRAs established for its employees. The
term SEP IRA means an IRA that receives
contributions made under a SEP. The
term SEP includes a salary reduction SEP
(SARSEP) described in section 408(k)(6).
(4) SIMPLE IRA.Section 408(p) de-
scribes a SIMPLE IRA Plan as an em-
ployer-sponsored plan under which an
February 22, 1999181999–8 I.R.B.

employer can make contributions to SIM-
PLE IRAs established for its employees.
The term SIMPLE IRA means an IRA to
which the only contributions that can be
made are contributions under a SIMPLE
IRA Plan or rollovers or transfers from
another SIMPLE IRA.
(5) Roth IRA.The term Roth IRA
means an IRA that meets the requirements
of section 408A.
(b) Other defined terms or phrases—
(1) 4-year spread.The term 4-year
spread is described in §1.408A–4 A-8.
(2) Conversion.The term conversion
means a transaction satisfying the require-
ments of §1.408A–4 A-1.
(3) Conversion amount or conversion
contribution.The term conversion
amount or conversion contribution is the
amount of a distribution and contribution
with respect to which a conversion de-
scribed in §1.408A–4 A-1 is made.
(4) Failed conversion.The term failed
conversion means a transaction in which
an individual contributes to a Roth IRA an
amount transferred or distributed from a
traditional IRA or SIMPLE IRA (includ-
ing a transfer by redesignation) in a trans-
action that does not constitute a conver-
sion under §1.408A-4 A-1.
(5) Modified AGI.The term modified
AGI is defined in §1.408A–3 A-5.
(6) Recharacterization. The term
recharacterization means a transaction de-
scribed in §1.408A–5 A-1.
(7) Recharacterized amount or rechar-
acterized contribution.The term rechar-
acterized amount or recharacterized con-
tribution means an amount or contribution
treated as contributed to an IRA other
than the one to which it was originally
contributed pursuant to a recharacteriza-
tion described in §1.408A–5 A-1.
(8) Taxable conversion amount.The
term taxable conversion amount means
the portion of a conversion amount in-
cludible in income on account of a con-
version, determined under the rules of
section 408(d)(1) and (2).
(9) Tax-free transfer.The term tax-free
transfer means a tax-free rollover de-
scribed in section 402(c), 402(e)(6),
403(a)(4), 403(a)(5), 403(b)(8), 403(b)(10)
or 408(d)(3), or a tax-free trustee-to-trustee
transfer.
(10) Treat an IRA as his or her own.
The phrase treat an IRA as his or her own
means to treat an IRA for which a surviv-
ing spouse is the sole beneficiary as his or
her own IRA after the death of the IRA
owner in accordance with the terms of the
IRA instrument or in the manner provided
in the regulations under section 408(a)(6)
or (b)(3).
(11) Trustee.The term trustee includes
a custodian or issuer (in the case of an an-
nuity) of an IRA (except where the con-
text clearly indicates otherwise).
§1.408A–9 Effective date.
This section contains the following
question and answer providing the effec-
tive date of §§1.408A–1 through
1.408A–8:
Q-1. To what taxable years do
§§1.408A–1 through 1.408A–8 apply?
A-1 Sections 1.408A–1 through
1.408A-8 apply to taxable years begin-
ning on or after January 1, 1998.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Paragraph 9. The authority citation for
part 602 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
Par.10. In §602.101, paragraph (c) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB control numbers.
* * * * *
(c) * * *
CFR part or section Current OMB
where identified and control no.
described
* * * * *
1.408A–2 . . . . . . . . . . . . . . . . 1545–1616
1.408A–4 . . . . . . . . . . . . . . . . 1545–1616
1.408A–5 . . . . . . . . . . . . . . . . 1545–1616
1.408A–7 . . . . . . . . . . . . . . . . 1545–1616
* * * * *
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved January 25, 1999.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on Feb-
ruary 3, 1999, 8:45 a.m., and published in the issue
of the Federal Register for February 4, 1999, 64 F.R.
5597)
Section 4980B.—Failure to
Satisfy Continuous Coverage
Requirements of Group Health
Plans
26 CFR 54.4980B–1: COBRA in general.
T.D. 8812
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 54 and 602
Continuation Coverage
Requirements Applicable to
Group Health Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final rule.
SUMMARY: The Consolidated Omnibus
Budget Reconciliation Act of 1985
(COBRA) added health care continuation
requirements that apply to group health
plans. Coverage required to be provided
under those requirements is referred to as
COBRA continuation coverage. Pro-
posed regulations interpreting the
COBRA continuation coverage require-
ments were published in the Federal
Registerof June 15, 1987 and of January
7, 1998. This document contains final
regulations based on these two sets of
proposed regulations. The final regula-
tions also reflect statutory amendments to
the COBRA continuation coverage re-
quirements since COBRA was enacted. A
new set of proposed regulations
REG–121865–98 addressing additional
issues under the COBRA continuation
coverage provisions is on page 63 of this
Bulletin. The regulations will generally
affect sponsors of and participants in
group health plans, and they provide plan
sponsors and plan administrators with
guidance necessary to comply with the
law.
1999–8 I.R.B.19February 22, 1999

DATES: Effective Date:These regula-
tions are effective February 3, 1999.
Applicability Dates:Sections
54.4980B–1 through 54.4980B–8 apply
to group health plans with respect to qual-
ifying events occurring in plan years be-
ginning on or after January 1, 2000. See
the Effective Date portion of this pream-
ble and Q&A-2 of §54.4980B–1.
FOR FURTHER INFORMATION CON-
TACT: Yurlinda Mathis, 202-622-4695.
This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have
been reviewed and approved by the Of-
fice of Management and Budget in accor-
dance with the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507) under control
number 1545-1581. Responses to these
collections of information are mandatory
in some cases and required in order to ob-
tain a benefit in other cases. Group
health plans are required to provide cer-
tain individuals a notice of their COBRA
continuation coverage rights when cer-
tain qualifying events occur and are re-
quired to inform health care providers
who contact the plan to confirm the cov-
erage of certain individuals of the indi-
viduals’ complete rights to coverage. To
obtain COBRA continuation coverage or
extended coverage, certain individuals
are required to notify the plan administra-
tor of certain events or that they are elect-
ing COBRA continuation coverage, and
plans are required to notify certain indi-
viduals of insignificant underpayments if
the plan wishes to require the individuals
to pay the deficiency. This information
will be used to advise employers and plan
administrators of their obligation to offer
COBRA continuation coverage, or an ex-
tended period of such coverage; to advise
qualified beneficiaries of their right to
elect COBRA continuation coverage and
of insignificant errors in payment; and to
inform health care providers of in-
dividuals’ rights to COBRA continuation
coverage.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
The estimated average annual burden
per respondent varies from 30 seconds to
330 hours, depending on individual cir-
cumstances, with an estimated average of
14 minutes.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service,Attn: IRS
Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and to the Office
of Management and Budget,Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to these col-
lections of information must be retained
as long as their contents may become ma-
terial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On June 15, 1987, proposed regulations
(EE–143–86, 1987–2 C.B. 929) relating
to continuation coverage requirements ap-
plicable to group health plans were pub-
lished in the Federal Register(52 F.R.
22716). A public hearing was held on
November 4, 1987. Written comments
were also received. A supplemental set of
proposed regulations (REG–209485–86,
1998–11 I.R.B. 21) was published in the
Federal Registerof January 7, 1998 (63
F.R. 708). No public hearing was re-
quested or held after the publication of the
supplemental proposed regulations; writ-
ten comments were received. After con-
sideration of these comments, after re-
view of the reported court decisions under
the parallel COBRA continuation cover-
age provisions of the Employee Retire-
ment Income Security Act of 1974
(ERISA) and the Public Health Service
Act, and based on the experience of the
IRS in administering the COBRA contin-
uation coverage requirements, a portion
of the regulations proposed by EE–143–
86 and REG–209485–86 is adopted as re-
vised by this Treasury decision. The revi-
sions are summarized in the explanation
below. Also being published elsewhere in
this issue of the Federal Registeris a
new set of proposed regulations, which
addresses additional issues.
Explanation of Provisions
Overview
The regulations are intended to provide
clear, administrable rules regarding
COBRA continuation coverage. The reg-
ulations give comprehensive guidance on
many questions under COBRA, with a
view to enhancing the certainty and re-
liance available to all parties – including
employees, qualified beneficiaries, em-
ployers, employee organizations, and
group health plans – in determining their
COBRA rights and obligations. The
guidance is designed to further the protec-
tive purposes of COBRA without undue
administrative burdens or costs on em-
ployers, employee organizations, or group
health plans.
For example, the regulations:
• Prevent group health plans from ter-
minating COBRA continuation cov-
erage on the basis of other coverage
that a qualified beneficiary had prior
to electing COBRA continuation
coverage, in accordance with the
Supreme Court’s decision in Geissal
v. Moore Medical Corp.
• Give employers and employee orga-
nizations significant flexibility in de-
termining, for purposes of COBRA,
the number of group health plans
they maintain. This will reduce bur-
dens on employers and employee or-
ganizations by permitting them to
structure their group health plans in
an efficient and cost-effective man-
ner and to satisfy their COBRA
obligations based upon that structure.
• Provide baseline rules for determin-
ing the COBRA liabilities of buyers
and sellers of corporate stock and cor-
porate assets and permit buyers and
sellers to reallocate and carry out
those liabilities by agreement. This
will significantly enhance employers’
ability to negotiate and to plan appro-
priately for the treatment of qualified
beneficiaries in connection with
mergers and acquisitions, while pro-
tecting the rights of qualified benefi-
ciaries affected by the transactions.
• Limit the application of COBRA for
most health flexible spending
February 22, 1999201999–8 I.R.B.

arrangements. This will ensure that
COBRA continuation coverage under
health flexible spending arrange-
ments is available in appropriate
cases without requiring continuation
coverage where that would not serve
the statutory purposes.
• Eliminate the requirement that group
health plans offer qualified beneficia-
ries the option to elect only core
(health) coverage under a group
health plan that otherwise provides
both core and noncore (vision and
dental) coverage.
• Give employers, in determining
whether the small-employer plan ex-
ception applies, the option of count-
ing by pay period rather than by
every business day, and provide, for
that exception, for the consistent
treatment of part-time employees
through the use of full-time equiva-
lents.
The COBRA continuation coverage re-
quirements enacted on April 7, 1986 have
been amended by the Omnibus Budget
Reconciliation Act of 1986 (OBRA
1986), the Tax Reform Act of 1986 (TRA
1986), the Technical and Miscellaneous
Revenue Act of 1988 (TAMRA), the Om-
nibus Budget Reconciliation Act of 1989
(OBRA 1989), the Omnibus Budget Rec-
onciliation Act of 1990 (OBRA 1990), the
Small Business Job Protection Act of
1996 (SBJPA), and the Health Insurance
Portability and Accountability Act of
1996 (HIPAA).
1
These amendments
made numerous clarifications and modifi-
cations to the COBRA continuation cov-
erage requirements, moved the require-
ments from section 162(k) to section
4980B, added various other features, such
as the disability extension to the required
period of coverage, and significantly al-
tered the sanctions imposed on employers
and plans for failing to comply with the
requirements. The specific changes made
by these amendments are discussed below
in connection with the provisions of the
regulations that relate to them.
The legislative history of COBRA pro-
vides that the Department of the Treasury
has the authority to interpret the coverage
and tax sanction provisions of COBRA
and that the Department of Labor has the
authority to interpret the reporting and
disclosure provisions. Accordingly, these
regulations apply in interpreting the cov-
erage provisions of COBRA in Title I of
ERISA, as well as those in the Internal
Revenue Code. With minor exceptions,
the final regulations and the new pro-
posed regulations being published today
do not address the notice provisions of the
COBRA continuation coverage require-
ments.
Organization
The final regulations being published
today follow the structure of the 1987
proposed regulations, with related ques-
tions-and-answers grouped into topics.
Each topic is now in a separate section,
and sections have been added to the new
proposed regulations being published
today for (1) business reorganizations and
employer withdrawals from multiem-
ployer plans and (2) the interaction of the
Family and Medical Leave Act of 1993
(FMLA) and COBRA. The substance of
the 1998 proposed regulations has been
integrated into the questions-and-answers
of the 1987 proposed regulations. The or-
dering of some of the questions-and-an-
swers has changed, and all of the ques-
tions-and-answers relating to the original
statutory effective date have been deleted.
In addition, in a few cases, the content of
two separate questions-and-answers in the
1987 proposed regulations has been com-
bined into a single question-and-answer;
in other cases the content of a single ques-
tion-and-answer has been expanded to
two or more questions-and-answers.
These changes have resulted in the
renumbering of the questions-and-an-
swers. The new proposed regulations
being published today are designed to fill
gaps designated in the final regulations as
reserved.
Effective Date
The 1987 proposed regulations provide
that they will be effective upon publica-
tion as final regulations. Some com-
menters suggested that the final regula-
tions should have a delayed effective date.
The final regulations follow this sugges-
tion; they apply with respect to qualifying
events occurring in plan years beginning
on or after January 1, 2000. For any pe-
riod before the effective date of the final
regulations, the plan and the employer
must operate in good faith compliance
with a reasonable interpretation of the re-
quirements in section 4980B. For the pe-
riod before the effective date of the final
regulations, the IRS will consider compli-
ance with the proposed regulations in
§1.162–26 (the 1987 proposed regula-
tions) and §54.4980B–1 (the 1998 pro-
posed regulations) to constitute good faith
compliance with a reasonable interpreta-
tion of the statutory requirements for the
topics that those proposed regulations ad-
dress, except to the extent inconsistent
with a statutory amendment adopted after
the dates the proposed regulations were
issued, during the period the amendment
is effective, or with a decision of the
United States Supreme Court released
after the proposed regulations were is-
sued, during the period after the decision
is released. For any period beginning on
or after the effective date of the final reg-
ulations with respect to topics not ad-
dressed in the final regulations, such as
how to calculate the applicable premium,
the plan and the employer must operate in
good faith compliance with a reasonable
interpretation of the requirements in sec-
tion 4980B.
Compliance with the new proposed
regulations will constitute good faith
compliance with a reasonable interpreta-
tion of the statutory requirements ad-
dressed in the new proposed regulations
until the new proposed regulations are fi-
nalized. In addition, actions inconsistent
with the terms of the new proposed regu-
lations will not necessarily constitute a
lack of good faith compliance with a rea-
sonable interpretation of the statutory re-
quirements addressed in the new pro-
posed regulations; whether there has been
good faith compliance with a reasonable
interpretation of the statutory require-
ments will depend on all the facts and cir-
cumstances of each case.
The IRS will not assess the excise tax
with respect to a plan that operates in
good faith compliance with a reasonable
interpretation of the statutory require-
ments, as described in the preceding two
paragraphs. Note, however, that in the
1999–8 I.R.B.21February 22, 1999
1
The COBRA continuation coverage require-
ments have also been affected by an amendment
made to the definition of group health plan by the
Omnibus Budget Reconciliation Act of 1993
(OBRA 1993). OBRA 1993 amended the definition
of group health plan in section 5000(b)(1), which the
COBRA continuation coverage provisions of the In-
ternal Revenue Code incorporate by reference.

case of lawsuits brought by qualified ben-
eficiaries to enforce their COBRA contin-
uation coverage rights under ERISA or
the Public Health Service Act, the courts
generally have not applied any good faith
compliance standard.
Plans That Must Comply
The final regulations provide rules re-
garding which group health plans are sub-
ject to COBRA. These rules are generally
similar to those set forth in the 1987 pro-
posed regulations. However, the rules for
determining, for purposes of the COBRA
continuation coverage requirements, the
number of group health plans maintained
by an employer have been deleted, and
the new proposed regulations set forth
substantially different rules, which pro-
vide that employers and employee organi-
zations generally have broad discretion to
determine the number of group health
plans that they maintain. Other signifi-
cant changes to the 1987 proposed regula-
tions on this point (some of which are set
forth in the 1998 proposed regulations)
include exceptions for long-term care ser-
vices and medical savings accounts and
new rules regarding the small-employer
plan exception.
As in the 1987 proposed regulations,
the final regulations provide that, in gen-
eral, all group health plans are subject to
the COBRA continuation coverage re-
quirements. However, small-employer
plans (discussed below), church plans
(within the meaning of section 414(e)),
and governmental plans (within the mean-
ing of section 414(d)) are not subject to
COBRA. (The final regulations refer to
these as plans excepted from COBRA.)
Plans excepted from COBRA are gener-
ally not subject to the COBRA continua-
tion coverage requirements or the
COBRA excise tax, although group health
plans maintained by state or local govern-
ments are subject to parallel continuation
coverage requirements in the Public
Health Service Act (which is administered
by the Department of Health and Human
Services). Also, the Federal Employees
Health Benefit Program is subject to gen-
erally similar, although not parallel, tem-
porary continuation of coverage provi-
sions under the Federal Employees Health
Benefits Amendments Act of 1988.
The final regulations define group
health planin a manner generally similar
to that in the 1987 proposed regulations.
However, certain changes in terminology
have been made to reflect the statutory
cross-reference to section 5000(b)(1) set
forth in section 4980B(g)(2) (such as the
use of the term health careand the defini-
tion of employee). Additionally, the final
regulations, in accordance with section
4980B(g)(2), provide that a plan is not a
group health plan if substantially all the
coverage provided under the plan is for
qualified long-term care services (as de-
fined in section 7702B(c)). The final reg-
ulations allow plans to use any reasonable
method in determining whether a plan sat-
isfies this exception. The final regula-
tions also provide, in accordance with
section 106(b)(5), that amounts con-
tributed by an employer to a medical sav-
ings account (as defined in section
220(d)) are not considered part of a group
health plan for purposes of COBRA (al-
though a high-deductible health plan will
not fail to be a group health plan simply
because it covers a holder of a medical
savings account).
Under the final regulations, agroup
health planis a plan maintained by an em-
ployer or employee organization to pro-
vide health care to individuals who have
an employment-related connection to the
employer or employee organization or to
the families of such individuals. In accor-
dance with section 5000(b)(1), these indi-
viduals include employees, former em-
ployees, the employer, and others
associated or formerly associated with the
employer or employee organization in a
business relationship. The final regula-
tions generally refer to all individuals cov-
ered under a plan by virtue of the perfor-
mance of services or by virtue of
membership in an employee organization
as employees. (As discussed below, the
term employeehas a narrower meaning for
purposes of the small-employer plan ex-
ception.) The final regulations use the
term employerto refer to a person for
whom an individual performs services.
Pursuant to section 414(t), the term em-
ployeralso includes, with respect to such a
person, any member of a group described
in section 414(b), (c), (m), or (o) that in-
cludes the person (a controlled group) as
well as any successor of the person or of a
member of the controlled group.
Under the final regulations, as under
the 1987 proposed regulations, a plan
generally is considered to provide health
care whether it does so directly or through
insurance, reimbursement, or other means
and whether it does so through an on-site
facility or a cafeteria or other flexible
benefit arrangement. Insurance includes
group insurance policies and one or more
individual policies under an arrangement
maintained by the employer or employee
organization to provide health care to two
or more employees. Under the final regu-
lations, as under the 1987 proposed regu-
lations, in the case of a cafeteria plan or
other flexible benefit arrangement, the
COBRA continuation coverage require-
ments apply only to the health care bene-
fits under the cafeteria plan or other flexi-
ble benefit arrangement that an employee
has actually chosen to receive.
Many commenters on the 1987 pro-
posed regulations requested clarification
of the application of COBRA to health
care benefits provided under flexible
spending arrangements (health FSAs).
Some commentators argued that health
FSAs should not be subject to COBRA.
Health FSAs satisfy the definition of
group health plan in section 5000(b)(1)
and, accordingly, are generally subject to
the COBRA continuation coverage re-
quirements. However, COBRA is in-
tended to ensure that a qualified benefi-
ciary has guaranteed access to coverage
under a group health plan and that the cost
of that coverage is no greater than 102
percent of the applicable premium.
The IRS and Treasury believe that the
purposes of COBRA are not furthered by
requiring an employer to offer COBRA
for a plan year if the amount that the em-
ployer could require to be paid for the
COBRA coverage for the plan year would
exceed the maximum benefit that the
qualified beneficiary could receive under
the FSA for that plan year and if the qual-
ified beneficiary could not avoid a break
in coverage, for purposes of the HIPAA
portability provisions
2
, by electing
COBRA coverage under the FSA. Ac-
cordingly, the new proposed regulations
contain a rule limiting the application of
February 22, 1999221999–8 I.R.B.
2
Under HIPAA, a qualified beneficiary who
maintains coverage after termination of employment
under a group health plan that is subject to HIPAA
can avoid a break in coverage and thereby avoid be-
coming subject to a preexisting condition exclusion
upon later becoming covered by another another
group health plan.

the COBRA continuation coverage re-
quirements in the case of health FSAs.
Under this rule, if the health FSA satis-
fies two conditions, the health FSA need
not make COBRA continuation coverage
available to a qualified beneficiary for
any plan year after the plan year in which
the qualifying event occurs. The first
condition that the health FSA must satisfy
for this exception to apply is that the
health FSA is not subject to the HIPAA
portability provisions in sections 9801
though 9833 because the benefits pro-
vided under the health FSA are excepted
benefits. (See sections 9831 and 9832.)
3
The second condition is that, in the plan
year in which the qualifying event of a
qualified beneficiary occurs, the maxi-
mum amount that the health FSA could
require to be paid for a full plan year of
COBRA continuation coverage equals or
exceeds the maximum benefit available
under the health FSA for the year. It is
contemplated that this second condition
will be satisfied in most cases.
Moreover, if a third condition is satis-
fied, the health FSA need not make
COBRA continuation coverage available
with respect to a qualified beneficiary at
all. This third condition is satisfied if, as
of the date of the qualifying event, the
maximum benefit available to the quali-
fied beneficiary under the health FSA for
the remainder of the plan year is not more
than the maximum amount that the plan
could require as payment for the remain-
der of that year to maintain coverage
under the health FSA.
A plan is maintained by an employer or
employee organization even if the em-
ployer or employee organization does not
directly or indirectly contribute to it if
coverage under the plan would not be
available to an individual at the same cost
if the individual did not have an employ-
ment-related connection to the employer
or employee organization. The final regu-
lations, for purposes of the definition of a
group health plan, use the term health
careinstead of the term medical care
(which was used in the 1987 proposed
regulations). This change reflects the
change in the definition of group health
plan made by OBRA 1989. However, the
final regulations provide that health care
has the same meaning as the term medical
careunder section 213(d). Like the 1987
proposed regulations, the final regulations
set forth a summary of items that do and
do not constitute health care.
The final regulations, generally follow-
ing the 1987 proposed regulations, set
forth rules for determining whether a
group health plan is a small-employer
plan. In general, a group health plan other
than a multiemployer plan is a small-em-
ployer plan if it is maintained for a calen-
dar year by an employer that normally em-
ployed fewer than 20 employees during
the preceding calendar year, and a group
health plan that is a multiemployer plan is
a small-employer plan if each of the em-
ployers contributing to the plan for a cal-
endar year normally employed fewer than
20 employees during the preceding calen-
dar year. Whether the plan is a multiem-
ployer plan or not, the term employer in-
cludes all members of a controlled group.
An example in the final regulations clari-
fies that the controlled group includes for-
eign members, and thus a U.S. subsidiary
with fewer than 20 employees is subject to
COBRA if the controlled group has 20 or
more employees world-wide. The final
regulations set forth additional rules for
the application of the small-employer plan
exception to multiemployer plans, and the
new proposed regulations contain the
same definition of multiemployer plan
that is in section 414(f).
Under the final regulations, an em-
ployer is considered to have normally em-
ployed fewer than 20 employees during a
particular calendar year if it had fewer
than 20 employees on at least 50 percent
of its typical business days during that
year. This rule differs from the rule in the
1987 proposed regulations in two ways.
First, the 1987 proposed regulations use
the term working days,whereas the final
regulations use the statutory term typical
business days.
The second difference relates to the
termemployee.Under the 1987 proposed
regulations, self-employed individuals
and independent contractors are counted
as employees for purposes of the small-
employer plan exception if they are cov-
ered under a plan of the employer. Com-
menters argued that only common law
employees should be counted for this pur-
pose. Unlike the definition of covered
employee(amended by OBRA 1989 to
make clear that individuals who are not
common law employees but who are cov-
ered under the group health plan of an
employer or employee organization by
virtue of the performance of services are
still considered covered employees) and
the definition of group health plan
(amended by OBRA 1993 to make clear
that a health plan covering individuals
who are not common law employees of
the employer or employee organization,
and who are not family members of com-
mon law employees, is still a group health
plan) the reference to employees for pur-
poses of the small-employer plan excep-
tion have not been amended to include in-
dividuals who are not common law
employees. Consequently, under the final
regulations, only common law employees
are taken into account for purposes of the
small-employer plan exception; self-em-
ployed individuals, independent contrac-
tors, and directors are not counted.
Although a small-employer plan is gen-
erally excepted from COBRA, a plan that
is not a small-employer plan for a period
remains subject to COBRA for qualifying
events that occurred during that period,
even if it subsequently becomes a small-
employer plan.
In determining whether a plan is eligi-
ble for the small-employer plan excep-
tion, part-time employees, as well as full-
time employees, must be taken into
account. Several commenters on the
1987 proposed regulations requested clar-
ification of how to count part-time em-
ployees for the small-employer plan ex-
ception, and the new proposed regulations
provide guidance on this issue. Under the
new proposed regulations, instead of each
part-time employee counting as a full em-
ployee, each part-time employee counts
as a fraction of an employee, with the
fraction equal to the number of hours that
the part-time employee works for the em-
ployer divided by the number of hours
that an employee must work in order to be
considered a full-time employee. The
1999–8 I.R.B.23February 22, 1999
3
The IRS and Treasury, together with the U.S.
Department of Labor and the U.S. Department of
Health and Human Services, have issued a notice
(62 F.R. 67688) holding that a health FSA is exempt
from HIPAA because the benefits provided under it
are excepted benefits under sections 9831 and 9833
if the employer also provides another group health
plan, the benefits under the other plan are not limited
to excepted benefits, and the maximum reimburse-
ment under the health FSA is not greater than two
times the employee’s salary reduction election (or if
greater, the employee’s salary reduction election
plus five hundred dollars.

number of hours that must be worked to
be considered a full-time employee is de-
termined in a manner consistent with the
employer’s general employment prac-
tices, although for this purpose not more
than eight hours a day or 40 hours a week
may be used. An employer may count
employees for each typical business day
or may count employees for a pay period
and attribute the total number of employ-
ees for that pay period to each typical
business day that falls within the pay pe-
riod. The employer must use the same
method for all employees and for the en-
tire year for which the small-employer
plan determination is made.
In determining whether a multiem-
ployer plan satisfies the requirements for
the small-employer plan exception, the
1987 proposed regulations provide a spe-
cial rule permitting the multiemployer
plan to be considered a small-employer
plan for a year if any contributing em-
ployer that grew to be too large to qualify
for the exception during the preceding
year ceases to contribute to the plan by
February 1 of the current year. Questions
have been raised about the need for and
the authority for this special rule, and one
commenter pointed out the uncertainty of
how to deal with a qualified beneficiary
experiencing a qualifying event under
such a plan in January of the current year
if the qualified beneficiary needed confir-
mation of coverage for urgent services be-
fore it was clear that the too-large em-
ployer would cease contributing to the
multiemployer plan by February 1. Based
on these concerns, the final regulations
eliminate this special rule for multiem-
ployer plans.
The new proposed regulations provide
guidance, for purposes of the COBRA
continuation coverage requirements, on
how to determine the number of group
health plans that an employer or employee
organization maintains. Under these rules,
the employer or employee organization is
generally permitted to establish the sepa-
rate identity and number of group health
plans under which it provides health care
benefits to employees. Thus, if an em-
ployer or employee organization provides
a variety of health care benefits to employ-
ees, it generally may aggregate the bene-
fits into a single group health plan or dis-
aggregate benefits into separate group
health plans. The status of health care
benefits as part of a single group health
plan or as separate plans is determined by
reference to the instruments governing
those arrangements. If it is not clear from
the instruments governing an arrangement
or arrangements to provide health care
benefits whether the benefits are provided
under one plan or more than one plan, or if
there are no instruments governing the
arrangement or arrangements, all such
health care benefits (other than those for
qualified long-term care services) pro-
vided by a single entity (determined with-
out regard to the controlled group) consti-
tute a single group health plan.
Under the new proposed regulations, a
multiemployer plan and a plan other than
a multiemployer plan are always separate
plans. In addition, any treatment of health
care benefits as constituting separate
group health plans will be disregarded if a
principal purpose of the treatment is to
evade any requirement of law. Of course,
an employer’s flexibility to treat benefits
as part of separate plans may be limited by
the operation of other laws, such as the
prohibition in section 9802 on condition-
ing eligibility to enroll in a group health
plan on the basis of any health factor of an
individual.
The final regulations modify the rules
set forth in the 1987 proposed regulations
for determining the plan year of a group
health plan under COBRA. These modi-
fications are made to be consistent with
the rules in the temporary regulations
under HIPAA. The definition of plan year
is important in applying, for example, the
effective date provisions under the final
regulations and the rules for health FSAs
under the new proposed regulations.
Under the final regulations, the plan year
is the year designated as such in the plan
documents. If the plan documents do not
designate a plan year (or if there are no
plan documents), the plan year is the de-
ductible/limit year used by the plan. If
the plan does not impose deductibles or
limits on an annual basis, the plan year is
the policy year. If the plan does not im-
pose deductibles or limits on an annual
basis and the plan is not insured (or the in-
surance policy is not renewed annually),
the plan year is the taxable year of the em-
ployer. In any other case, the plan year is
the calendar year.
The final regulations reflect the statu-
tory provisions that provide for the impo-
sition of an excise tax in the event of a
failure by a group health plan to comply
with the COBRA continuation coverage
requirements of section 4980B(f). In the
case of a multiemployer plan, the excise
tax is imposed on the plan
4
; in the case of
any other plan, the excise tax is imposed
on the employer maintaining the plan. In
certain circumstances, the excise tax can
be imposed on other persons involved
with the provision of benefits under the
plan, such as an insurer providing benefits
under the plan or a third party administra-
tor administering claims under the plan.
Separate, non-tax remedies may be avail-
able in the case of a plan that fails to com-
ply with the COBRA continuation cover-
age requirements in ERISA.
Qualified Beneficiaries
The rules in the final regulations for de-
termining who is a qualified beneficiary
generally follow those set forth in the
1987 proposed regulations, as well as
those set forth in the 1998 proposed regu-
lations regarding the status of newborn
and adopted children as qualified benefi-
ciaries. However, certain provisions have
been added to the final regulations to re-
flect the special statutory rules that apply
in the case of bankruptcy of the employer
as a qualifying event. Modifications have
also been made to reflect the decision of
the Supreme Court in Geissal v. Moore
Medical Corp.,118 S. Ct. 1869 (1998),
which held that an individual covered
under another group health plan at the
time she or he elects COBRA continua-
tion coverage cannot be denied COBRA
continuation coverage on the basis of that
other coverage.
Under the final regulations, a qualified
beneficiary is, in general: (1) any individ-
ual who, on the day before a qualifying
event, is covered under a group health
plan either as a covered employee, the
spouse of a covered employee, or the de-
pendent child of a covered employee; or
(2) any child born to or placed for adop-
tion with a covered employee during a pe-
February 22, 1999241999–8 I.R.B.
4
In this regard, the U.S. Department of Labor
has advised the IRS and Teasury that to the extent a
plan fiduciary subjects a plan to liability for the
COBRA excise tax on account of her or his impru-
dent actions, the plan fiduciary may be held person-
ally liable under Title I of ERISA for the amount of
the tax.

riod of COBRA continuation coverage.
(The final regulations retain the defini-
tions of the terms placement for adoption
and being placed for adoptionthat were
in the 1998 proposed regulations.) For a
qualifying event that is the bankruptcy of
the employer, any covered employee who
retired on or before the date of any sub-
stantial elimination of group health plan
coverage is a qualified beneficiary; the
spouse, surviving spouse, or dependent
child of the retired covered employee is
also a qualified beneficiary if the spouse,
surviving spouse, or dependent child was
a beneficiary under the plan on the day
before the bankruptcy qualifying event.
The final regulations add a provision clar-
ifying that if an individual is denied cov-
erage under a group health plan in viola-
tion of applicable law (including HIPAA)
and experiences an event that would be a
qualifying event if the coverage had not
been wrongfully denied, the individual is
considered a qualified beneficiary.
A covered employee can be a qualified
beneficiary only in connection with a
qualifying event that is the termination (or
reduction of hours) of the covered em-
ployee’s employment or the employer’s
bankruptcy. As under the 1987 proposed
regulations, the final regulations provide
that a covered employee is not a qualified
beneficiary if her or his status as a cov-
ered employee is attributable to certain
periods in which she or he was a nonresi-
dent alien (in which case the covered em-
ployee’s spouse and dependent children
are also not qualified beneficiaries). Al-
though a child born to or placed for adop-
tion with a covered employee during a pe-
riod of COBRA continuation coverage is
a qualified beneficiary, a child born to or
placed for adoption with a qualified bene-
ficiary other than the covered employee
after a qualifying event, or a person who
becomes the spouse of a qualified benefi-
ciary (regardless of whether the qualified
beneficiary is the covered employee) after
a qualifying event is not a qualified bene-
ficiary. The final regulations retain the
rule of the 1987 proposed regulations
under which an individual is not a quali-
fied beneficiary if, on the day before the
qualifying event, the individual is covered
under the group health plan solely be-
cause of another individual’s election of
COBRA continuation coverage. How-
ever, consistent with Geissal,the final
regulations eliminate the rule in the 1987
proposed regulations that an individual is
not a qualified beneficiary if, on the day
before the qualifying event, the individual
was entitled to Medicare benefits.
An individual ceases to be a qualified
beneficiary if she or he does not elect
COBRA continuation coverage by the end
of the election period (discussed below).
The final regulations clarify that an indi-
vidual who elects COBRA continuation
coverage ceases to be a qualified benefi-
ciary once the plan’s obligation to provide
COBRA continuation coverage has
ended.
The term covered employeeis defined
in the final regulations in a manner sub-
stantially the same as in the 1987 pro-
posed regulations. Although some com-
menters on the 1987 proposed regulations
objected to the inclusion in this definition
of individuals other than common law
employees, the statutory definition was
amended by OBRA 1989 to include such
individuals. Under the final regulations,
a covered employee generally includes
any individual who is or has been pro-
vided coverage under a group health plan
(other than one excepted from COBRA as
of the date of what would otherwise be a
qualifying event) because of her or his
present or past performance of services
for the employer maintaining the group
health plan (or by reason of membership
in the employee organization maintaining
the plan). Thus, retirees and former em-
ployees covered by a group health plan
are covered employees if the coverage is
provided in whole or in part because of
the previous employment. Any individual
who performs services for the employer
maintaining the plan or who is a member
of the employee organization maintaining
the plan may be a covered employee.
Thus, common law employees, self-
employed individuals, independent con-
tractors, and corporate directors can be
covered employees. Generally, mere eli-
gibility for coverage – as opposed to ac-
tual coverage – does not make an individ-
ual a covered employee. However, if an
individual who otherwise would be a cov-
ered employee is denied coverage under a
group health plan in violation of applica-
ble law (including HIPAA), the individual
is considered a covered employee.
Qualifying Events
The rules regarding qualifying events
under the final regulations generally are
the same as those in the 1987 proposed
regulations. Under the final regulations, a
qualifying event is any of a set of speci-
fied events that occurs while a group
health plan is subject to COBRA and that
causes a covered employee (or the spouse
or dependent child of the covered em-
ployee) to lose coverage under the plan.
These specified events are: the death of a
covered employee; the termination (other
than by reason of gross misconduct), or
reduction of hours, of a covered em-
ployee’s employment; the divorce or legal
separation of a covered employee from
the covered employee’s spouse; a covered
employee’s becoming entitled to
Medicare benefits under Title XVIII of
the Social Security Act; a dependent
child’s ceasing to be a dependent child of
the covered employee under the plan; and
a proceeding in bankruptcy under Title 11
of the United States Code with respect to
an employer from whose employment a
covered employee retired at any time.
The addition of employer bankruptcy as a
qualifying event reflects the amendments
made to COBRA by OBRA 1986.
The reasons for which an employee has
a termination of employment or a reduc-
tion of hours of employment generally are
not relevant in determining whether the
termination or reduction of hours is a
qualifying event. Thus, a voluntary ter-
mination, a strike, a lockout, a layoff, or
an involuntary discharge each may consti-
tute a qualifying event. However, if an
employee is discharged for gross miscon-
duct, the termination of employment does
not constitute a qualifying event. The
final regulations clarify that a reduction of
hours of a covered employee’s employ-
ment includes any decrease in the number
of hours that a covered employee works
or is required to work that does not consti-
tute a termination of employment. Thus,
if a covered employee takes a leave of ab-
sence, is laid off, or otherwise performs
no hours of work during a period, the cov-
ered employee has experienced a reduc-
tion in hours that, if the other applicable
requirements are satisfied, constitutes a
qualifying event. (But see Notice 94–
103 (1994–2 C.B. 569) and the new pro-
1999–8 I.R.B.25February 22, 1999

posed regulations, described below, for
special rules regarding FMLA leave.) A
covered employee’s loss of coverage by
reason of a failure to work the minimum
number of hours required for coverage
constitutes a reduction of hours of em-
ployment.
Under the final regulations, to lose cov-
eragemeans to cease to be covered under
the same terms and conditions as in effect
immediately before the event. The final
regulations clarify that a loss of coverage
includes an increase in an employee pre-
mium or contribution resulting from one
of the events described above. The loss
of coverage need not be concurrent with
the event; it is enough that the loss of cov-
erage occur at any time before the end of
the maximum coverage period (described
below). For employer bankruptcies, the
term to lose coveragealso includes a sub-
stantial elimination of coverage that oc-
curs within 12 months before or after the
date on which the bankruptcy proceeding
begins.
Under the final regulations, as under
the 1987 proposed regulations, reductions
or eliminations in coverage in anticipation
of an event are disregarded in determining
whether the event results in a loss of cov-
erage. Although several commenters ob-
jected to this rule, the final regulations re-
tain the provision in order to protect
qualified beneficiaries from being de-
prived of their COBRA rights because an
employer or employee organization trans-
poses a loss or reduction of coverage to a
time before the qualifying event. This
rule also applies in cases where a covered
employee discontinues the coverage of a
spouse in anticipation of a divorce or
legal separation. In such a case, upon re-
ceiving notice of the divorce or legal sep-
aration, a plan is required to make
COBRA continuation coverage available,
effective on the date of the divorce or
legal separation (but not for any period
before the date of the divorce or legal sep-
aration).
Under the final regulations, as under
the 1987 proposed regulations, an event
must occur while the group health plan is
subject to COBRA in order to constitute a
qualifying event. A plan that is excepted
from COBRA (for example, by reason of
the small-employer plan exception) and
that later becomes subject to COBRA is
not required to provide COBRA continua-
tion coverage to individuals who experi-
enced what would otherwise be a qualify-
ing event during the period when the plan
was not subject to COBRA.
Finally, in the case of a child born to or
placed for adoption with a covered em-
ployee during a period of COBRA contin-
uation coverage, the qualifying event that
gives rise to that period of COBRA con-
tinuation coverage is the qualifying event
applicable to that child. Thus, if a second
qualifying event has occurred before such
a child is born (for example, if the cov-
ered employee dies), the second qualify-
ing event also applies to the newborn
child.
COBRA Continuation Coverage
The 1987 proposed regulations gener-
ally refer to the coverage that a qualified
beneficiary is entitled to as the coverage
that was in effect on the day before the
qualifying event. While that is generally
true, the final regulations have been re-
vised to incorporate the statutory standard
that a qualified beneficiary is entitled to
the coverage made available to similarly
situated beneficiaries with respect to
whom a qualifying event has not oc-
curred. The final regulations generally
use as a shorthand for this statutory lan-
guage the phrase “similarly situated non-
COBRA beneficiaries” instead of the
phrase “similarly situated active employ-
ees” used in the 1987 proposed regula-
tions. In certain contexts in the final reg-
ulations, though, the phrase “similarly
situated active employees” is still used
because in those contexts – such as the
right to make an independent election for
COBRA continuation coverage – quali-
fied beneficiaries who are spouses and de-
pendent children of covered employees
are entitled to the rights that employees
have (and in those contexts, spouses and
dependent children who are not qualified
beneficiaries typically do not have the
rights that employees have).
The 1987 proposed regulations address
in a separate question-and-answer the
type of coverage that must be made avail-
able to qualified beneficiaries if a change
is made in the coverage provided to simi-
larly situated nonCOBRA beneficiaries.
The final regulations include this rule in
the question-and-answer that defines
COBRA continuation coverage. In doing
so, the final regulations delete several
specific requirements in the 1987 pro-
posed regulations. For example, if cover-
age for the similarly situated nonCOBRA
beneficiaries is changed or eliminated, the
1987 proposed regulations require that
qualified beneficiaries be permitted to
elect coverage under any remaining plan
made available to the similarly situated
active employees. Many commenters ob-
jected that in the case of a mere change in
benefits, the requirement to give qualified
beneficiaries an election among other
plans would give them greater rights than
those active employees might have. The
final regulations follow the suggestion of
the commenters in providing that the gen-
eral principle – that qualified beneficia-
ries have the same rights as similarly situ-
ated nonCOBRA beneficiaries – applies
in this situation. The same principle also
applies in determining whether credit for
deductibles must be carried over from a
discontinued plan to a new plan. Never-
theless, if an employer or employee orga-
nization providing more than one plan to
a group of similarly situated nonCOBRA
beneficiaries eliminates benefits under
one plan without giving the similarly situ-
ated nonCOBRA beneficiaries the right to
enroll in another plan, that option would
still have to be made available to qualified
beneficiaries if the employer continued to
maintain a group health plan because of
the employer’s obligation to continue to
make COBRA continuation coverage
available.
The 1987 proposed regulations include
detailed rules requiring that qualified ben-
eficiaries generally be offered the option
of electing only core coverage or both
core and noncore coverage. These rules
were based on a reference in the confer-
ence report to the Tax Reform Act of
1986. Many commenters expressed the
opinion that the reference in the confer-
ence report is an insufficient basis for in-
cluding this concept in the regulations
when nothing in the statute itself suggests
a distinction between core and noncore
coverage. Commenters also contended
that the core/noncore distinction would
create undue administrative complexity
and promote adverse selection. After
careful consideration, the IRS and Trea-
sury have decided not to include in either
the final or the new proposed regulations
any such requirement to offer for core
February 22, 1999261999–8 I.R.B.

coverage separately. However, comments
are invited on whether such a requirement
should be adopted.
The 1987 proposed regulations estab-
lish standards for determining the de-
ductibles and limits that apply to COBRA
continuation coverage in a period in
which an individual or a group of family
members has coverage that is not
COBRA continuation coverage and then
elects COBRA continuation coverage.
(Of course, during a period in which an
individual or group of family members
had only COBRA continuation coverage,
the rules for deductibles and limits would
apply to them in the same manner as they
would to similarly situated nonCOBRA
beneficiaries.) Some commenters ob-
jected to the provisions of the 1987 pro-
posed regulations for computing de-
ductibles or limits on a family basis in the
case of a qualifying event (such as di-
vorce) that splits a family into two (or
more) units. The 1987 proposed regula-
tions would require that each resulting
family unit be credited with all the ex-
penses incurred by the entire family be-
fore the qualifying event. The final regu-
lations revise this rule. Under the final
regulations, in computing deductibles and
limits for the family unit receiving
COBRA coverage, the plan is required to
take into account only those expenses in-
curred before the qualifying event by
family members who are part of the re-
sulting family unit after the qualifying
event.
The 1987 proposed regulations provide
that qualified beneficiaries moving out-
side the area served by a region-specific
plan must be given the right to obtain
other coverage from the employer main-
taining the region-specific plan. The rule
conditions the right to other coverage on
the employer having employees in the
area to which the qualified beneficiary is
moving. This proposed rule unduly limits
the application of the rule in the case of an
employer or employee organization that
could provide other coverage to the quali-
fied beneficiary without having to estab-
lish a new plan or enter into a new group
insurance contract even though the em-
ployer did not have employees or the em-
ployee organization did not have mem-
bers in the area that the qualified
beneficiary was moving to. This might be
the case, for example, if the employer or
employee organization maintained a self-
insured plan or maintained an insured
plan through an insurance company li-
censed to provide that same product in the
area that the qualified beneficiary was
moving to. The final regulations elimi-
nate the condition that an employer have
employees in the area to which the quali-
fied beneficiary is moving and instead re-
quire that coverage be made available to
the qualified beneficiary if the employer
or employee organization would be able
to provide coverage to the qualified bene-
ficiary under one of its existing plans.
Generally the coverage that must be made
available is that made available to the
similarly situated nonCOBRA beneficia-
ries. If, however, the coverage made
available to the similarly situated nonCO-
BRA beneficiaries cannot be made avail-
able in the area that the qualified benefi-
ciary is moving to, then the coverage that
must be made available is coverage pro-
vided to other employees.
The 1987 proposed regulations require,
in the case of a plan providing open en-
rollment rights, that open enrollment
rights be extended to qualified beneficia-
ries if an employer maintains two or more
plans. Thus, that rule, by its terms, does
not require that open enrollment rights be
given if an employer maintains a single
plan and allows active employees during
open enrollment to switch between cate-
gories of coverage such as single and
family or among categories such as em-
ployee-only, employee-plus-one-depen-
dent, or employee-plus-two-or-more-de-
pendents. The final regulations eliminate
the condition that an employer or em-
ployee organization maintain two or more
plans for a qualified beneficiary to have
open enrollment rights. Thus, open en-
rollment rights must be extended to quali-
fied beneficiaries in any case in which
they are extended to similarly situated ac-
tive employees. (Note that the open en-
rollment right of employees to enroll
when not previously enrolled would not
have to be extended to individuals who
previously did not elect to receive
COBRA continuation coverage because
an individual ceases to be a qualified ben-
eficiary if COBRA continuation coverage
is not elected.)
The 1987 proposed regulations require
that qualified beneficiaries be given the
same right to add new family members
that similarly situated active employees
have. Many commenters objected to this
rule, arguing that it requires more than a
mere continuation of coverage. However,
COBRA continuation coverage is more
than just a continuation of the coverage a
qualified beneficiary had before the quali-
fying event; it includes the same proce-
dural rights to expand or change coverage
that similarly situated active employees
have. Moreover, the policy behind the
1987 proposed regulations is reflected in
the HIPAA amendment to COBRA creat-
ing special qualified beneficiary status for
certain newborn and adopted children as
well as in the HIPAA special enrollment
rights in section 9801(f) for new spouses
and for newborn and adopted children.
Accordingly, the final regulations provide
guidance on the application of the HIPAA
special enrollment rights to qualified ben-
eficiaries and retain the rule in the 1987
proposed regulations regarding the right
of qualified beneficiaries to add new fam-
ily members (even though not eligible for
the HIPAA special enrollment rights) to
the same extent that active employees are
permitted to add new family members.
Electing COBRA Continuation Coverage
The final regulations set forth rules re-
garding elections of COBRA continuation
coverage by qualified beneficiaries. In
general, a group health plan is required to
offer a qualified beneficiary the opportu-
nity to elect COBRA continuation cover-
age at any time during the election period.
The election period begins not later than
the date the qualified beneficiary would
lose coverage by reason of a qualifying
event and ends not earlier than 60 days
after the later of that date or 60 days after
the date on which the qualified benefi-
ciary is provided notice of her or his right
to elect COBRA continuation coverage.
For purposes of determining whether a
qualified beneficiary’s election of
COBRA continuation coverage is timely,
the election is deemed to be made on the
date it is sent to the employer or plan ad-
ministrator. The final regulations clarify
that a qualified beneficiary need not her-
self or himself elect COBRA continuation
coverage; that election can be made on
behalf of the qualified beneficiary by a
third party (including a third party that is
not a qualified beneficiary).
1999–8 I.R.B.27February 22, 1999

Generally, the employer or plan admin-
istrator must determine when a qualifying
event has occurred, and a qualified bene-
ficiary is not required to give notice of the
event. However, a covered employee or
qualified beneficiary is required to notify
the plan administrator of a qualifying
event that is a divorce or legal separation
of the covered employee or a dependent
child’s ceasing to be a dependent child
under the plan terms. The 1987 proposed
regulations prescribe that the notification
should be given to the employer or other
plan administrator. The final regulations
simply require that the notice be provided
to the plan administrator.
The notice must be provided within 60
days after the date of the qualifying event
or the date on which the qualified benefi-
ciary would lose coverage because of the
qualifying event, whichever is later. If the
notice is not provided, the group health
plan is not required to make COBRA con-
tinuation coverage available to the quali-
fied beneficiary
5
. In the case of the cov-
ered employee’s divorce or legal
separation, a single notice sent by or on
behalf of the covered employee or any
one of the qualified beneficiaries (that is,
the spouse or a dependent child) satisfies
the notice requirement for all those who
become qualified beneficiaries as a result
of the divorce or legal separation.
The group health plan must make
COBRA continuation coverage available
for the entire election period if the quali-
fied beneficiary elects coverage prior to
the end of the period (except in the case of
a revoked waiver, as discussed below).
An employer or employee organization
maintaining a group health plan using an
indemnity or reimbursement arrangement
can satisfy this requirement by continuing
the qualified beneficiary’s coverage dur-
ing the election period or by discontinu-
ing the coverage until the qualified bene-
ficiary elects COBRA and then retroac-
tively reinstating the qualified benefi-
ciary’s coverage. Under the final regula-
tions, as under the 1987 proposed
regulations, the date of the qualifying
event (and thus, the beginning of the max-
imum coverage period) is not delayed
merely because a plan provides coverage
during the election period. Claims in-
curred by the qualified beneficiary during
the election period do not have to be paid
until COBRA continuation coverage is
elected and any payment required for cov-
erage is made.
For a group health plan providing
health services – including a health main-
tenance organization or a walk-in clinic –
a qualified beneficiary who has not
elected and paid for COBRA continuation
coverage can be required to choose either
to elect and to pay for coverage or to pay
a reasonable and customary charge for
plan services (but only if the qualified
beneficiary will be reimbursed for that
charge within 30 days after she or he
elects COBRA continuation coverage and
makes any payment for coverage). Alter-
natively, the plan can treat the qualified
beneficiary’s use of the plan’s health ser-
vices as a constructive election of
COBRA continuation coverage and, if it
so notifies the qualified beneficiary prior
to the use of services, can require pay-
ment for COBRA continuation coverage.
The final regulations adopt the position
in Communications Workers of America v.
NYNEX Corp., 898 F.2d 887 (2d Cir.
1989), regarding the responses that a
group health plan must make with respect
to the rights of a qualified beneficiary
during that qualified beneficiary’s elec-
tion period. Specifically, the final regula-
tions require that the plan make a com-
plete response to any inquiry from a
health care provider regarding the quali-
fied beneficiary’s right to coverage under
the plan during the election period. Thus,
if the qualified beneficiary has not yet
elected COBRA continuation coverage
but remains covered under the plan during
the election period (subject to retroactive
cancellation if no election is made), the
plan must so inform the health care
provider. Conversely, if the qualified
beneficiary is not covered during the elec-
tion period prior to her or his election, the
plan must inform the health care provider
that the qualified beneficiary does not
have current coverage but will have
retroactive coverage if COBRA continua-
tion coverage is elected. (The final regu-
lations also include similar requirements
with respect to inquiries made by health
care providers during the 30- and 45-day
grace periods for paying for COBRA con-
tinuation coverage.)
A qualified beneficiary who waives
COBRA continuation coverage during the
election period can revoke the waiver be-
fore the end of the election period, but the
group health plan is not then required to
provide coverage as of any date prior to
the revocation. Although several com-
menters objected to the rule in the 1987
proposed regulations allowing the revoca-
tion during the election period of any pre-
vious waiver, the final regulations retain
this rule. If the rule permitted irrevocable
waivers, plans might induce qualified
beneficiaries to execute waivers hastily
before becoming fully informed of their
rights and having the opportunity to care-
fully consider whether to elect COBRA.
As with the election of COBRA continua-
tion coverage, a waiver or a revocation of
a waiver is deemed to be made on the date
sent. The employer or employee organi-
zation maintaining the group health plan
is not permitted to withhold money, bene-
fits, or anything else to which the quali-
fied beneficiary is entitled under any law
or agreement in order to induce a quali-
fied beneficiary to make payment for
COBRA continuation coverage or to sur-
render any rights under COBRA. Any
waiver of COBRA continuation coverage
rights obtained through such means will
be invalid. However, the general rules for
coverage during the election period apply
in the case of waivers and revocations of
waivers. Thus, in the case of an indem-
nity arrangement, the plan can deny cov-
erage for claims until payment for the
coverage has been made (as can also be
done with those health maintenance orga-
nizations or walk-in clinics that adopt this
method for complying with the COBRA
continuation coverage requirements dur-
ing the election period).
A group health plan must offer each
qualified beneficiary the opportunity to
make an independent election to receive
COBRA continuation coverage and, dur-
ing an open enrollment period, to choose
among any options available to similarly
situated active employees. This require-
February 22, 1999281999–8 I.R.B.
5
The U.S. Department of Labor has advised the
IRS and Treasury that, if a covered employee or
qualified beneficiary has not been adequately in-
formed of the obligation to provide notice in the
case of a qualifying event that is the divorce or legal
separation of the covered employee or that is a de-
pendent child’s ceasing to be covered under the gen-
erally applicable requirements of the plan, the cov-
ered employee’s or qualified beneficiary’s failure to
provide timely notice to the plan administrator will
not affect the plan’s obligation to make continuation
coverage available upon receiving notice of such
event.

ment also applies to any child born to or
placed for adoption with a covered em-
ployee during a period of COBRA contin-
uation coverage. (An election for a minor
child may be made by the child’s parent
or legal guardian.) If a covered em-
ployee or the spouse of a covered em-
ployee elects COBRA continuation cover-
age and the election does not specify
whether the election is for self-only cov-
erage, the election is deemed to include
an election of COBRA continuation cov-
erage on behalf of other qualified benefi-
ciaries with respect to that qualifying
event.
Duration of COBRA Continuation
Coverage
The 1987 proposed regulations incor-
porate the statutory bases for terminating
COBRA continuation coverage except the
rule (added by OBRA 1989 and amended
by HIPAA) that COBRA coverage can be
terminated in the month that is more than
30 days after a final determination that a
qualified beneficiary is no longer dis-
abled. The new proposed regulations add
this statutory basis for terminating
COBRA coverage, with two clarifica-
tions. First, the new proposed regulations
clarify that a determination that a quali-
fied beneficiary is no longer disabled al-
lows termination of COBRA continuation
coverage for all qualified beneficiaries
who were entitled to the disability exten-
sion by reason of the disability of the
qualified beneficiary who has been deter-
mined to no longer be disabled. Second,
the new proposed regulations clarify that
such a determination does not allow ter-
mination of the COBRA continuation
coverage of a qualified beneficiary before
the end of the maximum coverage period
that would apply without regard to the
disability extension.
Section 4980B(f)(2)(B)(iv) provides
that a qualified beneficiary’s right to
COBRA continuation coverage may be
terminated when the qualified beneficiary
“first becomes,” after the date of the
COBRA election, covered under another
group health plan (subject to certain addi-
tional conditions) or entitled to Medicare
benefits. The final regulations add two
new questions-and-answers that provide
guidance on this provision.
The 1987 proposed regulations substi-
tute “is” for the statutory phrase “first be-
comes.” The effect of this substitution
was to permit an employer to cut off a
qualified beneficiary’s right to COBRA
continuation coverage based upon other
group health plan coverage that the quali-
fied beneficiary first became covered
under before she or he elected COBRA
coverage. In the case of entitlement to
Medicare benefits, the 1987 proposed
regulations not only shift the statutory
“becomes” to “is,” they also exclude from
the definition of qualified beneficiary
anyone who is entitled to Medicare bene-
fits on the day before the qualifying
event. After careful consideration, the
IRS and Treasury concluded that the bet-
ter interpretation of the statute is that
other group health plan coverage that a
qualified beneficiary has before the
COBRA election is not a basis for cutting
off the qualified beneficiary’s right to
COBRA continuation coverage. (The
same rule applies for entitlement to
Medicare benefits.)
Based upon the recommendation of the
IRS, the Solicitor General filed an amicus
brief before the Supreme Court urging
this position, which was unanimously
adopted by the Supreme Court in Geissal
v. Moore Medical Corp.,118 S. Ct. 1869
(1998). The final regulations adopt the
position urged by the IRS and Treasury
and adopted by the Court in Geissal.
They provide that an employer may cut
off the right to COBRA continuation cov-
erage based upon other group health plan
coverage or entitlement to Medicare ben-
efits only if the qualified beneficiary first
becomes covered under the other group
health plan coverage or entitled to the
Medicare benefits after the date of the
COBRA election.
The statutory rule allowing a plan to
discontinue COBRA continuation cover-
age on account of coverage under another
group health plan was amended by OBRA
1989 to prohibit the discontinuance if the
qualified beneficiary’s other coverage
was subject to a preexisting condition ex-
clusion. This amendment was further
modified by HIPAA to allow discontinu-
ance of COBRA continuation coverage if
the preexisting condition exclusion does
not apply or is satisfied by reason of the
limitations on preexisting condition ex-
clusions in section 9801. The final regu-
lations reflect this amendment and clarify
that coverage under another group health
plan includes coverage under a govern-
mental plan.
Many commenters asked whether mere
eligibility for Medicare justifies a discon-
tinuance of COBRA continuation cover-
age. In addition, many inquiries have
been received that ask whether the quali-
fied beneficiary must be entitled to both
Part A and B of Medicare. The final regu-
lations clarify that entitlement to
Medicare benefits means being enrolled
in Medicare and does not mean merely
being eligible to enroll in Medicare. The
final regulations also clarify that being
entitled to either Part A or B is sufficient
for the plan to discontinue COBRA con-
tinuation coverage (assuming that the en-
titlement to Medicare benefits first arises
after COBRA continuation coverage has
been elected).
The 1987 proposed regulations allow a
plan to discontinue providing COBRA
continuation coverage to a qualified bene-
ficiary for cause on the same basis that the
plan could terminate for cause the cover-
age of a similarly situated active em-
ployee (except for payments that would
be untimely if made by a nonCOBRA
beneficiary but that are made within the
grace periods provided by COBRA). The
final regulations provide that, for exam-
ple, if a plan terminates the coverage of
similarly situated active employees for
the submission of a fraudulent claim, then
the COBRA continuation coverage of a
qualified beneficiary can also be termi-
nated for the submission of a fraudulent
claim.
The 1987 proposed regulations reflect
the statutory rules that were then in effect
for the maximum period that a plan is re-
quired to make COBRA continuation cov-
erage available. Since then the statute has
been amended to add the disability exten-
sion, to permit plans to extend the notice
period if the maximum coverage period is
also extended (referred to as the optional
extension of the required periods), and to
add a special rule in the case of Medicare
entitlement preceding a qualifying event
that is the termination or reduction of
hours of employment. The new proposed
regulations reflect these statutory
changes. The maximum coverage period
1999–8 I.R.B.29February 22, 1999

for a qualifying event that is the bank-
ruptcy of the employer has also been
added to the new proposed regulations.
The 1998 proposed regulations set forth
the requirements for a disability extension
to apply to a qualified beneficiary. Those
requirements have been incorporated into
the final regulations, with one clarifica-
tion. One of the conditions for a disability
extension to apply is that the qualified
beneficiary be disabled during the first 60
days of COBRA continuation coverage.
In the case of a qualified beneficiary who
is born to or placed for adoption with a
covered employee during a period of
COBRA continuation coverage, the final
regulations clarify that the 60-day period
is measured from the date of the child’s
birth or placement for adoption.
The 1987 proposed regulations set
forth standards for expanding the maxi-
mum coverage period in the case of multi-
ple qualifying events. Since 1987, the
statutory rules for multiple qualifying
events have been affected by the addition
of the disability extension and the op-
tional extension of required periods. The
final regulations reflect the statutory
changes.
In addition, the final regulations clarify
that a termination of employment follow-
ing a qualifying event that is a reduction
of hours of employment does not expand
the maximum coverage period. Accord,
Burgess v. Adams Tool & Engineering,
Inc.,908 F. Supp. 473 (W.D. Mich. 1995);
contra, Gibbs v. Anchorage School Dis-
trict, 1995 U.S. LEXIS 6290 (D. Ark.
1995). The underlying pattern in the
statute is generally to require 18 months
(or 29 months, in the case of a disability
extension) of coverage for qualifying
events that are the termination or reduc-
tion of hours of a covered employee’s em-
ployment and 36 months for other quali-
fying events. The statutory provision for
expansion of the 18-month period to 36
months upon the occurrence of a second
qualifying event generally follows this
pattern by allowing a qualified benefi-
ciary who would have been entitled to 36
months of coverage if the second qualify-
ing event had occurred first to get a total
of 36 months of COBRA continuation
coverage. The statute lists six categories
of qualifying events, and termination of
employment and reduction of hours of
employment are in the same category
(just as divorce and legal separation are in
the same category of qualifying event).
Treating a reduction of hours of employ-
ment and a termination of employment as
variations of a single qualifying event
rather than as two distinct qualifying
events is consistent with the overall de-
sign of the statute.
The 1987 proposed regulations address
situations in which, following a qualify-
ing event, an employer provides alterna-
tive coverage, rather than COBRA contin-
uation coverage, to a former employee
and her or his spouse and dependent chil-
dren. The 1987 proposed regulations pro-
vide that if the alternative coverage does
not satisfy the requirements for COBRA
continuation coverage, each qualified
beneficiary must be given the opportunity
to elect COBRA continuation coverage
instead of the alternative coverage. If,
however, the alternative coverage would
satisfy the requirements for COBRA con-
tinuation coverage, the 1987 proposed
regulations provide that, at the time of the
original qualifying event, the employee,
spouse, and dependent children need not
be provided with the opportunity to elect
COBRA continuation coverage. The final
regulations generally retain these rules
but also clarify that if the employer in-
creases the employee share of premiums
upon the occurrence of a qualifying event,
the qualified beneficiaries must be offered
the opportunity to elect COBRA continu-
ation coverage.
The 1987 proposed regulations further
provide that, if the alternative coverage
does not satisfy the requirements for
COBRA continuation coverage and if,
after the original qualifying event, a qual-
ifying event occurs that would cause a
spouse or dependent child to lose the al-
ternative coverage, the spouse or child
must be offered COBRA continuation
coverage. However, if the alternative
coverage satisfies the requirements for
COBRA continuation coverage, and if an-
other qualifying event that causes the
spouse or dependent child to lose the al-
ternative coverage occurs more than 18
months after the original qualifying event,
the 1987 proposed regulations provide
that the spouse or dependent child need
not be offered COBRA continuation cov-
erage. The final regulations modify the
1987 proposed regulations and provide
that if an event such as the death of or di-
vorce from the covered employee would
end the right of a spouse or dependent
child to receive the alternative coverage
(whether during or after the first 18
months of COBRA continuation cover-
age), then that event is a qualifying event,
regardless of whether the alternative cov-
erage would satisfy the requirements for
COBRA continuation coverage.
The Uniformed Services Employment
and Reemployment Rights Act of 1994
(USERRA) gives certain members of the
military reserves the right to up to 18
months of continuation coverage when
they are called to active duty. Many peo-
ple have asked if the USERRA and
COBRA periods of continuation coverage
run concurrently or consecutively. The
final regulations clarify that USERRA
coverage is alternative coverage. Thus,
the periods run concurrently.
The 1987 proposed regulations include
the statutory rule requiring that a conver-
sion option otherwise made available
under the plan be made available within
180 days before the end of the maximum
coverage period. The final regulations
adopt this rule without change.
Paying for COBRA Continuation
Coverage
The 1987 proposed regulations identify
the qualified beneficiary as the person that
can be required to pay the applicable pre-
mium. Many plans and employers have
asked whether they must accept payment
on behalf of a qualified beneficiary from
third parties, such as a hospital or a new
employer. Nothing in the statute requires
the qualified beneficiary to pay the amount
required by the plan; the statute merely
permits the plan to require that payment be
made. In order to make clear that any per-
son may make the required payment on be-
half of a qualified beneficiary, the final
regulations modify the rule in the 1987
proposed regulations to refer to the pay-
ment requirement without identifying the
person who makes the payment.
The 1998 proposed regulations address
the amount that a plan can require to be
paid for COBRA continuation coverage
during the disability extension. This
amount is 150 percent of the applicable
premium instead of the limit of 102 per-
cent of the applicable premium that ap-
plies for coverage outside the disability
February 22, 1999301999–8 I.R.B.

extension. The 1998 proposed regula-
tions specifically reserve the issue of the
amount a plan could require to be paid in
a case where only nondisabled family
members of the disabled individual re-
ceive COBRA continuation coverage dur-
ing the disability extension. The pream-
ble to the 1998 proposed regulations
solicited comments on this issue. Com-
menters suggested that the 150 percent
rate could be required if the disabled indi-
vidual was part of the coverage group but
that the limit could be the 102 percent rate
if only nondisabled qualified beneficiaries
were in the coverage group. The final
regulations adopt this suggestion.
The 1987 proposed regulations provide
that the amount required to be paid for a
qualified beneficiary’s COBRA continua-
tion coverage must be fixed in advance
for each 12-month determination period.
Many commenters suggested exceptions
that could be made to this general rule.
Section 4980B(f)(4)(C) explicitly re-
quires that the determination of the ap-
plicable premium be made for a period of
12 months and that the determination be
made before the beginning. Therefore,
the final regulations do not permit an in-
crease in the applicable premium during
the 12-month determination period.
However, the final regulations do revise
the general rule from the 1987 proposed
regulations to recognize the difference
between the applicable premium (which
may not be increased during a 12-month
determination period and which is the
basis for calculating the maximum
amount that the plan can require to be
paid for COBRA continuation coverage)
and the maximum amount that the plan
can require to be paid for COBRA contin-
uation coverage. Thus, the final regula-
tions permit a plan to increase the amount
it requires to be paid for COBRA contin-
uation coverage during a determination
period to take into account the permitted
increases during the disability extension,
to explicitly permit a plan that is requir-
ing payment of less than the maximum
permissible amount to increase the
amount required to be paid during the 12-
month determination period, and to per-
mit an increase if a qualified beneficiary
changes to more expensive coverage (but
also to require a reduction if the qualified
beneficiary changes to less expensive
coverage).
The 1987 proposed regulations set
forth the statutory requirement that quali-
fied beneficiaries be allowed to pay for
COBRA coverage in monthly install-
ments. The 1987 proposed regulations
add that plans may allow payment to be
made at other intervals, and specifically
mention quarterly or semiannual payment
as examples. The final regulations adopt
the rule in the 1987 proposed regulations,
but the final regulations add weekly pay-
ment as an example to make clear that
shorter than monthly installments are also
permitted.
The 1987 proposed regulations provide
that the first payment for COBRA contin-
uation coverage does not apply prospec-
tively only. In order to make clear that a
plan is not precluded from allowing a
qualified beneficiary to apply the first
payment prospectively only, the final reg-
ulations provide that qualified beneficia-
ries need not be given the option of hav-
ing the first payment for COBRA
continuation coverage apply prospec-
tively only.
The 1987 proposed regulations address
the issue of timely payment for COBRA
continuation coverage, including an inter-
pretation of the statutory grace periods of
45 days for the initial payment and 30
days for all other payments. Commenters
pointed out that the application of the
statutory grace period rules could produce
an anomalous result in some situations,
such as allowing a plan to require pay-
ment for the third month of COBRA con-
tinuation coverage earlier than the plan
could require payment for the first two
months. OBRA 1989 amended the 45-day
grace period rule to prevent this, and the
final regulations conform to the OBRA
1989 change. The final regulations also
clarify that payment is considered made
on the date it is sent.
The final regulations also add a re-
quirement (similar to the one described
above for the election period) relating to
the response that a plan must give when a
health care provider, such as a physician,
a hospital, or a pharmacy, contacts the
plan to confirm coverage of a qualified
beneficiary with respect to whom the re-
quired payment has not been made for the
current period (but for whom any applica-
ble grace period has not expired). In such
a case, the plan is required to inform the
health care provider of all of the details of
the qualified beneficiary’s right to cover-
age during the applicable grace periods.
Many individuals have inquired about a
plan’s right to discontinue their COBRA
continuation coverage because the
amount of the payment made was short by
an amount that is not significant. Some-
times the error has been clearly one of
transposed digits on a check tendered for
payment; in other instances, payment has
been short by such a small amount that it
would be unreasonable to attribute the
shortfall to anything other than mistake.
The final regulations establish a mecha-
nism for the treatment of payments that
are short by an insignificant amount. Ei-
ther the plan must treat the payment as
satisfying the plan’s payment requirement
or it must notify the qualified beneficiary
of the amount of the deficiency and grant
the qualified beneficiary a reasonable pe-
riod of time for the deficiency to be paid.
The final regulations provide that, as a
safe harbor, a period of 30 days is deemed
to be a reasonable period for this purpose.
Business Reorganizations
The 1987 proposed regulations provide
little direct guidance on the allocation of
responsibility for COBRA continuation
coverage in the event of corporate trans-
actions, such as a sale of stock of a sub-
sidiary or a sale of substantial assets.
Commenters on the 1987 proposed regu-
lations requested further guidance on cor-
porate transactions, pointing out that the
existing degree of uncertainty tends to
drive up the costs and risks of a transac-
tion to both buyers and sellers. The IRS
and Treasury share this view and believe
also that greater certainty helps to protect
the rights of qualified beneficiaries in
these transactions. The IRS has been con-
tacted by many qualified beneficiaries
whose COBRA continuation coverage has
been dropped or denied in the context of a
corporate transaction. In many cases,
these qualified beneficiaries have been
told by each of the buyer and the seller
that the other party is the one responsible
for providing them with COBRA continu-
ation coverage.
The preamble to the 1998 proposed
regulations requested comments on a pos-
sible approach to allocating responsibility
for COBRA continuation coverage in cor-
porate transactions. Commenters sug-
1999–8 I.R.B.31February 22, 1999

gested that, in a stock sale, as in an asset
sale, it would be consistent with standard
commercial practice to provide that the
seller retains liability for all existing qual-
ified beneficiaries, including those for-
merly associated with the subsidiary
being sold. The IRS and Treasury have
studied the comments and given consider-
ation to several alternatives with a view to
establishing rules that will minimize the
administrative burden and transaction
costs for the parties to transactions while
protecting the rights of qualified benefi-
ciaries and maintaining consistency with
the statute.
Accordingly, the new proposed regula-
tions make clear that the parties to a trans-
action are free to allocate the responsibil-
ity for providing COBRA continuation
coverage by contract, even if the contract
imposes responsibility on a different party
than would the new proposed regulations.
So long as the party to whom the contract
allocates responsibility performs its oblig-
ations, the other party will have no re-
sponsibility for providing COBRA con-
tinuation coverage. If, however, the party
allocated responsibility under the contract
defaults on its obligation, and if, under the
new proposed regulations, the other party
would have the obligation to provide
COBRA continuation coverage in the ab-
sence of a contractual provision, then the
other party would retain that obligation.
This approach would avoid prejudicing
the rights of qualified beneficiaries to
COBRA continuation coverage based
upon the provisions of a contract to which
they were not a party and under which the
employer with the underlying obligation
under the regulations to provide COBRA
continuation coverage could otherwise
contract away that obligation to a party
that fails to perform. Moreover, the party
with the underlying responsibility under
the regulations can insist on appropriate
security and, of course, could pursue con-
tractual remedies against the defaulting
party.
The new proposed regulations provide,
for both sales of stock and sales of sub-
stantial assets, such as a division or plant
or substantially all the assets of a trade or
business, that the seller retains the obliga-
tion to make COBRA continuation cover-
age available to existing qualified benefi-
ciaries. In addition, in situations in which
the seller ceases to provide any group
health plan to any employee in connection
with the sale – whether such a cessation is
in connection with the sale is determined
on the basis of the facts and circum-
stances of each case – and thus is not re-
sponsible for providing COBRA continu-
ation coverage, the new proposed
regulations provide that the buyer is re-
sponsible for providing COBRA continu-
ation coverage to existing qualified bene-
ficiaries. This secondary liability for the
buyer applies in all stock sales and in all
sales of substantial assets in which the
buyer continues the business operations
associated with the assets without inter-
ruption or substantial change.
A particular type of asset sale raises is-
sues for which the new proposed regula-
tions do not provide any special rules.
(Thus, the general rules in the new pro-
posed regulations for business reorganiza-
tions would apply to this type of transac-
tion.) This type of asset sale is one in
which, after purchasing a business as a
going concern, the buyer continues to em-
ploy the employees of that business and
continues to provide those employees ex-
actly the same health coverage that they
had before the sale (either by providing
coverage through the same insurance con-
tract or by establishing a plan that mirrors
the one that provided benefits before the
sale). The application of the rules in the
new proposed regulations to this type of
asset sale would require the seller to make
COBRA continuation coverage available
to the employees continuing in employ-
ment with the buyer (and to other family
members who are qualified beneficiaries).
Ordinarily, the continuing employees (or
their family members) would be very un-
likely to elect COBRA continuation cov-
erage from the seller when they can re-
ceive the same coverage (usually at much
lower cost) as active employees of the
buyer.
Consideration is being given to
whether, under appropriate circum-
stances, such an asset sale would be con-
sidered not to result in a loss of coverage
for those employees who continue in em-
ployment with the buyer after the sale. A
countervailing concern, however, relates
to those qualified beneficiaries who might
have a reason to elect COBRA continua-
tion coverage from the seller. An exam-
ple of such a qualified beneficiary would
be an employee who continues in employ-
ment with the buyer, whose family is
likely to have medical expenses that ex-
ceed the cost of COBRA coverage, and
who has significant questions about the
solvency of the buyer or other concerns
about how long the buyer might continue
to provide the same health coverage.
Under one possible approach, a loss of
coverage would be considered not to have
occurred so long as the purchasing em-
ployer in an asset sale continued to main-
tain the same group health plan coverage
that the seller maintained before the sale
without charging the employees any
greater percentage of the total cost of cov-
erage than the seller had charged before
the sale. For this purpose, the coverage
would be considered unchanged if there
was no obligation to provide a summary
of material modifications within 60 days
after the change due to a material reduc-
tion in covered services or benefits under
the rules that apply under Title I of
ERISA. If these conditions were satisfied
for the maximum coverage period that
would otherwise apply to the seller’s ter-
mination of employment of the continu-
ing employees (generally 18 months from
the date of the sale), then those termina-
tions of employment would never be con-
sidered qualifying events. If the condi-
tions were not satisfied for the full
maximum coverage period, then on the
date when they ceased to be satisfied the
seller would be obligated to make
COBRA continuation coverage available
for the balance of the maximum coverage
period.
Comments are invited on the utility of
such a rule, either in situations in which
the seller retains an ownership interest in
the buyer after the sale (for example, a
sale of assets from a 100-percent owned
subsidiary to a 75-percent owned sub-
sidiary) or, more generally, in situations in
which the seller and the buyer are unre-
lated. Suggestions are also solicited for
other rules that would protect qualified
beneficiaries while providing relief to em-
ployers in these situations.
Although the new proposed regulations
address how COBRA obligations are af-
fected by a sale of stock (and a sale of
substantial assets), the new proposed reg-
ulations do not address how the obligation
to make COBRA continuation coverage
available is affected by the transfer of an
ownership interest in a noncorporate en-
February 22, 1999321999–8 I.R.B.

tity that causes the noncorporate entity to
cease to be a member of a group of trades
or businesses under common control
(whether or not it becomes a member of a
different group of trades or business
under common control). Comments are
invited on this issue.
Employer Withdrawals From
Multiemployer Plans
The new proposed regulations also ad-
dress COBRA obligations in connection
with an employer’s cessation of contribu-
tions to a multiemployer group health
plan. The new proposed regulations pro-
vide that the multiemployer plan gener-
ally continues to have the obligation to
make COBRA continuation coverage
available to qualified beneficiaries associ-
ated with that employer. (There generally
would not be any obligation to make
COBRA continuation coverage available
to continuing employees in this situation
because a cessation of contributions is not
a qualifying event.) However, once the
employer provides group health coverage
to a significant number of employees who
were formerly covered under the multi-
employer plan, or starts contributing to
another multiemployer plan on their be-
half, the employer’s plan (or the new mul-
tiemployer plan) would have the obliga-
tion to make COBRA continuation
coverage available to the existing quali-
fied beneficiaries. This rule is contrary to
the holding in In re Appletree Markets,
Inc., 19 F.3d 969 (5th Cir. 1994), which
held that the multiemployer plan contin-
ued to have the COBRA obligations with
respect to existing qualified beneficiaries
after the withdrawing employer estab-
lished a plan for the same class of em-
ployees previously covered under the
multiemployer plan.
Interaction of FMLA and COBRA
The new proposed regulations set forth
rules regarding the interaction of the
COBRA continuation coverage require-
ments with the provisions of the Family
and Medical Leave Act of 1993 (FMLA).
The rules under the new proposed regula-
tions are substantially the same as those
set forth in Notice 94–103. The last two
questions-and-answers in that notice have
not been included in the new proposed
regulations because they relate to general
subject matter that is addressed elsewhere
in the regulations.
Under the new proposed regulations,
the taking of FMLA leave by a covered
employee is not itself a qualifying event.
Instead, a qualifying event occurs when
an employee who is covered under a
group health plan immediately prior to
FMLA leave (or who becomes covered
under a group health plan during FMLA
leave) does not return to work with the
employer at the end of FMLA leave and
would, but for COBRA continuation cov-
erage, lose coverage under the group
health plan. (As under the general rules
of COBRA, this would also constitute a
qualifying event with respect to the
spouse or any dependent child of the em-
ployee.) The qualifying event is deemed
to occur on the last day of the employee’s
FMLA leave, and the maximum coverage
period generally begins on that day. (The
new proposed regulations provide a spe-
cial rule for cases where coverage is not
lost until a later date and the plan provides
for the optional extension of the required
periods.) In the case of such a qualifying
event, the employer cannot condition the
employee’s rights to COBRA continua-
tion coverage on the employee’s reim-
bursement of any premiums paid by the
employer to maintain the employee’s
group health plan coverage during the pe-
riod of FMLA leave.
Any lapse of coverage under the group
health plan during the period of FMLA
leave and any state or local law requiring
that group health plan coverage be pro-
vided for a period longer than that re-
quired by the FMLA are disregarded in
determining whether the employee has a
qualifying event on the last day of that
leave. However, the employee’s loss of
coverage at the end of FMLA leave will
not constitute a qualifying event if, prior
to the employee’s return from FMLA
leave, the employer has eliminated group
health plan coverage for the class of em-
ployees to which the employee would
have belonged if she or he had not taken
FMLA leave.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certified
that the collections of information in these
regulations will not have a significant
economic impact on a substantial number
of small entities. This certification is
based upon the fact that employers with
fewer than 20 employees are not subject
to the requirements set forth in the final
regulations and, thus, the very smallest
employers are not affected by the collec-
tion of information requirements. More-
over, even for small entities with 20 or
more employees who maintain group
health plans and who, thus, are subject to
the requirements of COBRA, the collec-
tions of information will not impose a
substantial economic impact. The only
collections of information imposed on
small entities by the regulations are (1) to
notify qualified beneficiaries of their right
to elect COBRA continuation coverage
upon the occurrence of a qualifying event
and (2) to notify certain qualified benefi-
ciaries that make insignificant payment
errors of those errors. With respect to this
first notice requirement, it is estimated
that, on average, in a given year, qualify-
ing events will occur with respect to ap-
proximately 10 percent of all covered em-
ployees. Thus, an employer with 100
employees would be required to send 10
notices to qualified beneficiaries each
year. The average cost of sending such a
notice is estimated to be $.50. Thus, the
total estimated cost for 10 notices is
$5.00, which is the estimated annual aver-
age burden on an employer with 100 em-
ployees. With respect to the second no-
tice requirement, it is estimated that, on
average, at any time, the number of quali-
fied beneficiaries is approximately equal
to two percent of an employer’s work-
force. Of that number, approximately 1 in
10 will make an insignificant error in pay-
ment each year that requires the employer
to send such a notice. For example, an
employer with 100 employees will have
an average of two qualified beneficiaries
at any time. Thus, the employer will re-
ceive an insignificant underpayment
about once every five years. Even if the
employer chose to send out a notice each
time such an insignificant underpayment
occurred, this would amount to only one
notice every five years. The average cost
of sending such a notice is estimated to be
$5.00, resulting in an average annual bur-
den of $1.00 for an employer with 100
1999–8 I.R.B.33February 22, 1999

employees. Thus, the total annual cost of
these two notice requirements for an em-
ployer with 100 employees is $6.00,
which is not a significant economic im-
pact. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
It has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these regulations. Pursuant to section
7805(f) of the Internal Revenue Code, the
1998 notice of proposed rulemaking pre-
ceding these final regulations was submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Russ Weinheimer, Office of the
Associate Chief Counsel (Employee Ben-
efits and Exempt Organizations), IRS.
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 54 and 602
are amended as follows:
PART 54–PENSION EXCISE TAXES
Paragraph 1. The authority citation for
part 54 is amended by adding the follow-
ing entries in numerical order to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.4980B–1 also issued under
26 U.S.C. 4980B.
Section 54.4980B–2 also issued under
26 U.S.C. 4980B.
Section 54.4980B–3 also issued under
26 U.S.C. 4980B.
Section 54.4980B–4 also issued under
26 U.S.C. 4980B.
Section 54.4980B–5 also issued under
26 U.S.C. 4980B.
Section 54.4980B–6 also issued under
26 U.S.C. 4980B.
Section 54.4980B–7 also issued under
26 U.S.C. 4980B.
Section 54.4980B–8 also issued under
26 U.S.C. 4980B. * * *
Par. 2. Sections 54.4980B–0,
54.4980B–1, 54.4980B–2, 54.4980B–3,
54.4980B–4, 54.4980B–5, 54.4980B–6,
54.4980B–7, and 54.4980B–8 are added
to read as follows:
§54.4980B–0 Table of contents.
This section contains first a list of the
section headings and then a list of the
questions in each section in §§54.4980B–
1 through 54.4980B–8.
LIST OF SECTIONS
§54.4980B–1 COBRA in general.
§54.4980B–2 Plans that must comply.
§54.4980B–3 Qualified beneficiaries.
§54.4980B–4 Qualifying events.
§54.4980B–5 COBRA continuation
coverage.
§54.4980B–6 Electing COBRA
continuation coverage.
§54.4980B–7 Duration of COBRA
continuation coverage.
§54.4980B–8 Paying for COBRA
continuation coverage.
LIST OF QUESTIONS
§54.4980B–1 COBRA in general.
Q-1: What are the health care continua-
tion coverage requirements con-
tained in section 4980B of the Inter-
nal Revenue Code and in ERISA?
Q-2: What is the effective date of
§§54.4980B–1 through 54.4980B–8?
§54.4980B–2 Plans that must comply.
Q-1: For purposes of section 4980B,
what is a group health plan?
Q-2: For purposes of section 4980B,
what is the employer?
Q-3: [Reserved]
Q-4: What group health plans are subject
to COBRA?
Q-5: What is a small-employer plan?
Q-6: [Reserved]
Q-7: What is the plan year?
Q-8: How do the COBRA continuation
coverage requirements apply to
cafeteria plans and other flexible
benefit arrangements?
Q-9: What is the effect of a group health
plan’s failure to comply with the re-
quirements of section 4980B(f)?
Q-10: Who is liable for the excise tax if a
group health plan fails to comply
with the requirements of section
4980B(f)?
§54.4980B–3 Qualified beneficiaries.
Q-1: Who is a qualified beneficiary?
Q-2: Who is an employee and who is a
covered employee?
Q-3: Who are the similarly situated non-
COBRA beneficiaries?
§54.4980B–4 Qualifying events.
Q-1: What is a qualifying event?
Q-2: Are the facts surrounding a termina-
tion of employment (such as
whether it was voluntary or invol-
untary) relevant in determining
whether the termination of employ-
ment is a qualifying event?
§54.4980B–5 COBRA continuation
coverage.
Q-1: What is COBRA continuation cov-
erage?
Q-2: What deductibles apply if COBRA
continuation coverage is elected?
Q-3: How do a plan’s limits apply to
COBRA continuation coverage?
Q-4: Can a qualified beneficiary who
elects COBRA continuation cover-
age ever change from the coverage
received by that individual immedi-
ately before the qualifying event?
Q-5: Aside from open enrollment peri-
ods, can a qualified beneficiary who
has elected COBRA continuation
coverage choose to cover individu-
als (such as newborn children,
adopted children, or new spouses)
who join the qualified beneficiary’s
family on or after the date of the
qualifying event?
§54.4980B–6 Electing COBRA
continuation coverage.
Q-1: What is the election period and how
long must it last?
Q-2: Is a covered employee or qualified
beneficiary responsible for inform-
ing the plan administrator of the oc-
currence of a qualifying event?
February 22, 1999341999–8 I.R.B.

Q-3: During the election period and be-
fore the qualified beneficiary has
made an election, must coverage be
provided?
Q-4: Is a waiver before the end of the
election period effective to end a
qualified beneficiary’s election
rights?
Q-5: Can an employer or employee orga-
nization withhold money or other
benefits owed to a qualified benefi-
ciary until the qualified beneficiary
either waives COBRA continuation
coverage, elects and pays for such
coverage, or allows the election pe-
riod to expire?
Q-6: Can each qualified beneficiary
make an independent election under
COBRA?
§54.4980B–7 Duration of COBRA
continuation coverage.
Q-1: How long must COBRA continua-
tion coverage be made available to a
qualified beneficiary?
Q-2: When may a plan terminate a quali-
fied beneficiary’s COBRA continu-
ation coverage due to coverage
under another group health plan?
Q-3: When may a plan terminate a quali-
fied beneficiary’s COBRA continu-
ation coverage due to the qualified
beneficiary’s entitlement to
Medicare benefits?
Q-4: [Reserved]
Q-5: How does a qualified beneficiary
become entitled to a disability ex-
tension?
Q-6: Under what circumstances can the
maximum coverage period be ex-
panded?
Q-7: If health coverage is provided to a
qualified beneficiary after a qualify-
ing event without regard to COBRA
continuation coverage (for example,
as a result of state or local law, the
Uniformed Services Employment
and Reemployment Rights Act of
1994 (38 U.S.C. 4315), industry
practice, a collective bargaining
agreement, severance agreement, or
plan procedure), will such alterna-
tive coverage extend the maximum
coverage period?
Q-8: Must a qualified beneficiary be
given the right to enroll in a conver-
sion health plan at the end of the
maximum coverage period for
COBRA continuation coverage?
§54.4980B–8 Paying for COBRA
continuation coverage.
Q-1: Can a group health plan require
payment for COBRA continuation
coverage?
Q-2: When is the applicable premium de-
termined and when can a group
health plan increase the amount it
requires to be paid for COBRA con-
tinuation coverage?
Q-3: Must a plan allow payment for
COBRA continuation coverage to
be made in monthly installments?
Q-4: Is a plan required to allow a quali-
fied beneficiary to choose to have
the first payment for COBRA con-
tinuation coverage applied prospec-
tively only?
Q-5: What is timely payment for
COBRA continuation coverage?
§54.4980B–1 COBRA in general.
The COBRA continuation coverage re-
quirements are described in general in the
following questions-and-answers:
Q-1: What are the health care continu-
ation coverage requirements contained in
section 4980B of the Internal Revenue
Code and in ERISA?
A-1: (a) Section 4980B provides gen-
erally that a group health plan must offer
each qualified beneficiary who would
otherwise lose coverage under the plan as
a result of a qualifying event an opportu-
nity to elect, within the election period,
continuation coverage under the plan.
The continuation coverage requirements
were added to section 162 by the Consoli-
dated Omnibus Budget Reconciliation
Act of 1985 (COBRA), Public Law 99-
272 (100 Stat. 222), and moved to section
4980B by the Technical and Miscella-
neous Revenue Act of 1988, Public Law
100-647 (102 Stat. 3342). Continuation
coverage required under section 4980B is
referred to in §§54.4980B–1 through
54.4980B–8 as COBRA continuation
coverage.
(b) COBRA also added parallel contin-
uation coverage requirements to Part 6 of
Subtitle B of Title I of the Employee Re-
tirement Income Security Act of 1974
(ERISA) (29 U.S.C. 1161-1168), which is
administered by the U.S. Department of
Labor. If a plan does not comply with the
COBRA continuation coverage require-
ments, the Internal Revenue Code im-
poses an excise tax on the employer main-
taining the plan (or on the plan itself),
whereas ERISA gives certain parties – in-
cluding qualified beneficiaries who are
participants or beneficiaries within the
meaning of Title I of ERISA, as well as
the Department of Labor – the right to file
a lawsuit to redress the noncompliance.
The rules in §§54.4980B–1 through
54.4980B–8 apply for purposes of section
4980B and generally also for purposes of
the COBRA continuation coverage re-
quirements in Title I of ERISA. How-
ever, certain provisions of the COBRA
continuation coverage requirements (such
as the definitions of group health plan,
employee, and employer) are not identical
in the Internal Revenue Code and Title I
of ERISA. In those cases in which the
statutory language is not identical, the
rules in §§54.4980B–1 though 54.4980B–
8 nonetheless apply to the COBRA con-
tinuation coverage requirements of Title I
of ERISA, except to the extent those rules
are inconsistent with the statutory lan-
guage of Title I of ERISA.
(c) A group health plan that is subject
to section 4980B (or the parallel provi-
sions under ERISA) is referred to as being
subject to COBRA. (See Q&A-4 of
§54.4980B–2). A qualified beneficiary
can be required to pay for COBRA con-
tinuation coverage. The term qualified
beneficiaryis defined in Q&A-1 of
§54.4980B–3. The term qualifying event
is defined in Q&A-1 of §54.4980B–4.
COBRA continuation coverage is de-
scribed in §54.4980B–5. The election
procedures are described in §54.4980B–6.
Duration of COBRA continuation cover-
age is addressed in §54.4980B–7, and
payment for COBRA continuation cover-
age is addressed in §54.4980B–8. Unless
the context indicates otherwise, any refer-
ence in §§54.4980B–1 through
54.4980B–8 to COBRA refers to section
4980B (as amended) and to the parallel
provisions of ERISA.
Q-2: What is the effective date of
§§54.4980B–1 through 54.4980B–8?
A-2: Sections 54.4980B–1 through
54.4980B–8 apply with respect to quali-
fying events occurring in plan years be-
ginning on or after January 1, 2000. For
1999–8 I.R.B.35February 22, 1999

purposes of section 4980B, with respect
to qualifying events that occur in plan
years beginning before that date, and with
respect to qualifying events that occur in
plan years beginning on or after that date
for topics relating to the COBRA continu-
ation coverage requirements of section
4980B that are not addressed in
§§54.4980B–1 through 54.4980B–8 (such
as methods for calculating the applicable
premium), plans and employers must op-
erate in good faith compliance with a rea-
sonable interpretation of the statutory re-
quirements in section 4980B.
§54.4980B–2 Plans that must comply.
The following questions-and-answers
apply in determining which plans must
comply with the COBRA continuation
coverage requirements:
Q-1: For purposes of section 4980B,
what is a group health plan?
A-1: (a) For purposes of section
4980B, a group health plan is a plan
maintained by an employer or employee
organization to provide health care to in-
dividuals who have an employment-re-
lated connection to the employer or em-
ployee organization or to their families.
Individuals who have an employment-re-
lated connection to the employer or em-
ployee organization consist of employees,
former employees, the employer, and oth-
ers associated or formerly associated with
the employer or employee organization in
a business relationship (including mem-
bers of a union who are not currently em-
ployees). Health care is provided under a
plan whether provided directly or through
insurance, reimbursement, or otherwise,
and whether or not provided through an
on-site facility (except as set forth in para-
graph (d) of this Q&A-1), or through a
cafeteria plan (as defined in section 125)
or other flexible benefit arrangement. For
purposes of this Q&A-1, insurance in-
cludes not only group insurance policies
but also one or more individual insurance
policies in any arrangement that involves
the provision of health care to two or
more employees. A plan maintained by
an employer or employee organization is
any plan of, or contributed to (directly or
indirectly) by, an employer or employee
organization. Thus, a group health plan is
maintained by an employer or employee
organization even if the employer or em-
ployee organization does not contribute to
it if coverage under the plan would not be
available at the same cost to an individual
but for the individual’s employment-re-
lated connection to the employer or em-
ployee organization. These rules are fur-
ther explained in paragraphs (b) through
(d) of this Q&A-1. An exception for
qualified long-term care services is set
forth in paragraph (e) of this Q&A-1, and
for medical savings accounts in paragraph
(f) of this Q&A-1.
(b) For purposes of §§54.4980B–1
through 54.4980B–8, health carehas the
same meaning as medical careunder sec-
tion 213(d). Thus, health care generally
includes the diagnosis, cure, mitigation,
treatment, or prevention of disease, and
any other undertaking for the purpose of
affecting any structure or function of the
body. Health care also includes trans-
portation primarily for and essential to
health care as described in the preceding
sentence. However, health care does not
include anything that is merely beneficial
to the general health of an individual,
such as a vacation. Thus, if an employer
or employee organization maintains a
program that furthers general good health,
but the program does not relate to the re-
lief or alleviation of health or medical
problems and is generally accessible to
and used by employees without regard to
their physical condition or state of health,
that program is not considered a program
that provides health care and so is not a
group health plan. For example, if an em-
ployer maintains a spa, swimming pool,
gymnasium, or other exercise/fitness pro-
gram or facility that is normally accessi-
ble to and used by employees for reasons
other than relief of health or medical
problems, such a facility does not consti-
tute a program that provides health care
and thus is not a group health plan. In
contrast, if an employer maintains a drug
or alcohol treatment program or a health
clinic, or any other facility or program
that is intended to relieve or alleviate a
physical condition or health problem, the
facility or program is considered to be the
provision of health care and so is consid-
ered a group health plan.
(c) Whether a benefit provided to em-
ployees constitutes health care is not af-
fected by whether the benefit is exclud-
able from income under section 132
(relating to certain fringe benefits). For
example, if a department store provides
its employees discounted prices on all
merchandise, including health care items
such as drugs or eyeglasses, the mere fact
that the discounted prices also apply to
health care items will not cause the pro-
gram to be a plan providing health care,
so long as the discount program would
normally be accessible to and used by em-
ployees without regard to health needs or
physical condition. If, however, the em-
ployer maintaining the discount program
is a health clinic, so that the program is
used exclusively by employees with
health or medical needs, the program is
considered to be a plan providing health
care and so is considered to be a group
health plan.
(d) The provision of health care at a fa-
cility that is located on the premises of an
employer or employee organization does
not constitute a group health plan if –
(1) The health care consists primarily
of first aid that is provided during the em-
ployer’s working hours for treatment of a
health condition, illness, or injury that oc-
curs during those working hours;
(2) The health care is available only to
current employees; and
(3) Employees are not charged for the
use of the facility.
(e) A plan does not constitute a group
health plan subject to COBRA if substan-
tially all of the coverage provided under
the plan is for qualified long-term care
services (as defined in section 7702B(c)).
For this purpose, a plan is permitted to
use any reasonable method in determining
whether substantially all of the coverage
provided under the plan is for qualified
long-term care services.
(f) Under section 106(b)(5), amounts
contributed by an employer to a medical
savings account (as defined in section
220(d)) are not considered part of a group
health plan subject to COBRA. Thus, a
plan is not required to make COBRA con-
tinuation coverage available with respect
to amounts contributed by an employer to
a medical savings account. A high de-
ductible health plan does not fail to be a
group health plan subject to COBRA
merely because it covers a medical sav-
ings account holder.
Q-2: For purposes of section 4980B,
what is the employer?
February 22, 1999361999–8 I.R.B.

A-2: For purposes of section 4980B,
employerrefers to –
(a) A person for whom services are
performed;
(b) Any other person that is a member
of a group described in section 414(b), (c),
(m), or (o) that includes a person de-
scribed in paragraph (a) of this Q&A-2;
and
(c) Any successor of a person de-
scribed in paragraph (a) or (b) of this
Q&A-2.
Q-3: [Reserved]
A-3: [Reserved]
Q-4: What group health plans are sub-
ject to COBRA?
A-4: (a) All group health plans are
subject to COBRA except group health
plans described in paragraph (b) of this
Q&A-4. Group health plans described in
paragraph (b) of this Q&A-4 are referred
to in §§54.4980B–1 through 54.4980B–8
as excepted from COBRA.
(b) The following group health plans
are excepted from COBRA –
(1) Small-employer plans (see Q&A-5
of this section);
(2) Church plans (within the meaning
of section 414(e)); and
(3) Governmental plans (within the
meaning of section 414(d)).
(c) The COBRA continuation coverage
requirements generally do not apply to
group health plans that are excepted from
COBRA. However, a small-employer
plan otherwise excepted from COBRA is
nonetheless subject to COBRA with re-
spect to qualified beneficiaries who expe-
rience a qualifying event during a period
when the plan is not a small-employer
plan (see paragraph (g) of Q&A-5 of this
section).
(d) Although governmental plans are
not subject to the COBRA continuation
coverage requirements, group health
plans maintained by state or local govern-
ments are generally subject to parallel
continuation coverage requirements that
were added by section 10003 of COBRA
to the Public Health Service Act (42
U.S.C. 300bb–1 through 300bb–8), which
is administered by the U.S. Department of
Health and Human Services. Federal em-
ployees and their family members cov-
ered under the Federal Employees Health
Benefit Program are covered by generally
similar, but not parallel, temporary con-
tinuation of coverage provisions enacted
by the Federal Employees Health Benefits
Amendments Act of 1988. See 5 U.S.C.
8905a.
Q-5: What is a small-employer plan?
A-5: (a) Except in the case of a multi-
employer plan, a small-employer planis a
group health plan maintained by an em-
ployer (within the meaning of Q&A-2 of
this section) that normally employed
fewer than 20 employees (within the
meaning of paragraph (c) of this Q&A-5)
during the preceding calendar year. In the
case of a multiemployer plan, a small-em-
ployer planis a group health plan under
which each of the employers contributing
to the plan for a calendar year normally
employed fewer than 20 employees dur-
ing the preceding calendar year. The rules
of this paragraph (a) are illustrated in the
following example:
Example.(i) Corporation Semploys 12 employ-
ees, all of whom work and reside in the United
States. Smaintains a group health plan for its em-
ployees and their families. Sis a wholly-owned sub-
sidiary of P. In the previous calendar year, the con-
trolled group of corporations including Pand S
employed more than 19 employees, although the
only employees in the United States of the con-
trolled group that includes Pand Sare the 12 em-
ployees of S.
(ii) Under §1.414(b)–1 of this chapter, foreign
corporations are not excluded from membership in a
controlled group of corporations. Consequently, the
group health plan maintained by S is not a small-em-
ployer plan during the current calendar year because
the controlled group including S normally employed
at least 20 employees in the preceding calendar year.
(b) An employer is considered to have
normally employed fewer than 20 em-
ployees during a particular calendar year
if, and only if, it had fewer than 20 em-
ployees on at least 50 percent of its typi-
cal business days during that year.
(c) All full-time and part-time common
law employees of an employer are taken
into account in determining whether an
employer had fewer than 20 employees;
however, an individual who is not a com-
mon law employee of the employer is not
taken into account. Thus, the following
individuals are not counted as employees
for purposes of this Q&A-5 even though
they are referred to as employees for all
other purposes of §§54.4980B–1 through
54.4980B–8 –
(1) Self-employed individuals (within
the meaning of section 401(c)(1));
(2) Independent contractors (and their
employees and independent contractors);
and
(3) Directors (in the case of a corpora-
tion).
(d) [Reserved]
(e) [Reserved]
(f) [Reserved]
(g) A small-employer plan is generally
excepted from COBRA. If, however, a
plan that has been subject to COBRA
(that is, was not a small-employer plan)
becomes a small-employer plan, the plan
remains subject to COBRA for qualifying
events that occurred during the period
when the plan was subject to COBRA.
The rules of this paragraph (g) are illus-
trated by the following examples:
Example 1.An employer maintains a group
health plan. The employer employed 20 employees
on more than 50 percent of its working days during
2001, and consequently the plan is not excepted
from COBRA during 2002. Employee Eresigns and
does not work for the employer after January 31,
2002. Under the terms of the plan, Eis no longer el-
igible for coverage upon the effective date of the res-
ignation, that is, February 1, 2002. The employer
does not hire a replacement for E. E timely elects
and pays for COBRA continuation coverage. The
employer employs 19 employees for the remainder
of 2002, and consequently the plan is not subject to
COBRA in 2003. The plan must nevertheless con-
tinue to make COBRA continuation coverage avail-
able to Eduring 2003 until the obligation to make
COBRA continuation coverage available ceases
under the rules of §54.4980B–7. The obligation
could continue until August 1, 2003, the date that is
18 months after the date of E’s qualifying event, or
longer if Eis eligible for a disability extension.
Example 2.The facts are the same as in Example
1.The employer continues to employ 19 employees
throughout 2003 and 2004 and consequently the
plan continues to be excepted from COBRA during
2004 and 2005. Spouse Sis covered under the plan
because Sis married to one of the employer’s em-
ployees. On April 1, 2002, Sis divorced from that
employee and ceases to be eligible for coverage
under the plan. The plan is subject to COBRA dur-
ing 2002 because Xnormally employed 20 employ-
ees during 2001. Stimely notifies the plan adminis-
trator of the divorce and timely elects and pays for
COBRA continuation coverage. Even though the
plan is generally excepted from COBRA during
2003, 2004, and 2005, it must nevertheless continue
to make COBRA continuation coverage available to
Sduring those years until the obligation to make
COBRA continuation coverage available ceases
under the rules of §54.4980B–7. The obligation
could continue until April 1, 2005, the date that is 36
months after the date of S’s qualifying event.
Example 3.The facts are the same as in Example
2.C is a dependent child of one of the employer’s
employees and is covered under the plan. A depen-
dent child is no longer eligible for coverage under
1999–8 I.R.B.37February 22, 1999

the plan upon the attainment of age 23. Cattains age
23 on November 16, 2005. The plan is excepted
from COBRA with respect to Cduring 2005 because
the employer normally employed fewer than 20 em-
ployees during 2004. Consequently, the plan is not
obligated to make COBRA continuation coverage
available to C(and would not be obligated to make
COBRA continuation coverage available to Ceven
if the plan later became subject to COBRA again).
Q-6: [Reserved]
A-6: [Reserved]
Q-7: What is the plan year?
A-7: (a) The plan yearis the year that
is designated as the plan year in the plan
documents.
(b) If the plan documents do not desig-
nate a plan year (or if there are no plan
documents), then the plan year is deter-
mined in accordance with this paragraph
(b).
(1) The plan year is the deductible/
limit year used under the plan.
(2) If the plan does not impose de-
ductibles or limits on an annual basis,
then the plan year is the policy year.
(3) If the plan does not impose de-
ductibles or limits on an annual basis, and
either the plan is not insured or the insur-
ance policy is not renewed on an annual
basis, then the plan year is the employer’s
taxable year.
(4) In any other case, the plan year is
the calendar year.
Q-8: How do the COBRA continuation
coverage requirements apply to cafeteria
plans and other flexible benefit arrange-
ments?
A-8: The provision of health care ben-
efits does not fail to be a group health
plan merely because those benefits are of-
fered under a cafeteria plan (as defined in
section 125) or under any other arrange-
ment under which an employee is offered
a choice between health care benefits and
other taxable or nontaxable benefits.
However, the COBRA continuation cov-
erage requirements apply only to the type
and level of coverage under the cafeteria
plan or other flexible benefit arrangement
that a qualified beneficiary is actually re-
ceiving on the day before the qualifying
event. The rules of this Q&A-8 are illus-
trated by the following example:
Example:(i) Under the terms of a cafeteria plan,
employees can choose among life insurance cover-
age, membership in a health maintenance organiza-
tion (HMO), coverage for medical expenses under
an indemnity arrangement, and cash compensation.
Of these available choices, the HMO and the indem-
nity arrangement are the arrangements providing
health care. The instruments governing the HMO
and indemnity arrangements indicate that they are
separate group health plans. These group health
plans are subject to COBRA. The employer does
not provide any group health plan outside of the
cafeteria plan. Band Care unmarried employees. B
has chosen the life insurance coverage, and Chas
chosen the indemnity arrangement.
(ii) Bdoes not have to be offered COBRA con-
tinuation coverage upon terminating employment,
nor is a subsequent open enrollment period for ac-
tive employees required to be made available to B.
However, if Cterminates employment and the termi-
nation constitutes a qualifying event, Cmust be of-
fered an opportunity to elect COBRA continuation
coverage under the indemnity arrangement. If C
makes such an election and an open enrollment pe-
riod for active employees occurs while Cis still re-
ceiving the COBRA continuation coverage, Cmust
be offered the opportunity to switch from the indem-
nity arrangement to the HMO (but not to the life in-
surance coverage because that does not constitute
coverage provided under a group health plan).
Q-9: What is the effect of a group
health plan’s failure to comply with the
requirements of section 4980B(f)?
A-9: Under section 4980B(a), if a
group health plan subject to COBRA fails
to comply with section 4980B(f), an ex-
cise tax is imposed. Moreover, non-tax
remedies may be available if the plan fails
to comply with the parallel requirements
in ERISA, which are administered by the
Department of Labor.
Q-10: Who is liable for the excise tax
if a group health plan fails to comply with
the requirements of section 4980B(f)?
A-10: (a) In general, the excise tax is
imposed on the employer maintaining the
plan, except that in the case of a multiem-
ployer plan the excise tax is imposed on
the plan.
(b) In certain circumstances, the excise
tax is also imposed on a person involved
with the provision of benefits under the
plan (other than in the capacity of an em-
ployee), such as an insurer providing ben-
efits under the plan or a third party admin-
istrator administering claims under the
plan. In general, such a person will be li-
able for the excise tax if the person as-
sumes, under a legally enforceable writ-
ten agreement, the responsibility for
performing the act to which the failure to
comply with the COBRA continuation
coverage requirements relates. Such a
person will be liable for the excise tax
notwithstanding the absence of a written
agreement assuming responsibility for
complying with COBRA if the person
provides coverage under the plan to a
similarly situated nonCOBRA beneficiary
(see Q&A-3 of §54.4980B–3 for a defini-
tion of similarly situated nonCOBRA
beneficiaries) and the employer or plan
administrator submits a written request to
the person to provide to a qualified bene-
ficiary the same coverage that the person
provides to the similarly situated nonCO-
BRA beneficiary. If the person providing
coverage under the plan to a similarly sit-
uated nonCOBRA beneficiary is the plan
administrator and the qualifying event is a
divorce or legal separation or a dependent
child’s ceasing to be covered under the
generally applicable requirements of the
plan, the plan administrator will also be
liable for the excise tax if the qualified
beneficiary submits a written request for
coverage.
§54.4980B–3 Qualified beneficiaries.
The determination of who is a qualified
beneficiary, an employee, or a covered
employee, and of who are the similarly
situated nonCOBRA beneficiaries is ad-
dressed in the following questions-and-
answers:
Q-1: Who is a qualified beneficiary?
A-1: (a)(1) Except as set forth in para-
graphs (c) through (f) of this Q&A-1, a
qualified beneficiary is –
(i) Any individual who, on the day be-
fore a qualifying event, is covered under a
group health plan by virtue of being on
that day either a covered employee, the
spouse of a covered employee, or a de-
pendent child of the covered employee; or
(ii) Any child who is born to or placed
for adoption with a covered employee
during a period of COBRA continuation
coverage.
(2) In the case of a qualifying event
that is the bankruptcy of the employer, a
covered employee who had retired on or
before the date of substantial elimination
of group health plan coverage is also a
qualified beneficiary, as is any spouse,
surviving spouse, or dependent child of
such a covered employee if, on the day
before the bankruptcy qualifying event,
the spouse, surviving spouse, or depen-
dent child is a beneficiary under the plan.
(3) In general, an individual (other
than a child who is born to or placed for
adoption with a covered employee during
a period of COBRA continuation cover-
February 22, 1999381999–8 I.R.B.

age) who is not covered under a plan on
the day before the qualifying event cannot
be a qualified beneficiary with respect to
that qualifying event, and the reason for
the individual’s lack of actual coverage
(such as the individual’s having declined
participation in the plan or failed to sat-
isfy the plan’s conditions for participa-
tion) is not relevant for this purpose.
However, if the individual is denied or not
offered coverage under a plan under cir-
cumstances in which the denial or failure
to offer constitutes a violation of applica-
ble law (such as the Americans with Dis-
abilities Act, 42 U.S.C. 12101–12213, the
special enrollment rules of section 9801,
or the requirements of section 9802 pro-
hibiting discrimination in eligibility to en-
roll in a group health plan based on health
status), then, for purposes of §§54.4980B–
1 through 54.4980B–8, the individual will
be considered to have had the coverage
that was wrongfully denied or not offered.
(4) Paragraph (b) of this Q&A-1 de-
scribes how certain family members are
not qualified beneficiaries even if they be-
come covered under the plan; paragraphs
(c), (d), and (e) of this Q&A-1 place lim-
its on the general rules of this paragraph
(a) concerning who is a qualified benefi-
ciary; paragraph (f) of this Q&A-1 pro-
vides when an individual who has been a
qualified beneficiary ceases to be a quali-
fied beneficiary; paragraph (g) of this
Q&A-1 defines placed for adoption;and
paragraph (h) of this Q&A-1 contains
examples.
(b) In contrast to a child who is born to
or placed for adoption with a covered em-
ployee during a period of COBRA contin-
uation coverage, an individual who mar-
ries any qualified beneficiary on or after
the date of the qualifying event and a
newborn or adopted child (other than one
born to or placed for adoption with a cov-
ered employee) are not qualified benefi-
ciaries by virtue of the marriage, birth, or
placement for adoption or by virtue of the
individual’s status as the spouse or the
child’s status as a dependent of the quali-
fied beneficiary. These new family mem-
bers do not themselves become qualified
beneficiaries even if they become covered
under the plan. (For situations in which a
plan is required to make coverage avail-
able to new family members of a qualified
beneficiary who is receiving COBRA
continuation coverage, see Q&A-5 of
§54.4980B–5, paragraph (c) in Q&A-4 of
§54.4980B–5, section 9801(f)(2), and
§54.9801–6T(b).)
(c) An individual is not a qualified
beneficiary if, on the day before the quali-
fying event referred to in paragraph (a) of
this Q&A-1, the individual is covered
under the group health plan by reason of
another individual’s election of COBRA
continuation coverage and is not already a
qualified beneficiary by reason of a prior
qualifying event.
(d) A covered employee can be a quali-
fied beneficiary only in connection with a
qualifying event that is the termination, or
reduction of hours, of the covered em-
ployee’s employment, or that is the bank-
ruptcy of the employer.
(e) An individual is not a qualified
beneficiary if the individual’s status as a
covered employee is attributable to a pe-
riod in which the individual was a nonres-
ident alien who received from the indi-
vidual’s employer no earned income
(within the meaning of section 911(d)(2))
that constituted income from sources
within the United States (within the
meaning of section 861(a)(3)). If, pur-
suant to the preceding sentence, an indi-
vidual is not a qualified beneficiary, then
a spouse or dependent child of the indi-
vidual is not considered a qualified bene-
ficiary by virtue of the relationship to the
individual.
(f) A qualified beneficiary who does
not elect COBRA continuation coverage
in connection with a qualifying event
ceases to be a qualified beneficiary at the
end of the election period (see Q&A-1 of
§54.4980B–6). Thus, for example, if
such a former qualified beneficiary is
later added to a covered employee’s cov-
erage (e.g., during an open enrollment pe-
riod) and then another qualifying event
occurs with respect to the covered em-
ployee, the former qualified beneficiary
does not become a qualified beneficiary
by reason of the second qualifying event.
If a covered employee who is a qualified
beneficiary does not elect COBRA con-
tinuation coverage during the election pe-
riod, then any child born to or placed for
adoption with the covered employee on or
after the date of the qualifying event is not
a qualified beneficiary. Once a plan’s
obligation to make COBRA continuation
coverage available to an individual who
has been a qualified beneficiary ceases
under the rules of §54.4980B–7, the indi-
vidual ceases to be a qualified benefi-
ciary.
(g) For purposes of §§54.4980B–1
through 54.4980B–8, placement for adop-
tionor being placed for adoptionmeans
the assumption and retention by the cov-
ered employee of a legal obligation for
total or partial support of a child in antici-
pation of the adoption of the child. The
child’s placement for adoption with the
covered employee terminates upon the
termination of the legal obligation for
total or partial support. A child who is
immediately adopted by the covered em-
ployee without a preceding placement for
adoption is considered to be placed for
adoption on the date of the adoption.
(h) The rules of this Q&A-1 are illus-
trated by the following examples:
Example 1. (i) Bis a single employee who vol-
untarily terminates employment and elects COBRA
continuation coverage under a group health plan. To
comply with the requirements of section 9801(f) and
§54.9801–6T(b), the plan permits a covered em-
ployee who marries to have her or his spouse cov-
ered under the plan. One month after electing
COBRA continuation coverage, Bmarries and
chooses to have B’s spouse covered under the plan.
(ii) B’s spouse is not a qualified beneficiary.
Thus, if Bdies during the period of COBRA contin-
uation coverage, the plan does not have to offer B’s
surviving spouse an opportunity to elect COBRA
continuation coverage.
Example 2.(i) Cis a married employee who ter-
minates employment. Celects COBRA continua-
tion coverage for Cbut not C’s spouse, and C’s
spouse declines to elect such coverage. C’s spouse
thus ceases to be a qualified beneficiary. At the next
open enrollment period, Cadds the spouse as a ben-
eficiary under the plan.
(ii) The addition of the spouse during the open en-
rollment period does not make the spouse a qualified
beneficiary. The plan thus will not have to offer the
spouse an opportunity to elect COBRA continuation
coverage upon a later divorce from or death of C.
Example 3.(i) Under the terms of a group health
plan, a covered employee’s child, upon attaining age
19, ceases to be a dependent eligible for coverage.
(ii) At that time, the child must be offered an op-
portunity to elect COBRA continuation coverage. If
the child elects COBRA continuation coverage, the
child marries during the period of the COBRA con-
tinuation coverage, and the child’s spouse becomes
covered under the group health plan, the child’s
spouse is not a qualified beneficiary.
Example 4.(i) Dis a single employee who, upon
retirement, is given the opportunity to elect COBRA
continuation coverage but declines it in favor of an
alternative offer of 12 months of employer-paid re-
tiree health benefits. At the end of the election pe-
riod, Dceases to be a qualified beneficiary and will
not have to be given another opportunity to elect
COBRA continuation coverage (at the end of those
12 months or at any other time). Dmarries Eduring
1999–8 I.R.B.39February 22, 1999

the period of retiree health coverage and, under the
terms of that coverage, Ebecomes covered under the
plan.
(ii) If a divorce from or death of Dwill result in
E’s losing coverage, Ewill be a qualified beneficiary
because E’s coverage under the plan on the day be-
fore the qualifying event (that is, the divorce or
death) will have been by reason of D’s acceptance of
12 months of employer-paid coverage after the prior
qualifying event (D’s retirement) rather than by rea-
son of an election of COBRA continuation coverage.
Example 5. (i) The facts are the same as in Ex-
ample 4, except that, under the terms of the plan, the
divorce or death does not cause Eto lose coverage
so that Econtinues to be covered for the balance of
the original 12-month period.
(ii) Edoes not have to be allowed to elect
COBRA continuation coverage because the loss of
coverage at the end of the 12-month period is not
caused by the divorce or death, and thus the divorce
or death does not constitute a qualifying event. See
Q&A-1 of §54.4980B–4.
Q-2: Who is an employee and who is a
covered employee?
A-2: (a)(1) For purposes of
§§54.4980B–1 through 54.4980B–8 (ex-
cept for purposes of Q&A-5 in
§54.4980B–2, relating to the exception
from COBRA for plans maintained by an
employer with fewer than 20 employees),
an employeeis any individual who is eli-
gible to be covered under a group health
plan by virtue of the performance of ser-
vices for the employer maintaining the
plan or by virtue of membership in the
employee organization maintaining the
plan. Thus, for purposes of §§54.4980B–
1 through 54.4980B–8 (except for pur-
poses of Q&A-5 in §54.4980B–2), the
following individuals are employees if
their relationship to the employer main-
taining the plan makes them eligible to be
covered under the plan –
(i) Self-employed individuals (within
the meaning of section 401(c)(1));
(ii) Independent contractors (and their
employees and independent contractors);
and
(iii) Directors (in the case of a corpora-
tion).
(2) Similarly, whenever reference is
made in §§54.4980B–1 through
54.4980B–8 (except in Q&A-5 of
§54.4980B–2) to an employment relation-
ship (such as by referring to the termina-
tion of employment of an employee or to
an employee’s being employed by an em-
ployer), the reference includes the rela-
tionship of those individuals who are em-
ployees within the meaning of this
paragraph (a). See paragraph (c) in
Q&A-5 of §54.4980B–2 for a narrower
meaning of employee solely for purposes
of Q&A-5 of §54.4980B–2.
(b) For purposes of §§54.4980B–1
through 54.4980B–8, a covered employee
is any individual who is (or was) provided
coverage under a group health plan (other
than a plan that is excepted from COBRA
on the date of the qualifying event; see
Q&A-4 of §54.4980B–2) by virtue of
being or having been an employee. For
example, a retiree or former employee
who is covered by a group health plan is a
covered employee if the coverage results
in whole or in part from her or his previ-
ous employment. An employee (or for-
mer employee) who is merely eligible for
coverage under a group health plan is
generally not a covered employee if the
employee (or former employee) is not ac-
tually covered under the plan. In general,
the reason for the employee’s (or former
employee’s) lack of actual coverage (such
as having declined participation in the
plan or having failed to satisfy the plan’s
conditions for participation) is not rele-
vant for this purpose. However, if the
employee (or former employee) is denied
or not offered coverage under circum-
stances in which the denial or failure to
offer constitutes a violation of applicable
law (such as the Americans with Disabili-
ties Act, 42 U.S.C. 12101 through 12213,
the special enrollment rules of section
9801, or the requirements of section 9802
prohibiting discrimination in eligibility to
enroll in a group health plan based on
health status), then, for purposes of
§§54.4980B–1 through 54.4980B–8, the
employee (or former employee) will be
considered to have had the coverage that
was wrongfully denied or not offered.
Q-3: Who are the similarly situated
nonCOBRA beneficiaries?
A-3: For purposes of §§54.4980B–1
through 54.4980B–8, similarly situated
nonCOBRA beneficiariesmeans the
group of covered employees, spouses of
covered employees, or dependent chil-
dren of covered employees receiving cov-
erage under a group health plan main-
tained by the employer or employee
organization who are receiving that cov-
erage for a reason other than the rights
provided under the COBRA continuation
coverage requirements and who, based on
all of the facts and circumstances, are
most similarly situated to the situation of
the qualified beneficiary immediately be-
fore the qualifying event.
§54.4980B–4 Qualifying events.
The determination of what constitutes a
qualifying event is addressed in the fol-
lowing questions-and-answers:
Q-1: What is a qualifying event?
A-1: (a) Aqualifying eventis an event
that satisfies paragraphs (b), (c), and (d)
of this Q&A-1. Paragraph (e) of this
Q&A-1 further explains a reduction of
hours of employment, paragraph (f) of
this Q&A-1 describes the treatment of
children born to or placed for adoption
with a covered employee during a period
of COBRA continuation coverage, and
paragraph (g) of this Q&A-1 contains ex-
amples.
(b) An event satisfies this paragraph
(b) if the event is any of the following –
(1) The death of a covered employee;
(2) The termination (other than by rea-
son of the employee’s gross misconduct),
or reduction of hours, of a covered em-
ployee’s employment;
(3) The divorce or legal separation of a
covered employee from the employee’s
spouse;
(4) A covered employee’s becoming
entitled to Medicare benefits under Title
XVIII of the Social Security Act (42
U.S.C. 1395-1395ggg);
(5) A dependent child’s ceasing to be a
dependent child of a covered employee
under the generally applicable require-
ments of the plan; or
(6) A proceeding in bankruptcy under
Title 11 of the United States Code with re-
spect to an employer from whose employ-
ment a covered employee retired at any
time.
(c) An event satisfies this paragraph (c)
if, under the terms of the group health
plan, the event causes the covered em-
ployee, or the spouse or a dependent child
of the covered employee, to lose coverage
under the plan. For this purpose, to lose
coveragemeans to cease to be covered
under the same terms and conditions as in
effect immediately before the qualifying
event. Any increase in the premium or
contribution that must be paid by a cov-
ered employee (or the spouse or depen-
dent child of a covered employee) for
coverage under a group health plan that
results from the occurrence of one of the
events listed in paragraph (b) of this
February 22, 1999401999–8 I.R.B.

Q&A-1 is a loss of coverage.In the case
of an event that is the bankruptcy of the
employer, lose coverage also means any
substantial elimination of coverage under
the plan, occurring within 12 months be-
fore or after the date the bankruptcy pro-
ceeding commences, for a covered em-
ployee who had retired on or before the
date of the substantial elimination of
group health plan coverage or for any
spouse, surviving spouse, or dependent
child of such a covered employee if, on
the day before the bankruptcy qualifying
event, the spouse, surviving spouse, or
dependent child is a beneficiary under the
plan. For purposes of this paragraph (c), a
loss of coverage need not occur immedi-
ately after the event, so long as the loss of
coverage occurs before the end of the
maximum coverage period (see Q&A-1
and Q&A-6 of §54.4980B–7). However,
if neither the covered employee nor the
spouse or a dependent child of the cov-
ered employee loses coverage before the
end of what would be the maximum cov-
erage period, the event does not satisfy
this paragraph (c). If coverage is reduced
or eliminated in anticipation of an event
(for example, an employer’s eliminating
an employee’s coverage in anticipation of
the termination of the employee’s em-
ployment, or an employee’s eliminating
the coverage of the employee’s spouse in
anticipation of a divorce or legal separa-
tion), the reduction or elimination is dis-
regarded in determining whether the
event causes a loss of coverage.
(d) An event satisfies this paragraph
(d) if it occurs while the plan is subject to
COBRA. Thus, an event will not satisfy
this paragraph (d) if it occurs while the
plan is excepted from COBRA (see Q&A-
4 of §54.4980B–2). Even if the plan later
becomes subject to COBRA, it is not re-
quired to make COBRA continuation cov-
erage available to anyone whose coverage
ends as a result of an event during a year
in which the plan is excepted from
COBRA. For example, if a group health
plan is excepted from COBRA as a small-
employer plan during the year 2001 (see
Q&A-5 of §54.4980B–2) and an em-
ployee terminates employment on De-
cember 31, 2001, the termination is not a
qualifying event and the plan is not re-
quired to permit the employee to elect
COBRA continuation coverage. This is
the case even if the plan ceases to be a
small-employer plan as of January 1,
2002. Also, the same result will follow
even if the employee is given three
months of coverage beyond December 31
(that is, through March of 2002), because
there will be no qualifying event as of the
termination of coverage in March. How-
ever, if the employee’s spouse is initially
provided with the three-month coverage
through March 2002, but the spouse di-
vorces the employee before the end of the
three months and loses coverage as a re-
sult of the divorce, the divorce will con-
stitute a qualifying event during 2002 and
so entitle the spouse to elect COBRA con-
tinuation coverage. See Q&A-7 of
§54.4980B–7 regarding the maximum
coverage period in such a case.
(e) A reduction of hours of a covered
employee’s employment occurs whenever
there is a decrease in the hours that a cov-
ered employee is required to work or ac-
tually works, but only if the decrease is
not accompanied by an immediate termi-
nation of employment. This is true re-
gardless of whether the covered employee
continues to perform services following
the reduction of hours of employment.
For example, an absence from work due
to disability, a temporary layoff, or any
other reason is a reduction of hours of a
covered employee’s employment if there
is not an immediate termination of em-
ployment. If a group health plan mea-
sures eligibility for the coverage of em-
ployees by the number of hours worked in
a given time period, such as the preceding
month or quarter, and an employee cov-
ered under the plan fails to work the mini-
mum number of hours during that time
period, the failure to work the minimum
number of required hours is a reduction of
hours of that covered employee’s employ-
ment.
(f) The qualifying event of a qualified
beneficiary who is a child born to or
placed for adoption with a covered em-
ployee during a period of COBRA contin-
uation coverage is the qualifying event
giving rise to the period of COBRA con-
tinuation coverage during which the child
is born or placed for adoption. If a second
qualifying event has occurred before the
child is born or placed for adoption (such
as the death of the covered employee),
then the second qualifying event also ap-
plies to the newborn or adopted child.
See Q&A-6 of §54.4980B–7.
(g) The rules of this Q&A-1 are illus-
trated by the following examples, in each
of which the group health plan is subject
to COBRA:
Example 1.(i) An employee who is covered by a
group health plan terminates employment (other
than by reason of the employee’s gross misconduct)
and, beginning with the day after the last day of em-
ployment, is given 3 months of employer-paid cov-
erage under the same terms and conditions as before
that date. At the end of the three months, the cover-
age terminates.
(ii) The loss of coverage at the end of the three
months results from the termination of employment
and, thus, the termination of employment is a quali-
fying event.
Example 2. (i) An employee who is covered by a
group health plan retires (which is a termination of
employment other than by reason of the employee’s
gross misconduct) and, upon retirement, is required
to pay an increased amount for the same group
health coverage that the employee had before retire-
ment.
(ii) The increase in the premium or contribution
required for coverage is a loss of coverage under
paragraph (c) of this Q&A-1 and, thus, the retire-
ment is a qualifying event.
Example 3. (i) An employee and the employee’s
spouse are covered under an employer’s group
health plan. The employee retires and is given iden-
tical coverage for life. However, the plan provides
that the spousal coverage will not be continued be-
yond six months unless a higher premium for the
spouse is paid to the plan.
(ii) The requirement for the spouse to pay a
higher premium at the end of the six months is a loss
of coverage under paragraph (c) of this Q&A-1.
Thus, the retirement is a qualifying event and the
spouse must be given an opportunity to elect
COBRA continuation coverage.
Example 4. (i) Fis a covered employee who is
married to G, and both are covered under a group
health plan maintained by F’s employer. Fand G
are divorced. Under the terms of the plan, the di-
vorce causes Gto lose coverage. The divorce is a
qualifying event, and Gelects COBRA continuation
coverage, remarries during the period of COBRA
continuation coverage, and G’s new spouse becomes
covered under the plan. (See Q&A-5 in
§54.4980B–5, paragraph (c) in Q&A-4 of
§54.4980B–5, section 9801(f)(2), and §54.9801-
6T(b).) Gdies. Under the terms of the plan, the
death causes G’s new spouse to lose coverage under
the plan.
(ii) G’s death is not a qualifying event because G
is not a covered employee.
Example 5.(i) An employer maintains a group
health plan for both active employees and retired
employees (and their families). The coverage for
active employees and retired employees is identical,
and the employer does not require retirees to pay
more for coverage than active employees. The plan
does not make COBRA continuation coverage avail-
able when an employee retires (and is not required
to because the retired employee has not lost cover-
age under the plan). The employer amends the plan
to eliminate coverage for retired employees effective
January 1, 2002. On that date, several retired em-
1999–8 I.R.B.41February 22, 1999

ployees (and their spouses and dependent children)
have been covered under the plan since their retire-
ment for less than the maximum coverage period
that would apply to them in connection with their re-
tirement.
(ii) The elimination of retiree coverage under
these circumstances is a deferred loss of coverage
for those retirees (and their spouses and dependent
children) under paragraph (c) of this Q&A-1 and,
thus, the retirement is a qualifying event. The plan
must make COBRA continuation coverage available
to them for the balance of the maximum coverage
period that applies to them in connection with the re-
tirement.
Q-2: Are the facts surrounding a termi-
nation of employment (such as whether it
was voluntary or involuntary) relevant in
determining whether the termination of
employment is a qualifying event?
A-2: Apart from facts constituting
gross misconduct, the facts surrounding
the termination or reduction of hours are
irrelevant in determining whether a quali-
fying event has occurred. Thus, it does
not matter whether the employee volun-
tarily terminated or was discharged. For
example, a strike or a lockout is a termi-
nation or reduction of hours that consti-
tutes a qualifying event if the strike or
lockout results in a loss of coverage as de-
scribed in paragraph (c) of Q&A-1 of this
section. Similarly, a layoff that results in
such a loss of coverage is a qualifying
event.
§54.4980B–5 COBRA continuation
coverage.
The following questions-and-answers
address the requirements for coverage to
constitute COBRA continuation cover-
age:
Q-1: What is COBRA continuation
coverage?
A-1: (a) If a qualifying event occurs,
each qualified beneficiary (other than a
qualified beneficiary for whom the quali-
fying event will not result in any immedi-
ate or deferred loss of coverage) must be
offered an opportunity to elect to receive
the group health plan coverage that is pro-
vided to similarly situated nonCOBRA
beneficiaries (ordinarily, the same cover-
age that the qualified beneficiary had on
the day before the qualifying event). See
Q&A-3 of §54.4980B–3 for the definition
of similarly situated nonCOBRA benefi-
ciaries. This coverage is COBRA contin-
uation coverage. If coverage under the
plan is modified for similarly situated
nonCOBRA beneficiaries, then the cover-
age made available to qualified beneficia-
ries is modified in the same way. If the
continuation coverage offered differs in
any way from the coverage made avail-
able to similarly situated nonCOBRA ben-
eficiaries, the coverage offered does not
constitute COBRA continuation coverage
and the group health plan is not in compli-
ance with COBRA unless other coverage
that does constitute COBRA continuation
coverage is also offered. Any elimination
or reduction of coverage in anticipation of
an event described in paragraph (b) of
Q&A-1 of §54.4980B–4 is disregarded for
purposes of this Q&A-1 and for purposes
of any other reference in §§54.4980B–1
through 54.4980B–8 to coverage in effect
immediately before (or on the day before)
a qualifying event. COBRA continuation
coverage must not be conditioned upon, or
discriminate on the basis of lack of, evi-
dence of insurability.
(b) In the case of a qualified benefi-
ciary who is a child born to or placed for
adoption with a covered employee during
a period of COBRA continuation cover-
age, the child is generally entitled to elect
immediately to have the same coverage
that dependent children of active employ-
ees receive under the benefit packages
under which the covered employee has
coverage at the time of the birth or place-
ment for adoption. Such a child would be
entitled to elect coverage different from
that elected by the covered employee dur-
ing the next available open enrollment pe-
riod under the plan. See Q&A-4 of this
section.
Q-2: What deductibles apply if
COBRA continuation coverage is
elected?
A-2: (a) Qualified beneficiaries elect-
ing COBRA continuation coverage gener-
ally are subject to the same deductibles as
similarly situated nonCOBRA beneficia-
ries. If a qualified beneficiary’s COBRA
continuation coverage begins before the
end of a period prescribed for accumulat-
ing amounts toward deductibles, the qual-
ified beneficiary must retain credit for ex-
penses incurred toward those deductibles
before the beginning of COBRA continu-
ation coverage as though the qualifying
event had not occurred. The specific ap-
plication of this rule depends on the type
of deductible, as set forth in paragraphs
(b) through (d) of this Q&A-2. Special
rules are set forth in paragraph (e) of this
Q&A-2, and examples appear in para-
graph (f) of this Q&A-2.
(b) If a deductible is computed sepa-
rately for each individual receiving cover-
age under the plan, each individual’s re-
maining deductible amount (if any) on the
date COBRA continuation coverage be-
gins is equal to that individual’s remain-
ing deductible amount immediately be-
fore that date.
(c) If a deductible is computed on a
family basis, the remaining deductible for
the family on the date that COBRA con-
tinuation coverage begins depends on the
members of the family electing COBRA
continuation coverage. In computing the
family deductible that remains on the date
COBRA continuation coverage begins,
only the expenses of those family mem-
bers receiving COBRA continuation cov-
erage need be taken into account. If the
qualifying event results in there being
more than one family unit (for example,
because of a divorce), the family de-
ductible may be computed separately for
each resulting family unit based on the
members in each unit. These rules apply
regardless of whether the plan provides
that the family deductible is an alternative
to individual deductibles or an additional
requirement.
(d) Deductibles that are not described
in paragraph (b) or (c) of this Q&A-2
must be treated in a manner consistent
with the principles set forth in those para-
graphs.
(e) If a deductible is computed on the
basis of a covered employee’s compensa-
tion instead of being a fixed dollar amount
and the employee remains employed dur-
ing the period of COBRA continuation
coverage, the plan is permitted to choose
whether to apply the deductible by treat-
ing the employee’s compensation as con-
tinuing without change for the duration of
the COBRA continuation coverage at the
level that was used to compute the de-
ductible in effect immediately before the
COBRA continuation coverage began, or
to apply the deductible by taking the em-
ployee’s actual compensation into ac-
count. In applying a deductible that is
computed on the basis of the covered em-
ployee’s compensation instead of being a
fixed dollar amount, for periods of
COBRA continuation coverage in which
the employee is not employed by the em-
February 22, 1999421999–8 I.R.B.

ployer, the plan is required to compute the
deductible by treating the employee’s
compensation as continuing without
change for the duration of the COBRA
continuation coverage either at the level
that was used to compute the deductible in
effect immediately before the COBRA
continuation coverage began or at the
level that was used to compute the de-
ductible in effect immediately before the
employee’s employment was terminated.
(f) The rules of this Q&A-2 are illus-
trated by the following examples; in each
example, deductibles under the plan are
determined on a calendar year basis:
Example 1.(i) A group health plan applies a sep-
arate $100 annual deductible to each individual it
covers. The plan provides that the spouse and de-
pendent children of a covered employee will lose
coverage on the last day of the month after the
month of the covered employee’s death. A covered
employee dies on June 11, 2001. The spouse and the
two dependent children elect COBRA continuation
coverage, which will begin on August 1, 2001. As
of July 31, 2001, the spouse has incurred $80 of cov-
ered expenses, the older child has incurred no cov-
ered expenses, and the younger one has incurred
$120 of covered expenses (and therefore has already
satisfied the deductible).
(ii) At the beginning of COBRA continuation
coverage on August 1, the spouse has a remaining
deductible of $20, the older child still has the full
$100 deductible, and the younger one has no further
deductible.
Example 2.(i) A group health plan applies a sep-
arate $200 annual deductible to each individual it
covers, except that each family member is treated as
having satisfied the individual deductible once the
family has incurred $500 of covered expenses dur-
ing the year. The plan provides that upon the di-
vorce of a covered employee, coverage will end im-
mediately for the employee’s spouse and any
children who do not remain in the employee’s cus-
tody. A covered employee with four dependent chil-
dren is divorced, the spouse obtains custody of the
two oldest children, and the spouse and those chil-
dren all elect COBRA continuation coverage to
begin immediately. The family had accumulated
$420 of covered expenses before the divorce, as fol-
lows: $70 by each parent, $200 by the oldest child,
$80 by the youngest child, and none by the other two
children.
(ii) The resulting family consisting of the spouse
and the two oldest children accumulated a total of
$270 of covered expenses, and thus the remaining
deductible for that family could be as high as $230
(because the plan would not have to count the in-
curred expenses of the covered employee and the
youngest child). The remaining deductible for the
resulting family consisting of the covered employee
and the two youngest children is not subject to the
rules of this Q&A-2 because their coverage is not
COBRA continuation coverage.
Example 3.Each year a group health plan pays
70 percent of the cost of an individual’s psychother-
apy after that individual’s first three visits during the
year. A qualified beneficiary whose election of
COBRA continuation coverage takes effect begin-
ning August 1, 2001 and who has already made two
visits as of that date need only pay for one more visit
before the plan must begin to pay 70 percent of the
cost of the remaining visits during 2001.
Example 4.(i) A group health plan has a $250
annual deductible per covered individual. The plan
provides that if the deductible is not satisfied in a
particular year, expenses incurred during October
through December of that year are credited toward
satisfaction of the deductible in the next year. A
qualified beneficiary who has incurred covered ex-
penses of $150 from January through September of
2001 and $40 during October elects COBRA contin-
uation coverage beginning November 1, 2001.
(ii) The remaining deductible amount for this
qualified beneficiary is $60 at the beginning of the
COBRA continuation coverage. If this individual in-
curs covered expenses of $50 in November and De-
cember of 2001 combined (so that the $250 de-
ductible for 2001 is not satisfied), the $90 incurred
from October through December of 2001 are credited
toward satisfaction of the deductible amount for
2002.
Q-3: How do a plan’s limits apply to
COBRA continuation coverage?
A-3: (a) Limits are treated in the same
way as deductibles (see Q&A-2 of this
section). This rule applies both to limits
on plan benefits (such as a maximum
number of hospital days or dollar amount
of reimbursable expenses) and limits on
out-of-pocket expenses (such as a limit on
copayments, a limit on deductibles plus
copayments, or a catastrophic limit). This
rule applies equally to annual and lifetime
limits and applies equally to limits on spe-
cific benefits and limits on benefits in the
aggregate under the plan.
(b) The rule of this Q&A-3 is illus-
trated by the following examples; in each
example limits are determined on a calen-
dar year basis:
Example 1.(i) A group health plan pays for a
maximum of 150 days of hospital confinement per
individual per year. A covered employee who has
had 20 days of hospital confinement as of May 1,
2001 terminates employment and elects COBRA
continuation coverage as of that date.
(ii) During the remainder of the year 2001 the
plan need only pay for a maximum of 130 days of
hospital confinement for this individual.
Example 2.(i) A group health plan reimburses a
maximum of $20,000 of covered expenses per fam-
ily per year, and the same $20,000 limit applies to
unmarried covered employees. A covered employee
and spouse who have no children divorce on May 1,
2001, and the spouse elects COBRA continuation
coverage as of that date. In 2001, the employee had
incurred $5,000 of expenses and the spouse had in-
curred $8,000 before May 1.
(ii) The plan can limit its reimbursement of the
amount of expenses incurred by the spouse on and
after May 1 for the remainder of the year to $12,000
($20,000 – $8,000 = $12,000). The remaining limit
for the employee is not subject to the rules of this
Q&A-3 because the employee’s coverage is not
COBRA continuation coverage.
Example 3.(i) A group health plan pays for 80
percent of covered expenses after satisfaction of a
$100-per-individual deductible, and the plan pays
for 100 percent of covered expenses after a family
has incurred out-of-pocket costs of $2,000. The plan
provides that upon the divorce of a covered em-
ployee, coverage will end immediately for the em-
ployee’s spouse and any children who do not remain
in the employee’s custody. An employee and spouse
with three dependent children divorce on June 1,
2001, and one of the children remains with the em-
ployee. The spouse elects COBRA continuation
coverage as of that date for the spouse and the other
two children. During January through May of 2001,
the spouse incurred $600 of covered expenses and
each of the two children in the spouse’s custody
after the divorce incurred covered expenses of
$1,100. This resulted in total out-of-pocket costs for
these three individuals of $800 ($300 total for the
three deductibles, plus $500 for 20 percent of the
other $2,500 in incurred expenses [$600 + $1,100 +
$1,100 = $2,800; $2,800 – $300 = $2,500]).
(ii) For the remainder of 2001, the resulting fam-
ily consisting of the spouse and two children has an
out-of-pocket limit of $1,200 ($2,000 – $800 =
$1,200) . The remaining out-of- pocket limit for the
resulting family consisting of the employee and one
child is not subject to the rules of this Q&A-3 be-
cause their coverage is not COBRA continuation
coverage.
Q-4: Can a qualified beneficiary who
elects COBRA continuation coverage
ever change from the coverage received
by that individual immediately before the
qualifying event?
A-4: (a) In general, a qualified benefi-
ciary need only be given an opportunity to
continue the coverage that she or he was
receiving immediately before the qualify-
ing event. This is true regardless of
whether the coverage received by the
qualified beneficiary before the qualify-
ing event ceases to be of value to the qual-
ified beneficiary, such as in the case of a
qualified beneficiary covered under a re-
gion-specific health maintenance organi-
zation (HMO) who leaves the HMO’s ser-
vice region. The only situations in which
a qualified beneficiary must be allowed to
change from the coverage received imme-
diately before the qualifying event are as
set forth in paragraphs (b) and (c) of this
Q&A-4 and in Q&A-1 of this section (re-
garding changes to or elimination of the
coverage provided to similarly situated
nonCOBRA beneficiaries).
(b) If a qualified beneficiary partici-
pates in a region-specific benefit package
1999–8 I.R.B.43February 22, 1999

(such as an HMO or an on-site clinic) that
will not service her or his health needs in
the area to which she or he is relocating
(regardless of the reason for the reloca-
tion), the qualified beneficiary must be
given an opportunity to elect alternative
coverage that the employer or employee
organization makes available to active
employees. If the employer or employee
organization makes group health plan
coverage available to similarly situated
nonCOBRA beneficiaries that can be ex-
tended in the area to which the qualified
beneficiary is relocating, then that cover-
age is the alternative coverage that must
be made available to the relocating quali-
fied beneficiary. If the employer or em-
ployee organization does not make group
health plan coverage available to simi-
larly situated nonCOBRA beneficiaries
that can be extended in the area to which
the qualified beneficiary is relocating but
makes coverage available to other em-
ployees that can be extended in that area,
then the coverage made available to those
other employees must be made available
to the relocating qualified beneficiary.
However, the employer or employee or-
ganization is not required to make any
other coverage available to the relocating
qualified beneficiary if the only coverage
the employer or employee organization
makes available to active employees is
not available in the area to which the
qualified beneficiary relocates (because
all such coverage is region-specific and
does not service individuals in that area).
(c) If an employer or employee organi-
zation makes an open enrollment period
available to similarly situated active em-
ployees with respect to whom a qualify-
ing event has not occurred, the same open
enrollment period rights must be made
available to each qualified beneficiary re-
ceiving COBRA continuation coverage.
An open enrollment period means a pe-
riod during which an employee covered
under a plan can choose to be covered
under another group health plan or under
another benefit package within the same
plan, or to add or eliminate coverage of
family members.
(d) The rules of this Q&A-4 are illus-
trated by the following examples:
Example 1. (i) Eis an employee who works for
an employer that maintains several group health
plans. Under the terms of the plans, if an employee
chooses to cover any family members under a plan,
all family members must be covered by the same
plan and that plan must be the same as the plan cov-
ering the employee. Immediately before E’s termi-
nation of employment (for reasons other than gross
misconduct), Eis covered along with E’s spouse and
children by a plan. The coverage under that plan will
end as a result of the termination of employment.
(ii) Upon E’s termination of employment, each
of the four family members is a qualified benefi-
ciary. Even though the employer maintains various
other plans and options, it is not necessary for the
qualified beneficiaries to be allowed to switch to a
new plan when Eterminates employment.
(iii) COBRA continuation coverage is elected for
each of the four family members. Three months
after E’s termination of employment there is an open
enrollment period during which similarly situated
active employees are offered an opportunity to
choose to be covered under a new plan or to add or
eliminate family coverage.
(iv) During the open enrollment period, each of
the four qualified beneficiaries must be offered the
opportunity to switch to another plan (as though
each qualified beneficiary were an individual em-
ployee). For example, each member of E’s family
could choose coverage under a separate plan, even
though the family members of employed individuals
could not choose coverage under separate plans. Of
course, if each family member chooses COBRA
continuation coverage under a separate plan, the
plan can require payment for each family member
that is based on the applicable premium for individ-
ual coverage under that separate plan. See Q&A-1
of §54.4980B–8.
Example 2. (i) The facts are the same as in Ex-
ample 1,except that E’s family members are not
covered under E’s group health plan when Etermi-
nates employment.
(ii) Although the family members do not have to
be given an opportunity to elect COBRA continua-
tion coverage, Emust be allowed to add them to E’s
COBRA continuation coverage during the open en-
rollment period. This is true even though the family
members are not, and cannot become, qualified ben-
eficiaries (see Q&A-1 of §54.4980B–3).
Q-5: Aside from open enrollment peri-
ods, can a qualified beneficiary who has
elected COBRA continuation coverage
choose to cover individuals (such as new-
born children, adopted children, or new
spouses) who join the qualified benefi-
ciary’s family on or after the date of the
qualifying event?
A-5: (a) Yes. Under section 9801 and
§54.9801–6T, employees eligible to par-
ticipate in a group health plan (whether or
not participating), as well as former em-
ployees participating in a plan (referred to
in those rules as participants), are entitled
to special enrollment rights for certain
family members upon the loss of other
group health plan coverage or upon the
acquisition by the employee or participant
of a new spouse or of a new dependent
through birth, adoption, or placement for
adoption, if certain requirements are satis-
fied. Employees not participating in the
plan also can obtain rights for self-enroll-
ment under those rules. Once a qualified
beneficiary is receiving COBRA continu-
ation coverage (that is, has timely elected
and made timely payment for COBRA
continuation coverage), the qualified ben-
eficiary has the same right to enroll fam-
ily members under those special enroll-
ment rules as if the qualified beneficiary
were an employee or participant within
the meaning of those rules. However,
neither a qualified beneficiary who is not
receiving COBRA continuation coverage
nor a former qualified beneficiary has any
special enrollment rights under those
rules.
(b) In addition to the special enrollment
rights described in paragraph (a) of this
Q&A-5, if the plan covering the qualified
beneficiary provides that new family
members of active employees can become
covered (either automatically or upon an
appropriate election) before the next open
enrollment period, then the same right
must be extended to the new family mem-
bers of a qualified beneficiary.
(c) If the addition of a new family
member will result in a higher applicable
premium (for example, if the qualified
beneficiary was previously receiving
COBRA continuation coverage as an indi-
vidual, or if the applicable premium for
family coverage depends on family size),
the plan can require the payment of a cor-
respondingly higher amount for the
COBRA continuation coverage. See
Q&A-1 of §54.4980B–8.
(d) The right to add new family mem-
bers under this Q&A-5 is in addition to
the rights that newborn and adopted chil-
dren of covered employees may have as
qualified beneficiaries; see Q&A-1 in
§54.4980B–3.
§54.4980B–6 Electing COBRA
continuation coverage.
The following questions-and-answers
address the manner in which COBRA
continuation coverage is elected:
Q-1: What is the election period and
how long must it last?
A-1: (a) A group health plan can con-
dition the availability of COBRA continu-
ation coverage upon the timely election of
such coverage. An election of COBRA
February 22, 1999441999–8 I.R.B.

continuation coverage is a timely election
if it is made during the election period.
The election period must begin not later
than the date the qualified beneficiary
would lose coverage on account of the
qualifying event. (See paragraph (c) of
Q&A-1 of §54.4980B–4 for the meaning
of lose coverage.) The election period
must not end before the date that is 60
days after the later of –
(1) The date the qualified beneficiary
would lose coverage on account of the
qualifying event; or
(2) The date notice is provided to the
qualified beneficiary of her or his right to
elect COBRA continuation coverage.
(b) An election is considered to be
made on the date it is sent to the plan ad-
ministrator.
(c) The rules of this Q&A-1 are illus-
trated by the following example:
Example.(i) An unmarried employee without
children who is receiving employer-paid coverage
under a group health plan voluntarily terminates em-
ployment on June 1, 2001. The employee is not dis-
abled at the time of the termination of employment
nor at any time thereafter, and the plan does not pro-
vide for the extension of the required periods (as is
permitted under section 4980B(f)(8)).
(ii) Case 1:If the plan provides that the em-
ployer-paid coverage ends immediately upon the ter-
mination of employment, the election period must
begin not later than June 1, 2001, and must not end
earlier than July 31, 2001. If notice of the right to
elect COBRA continuation coverage is not provided
to the employee until June 15, 2001, the election pe-
riod must not end earlier than August 14, 2001.
(iii) Case 2:If the plan provides that the em-
ployer-paid coverage does not end until 6 months
after the termination of employment, the employee
does not lose coverage until December 1, 2001. The
election period can therefore begin as late as Decem-
ber 1, 2001, and must not end before January 30,
2002.
(iv) Case 3:If employer-paid coverage for 6
months after the termination of employment is of-
fered only to those qualified beneficiaries who
waive COBRA continuation coverage, the employee
loses coverage on June 1, 2001, so the election pe-
riod is the same as in Case 1. The difference be-
tween Case 2 and Case 3 is that in Case 2 the em-
ployee can receive 6 months of employer-paid
coverage and then elect to pay for up to an addi-
tional 12 months of COBRA continuation coverage,
while in Case 3 the employee must choose between
6 months of employer-paid coverage and paying for
up to 18 months of COBRA continuation coverage.
In all three cases, COBRA continuation coverage
need not be provided for more than 18 months after
the termination of employment, and in certain cir-
cumstances might be provided for a shorter period
(see Q&A-1 of §54.4980B–7).
Q-2: Is a covered employee or quali-
fied beneficiary responsible for informing
the plan administrator of the occurrence
of a qualifying event?
A-2: (a) In general, the employer or
plan administrator must determine when a
qualifying event has occurred. However,
each covered employee or qualified bene-
ficiary is responsible for notifying the
plan administrator of the occurrence of a
qualifying event that is either a dependent
child’s ceasing to be a dependent child
under the generally applicable require-
ments of the plan or a divorce or legal
separation of a covered employee. The
group health plan is not required to offer
the qualified beneficiary an opportunity to
elect COBRA continuation coverage if
the notice is not provided to the plan ad-
ministrator within 60 days after the later
of –
(1) The date of the qualifying event; or
(2) The date the qualified beneficiary
would lose coverage on account of the
qualifying event.
(b) For purposes of this Q&A-2, if
more than one qualified beneficiary
would lose coverage on account of a di-
vorce or legal separation of a covered em-
ployee, a timely notice of the divorce or
legal separation that is provided by the
covered employee or any one of those
qualified beneficiaries will be sufficient
to preserve the election rights of all of the
qualified beneficiaries.
Q-3: During the election period and be-
fore the qualified beneficiary has made an
election, must coverage be provided?
A-3: (a) In general, each qualified
beneficiary has until 60 days after the
later of the date the qualifying event
would cause her or him to lose coverage
or the date notice is provided to the quali-
fied beneficiary of her or his right to elect
COBRA continuation coverage to decide
whether to elect COBRA continuation
coverage. If the election is made during
that period, coverage must be provided
from the date that coverage would other-
wise have been lost (but see Q&A-4 of
this section). This can be accomplished
as described in paragraph (b) or (c) of this
Q&A-3.
(b) In the case of an indemnity or reim-
bursement arrangement, the employer or
employee organization can provide for
plan coverage during the election period
or, if the plan allows retroactive reinstate-
ment, the employer or employee organi-
zation can terminate the coverage of the
qualified beneficiary and reinstate her or
him when the election is made. Claims
incurred by a qualified beneficiary during
the election period do not have to be paid
before the election (and, if applicable,
payment for the coverage) is made. If a
provider of health care (such as a physi-
cian, hospital, or pharmacy) contacts the
plan to confirm coverage of a qualified
beneficiary during the election period, the
plan must give a complete response to the
health care provider about the qualified
beneficiary’s COBRA continuation cover-
age rights during the election period. For
example, if the plan provides coverage
during the election period but cancels
coverage retroactively if COBRA contin-
uation coverage is not elected, then the
plan must inform a provider that a quali-
fied beneficiary for whom coverage has
not been elected is covered but that the
coverage is subject to retroactive termina-
tion. Similarly, if the plan cancels cover-
age but then retroactively reinstates it
once COBRA continuation coverage is
elected, then the plan must inform the
provider that the qualified beneficiary
currently does not have coverage but will
have coverage retroactively to the date
coverage was lost if COBRA continuation
coverage is elected. (See paragraph (c) of
Q&A-5 in §54.4980B–8 for similar rules
that a plan must follow in confirming cov-
erage during a period when the plan has
not received payment but that is still
within the grace period for a qualified
beneficiary for whom COBRA continua-
tion coverage has been elected.)
(c)(1) In the case of a group health
plan that provides health services (such as
a health maintenance organization or a
walk-in clinic), the plan can require with
respect to a qualified beneficiary who has
not elected and paid for COBRA continu-
ation coverage that the qualified benefi-
ciary choose between –
(i) Electing and paying for the cover-
age; or
(ii) Paying the reasonable and custom-
ary charge for the plan’s services, but only
if a qualified beneficiary who chooses to
pay for the services will be reimbursed for
that payment within 30 days after the
election of COBRA continuation cover-
age (and, if applicable, the payment of
any balance due for the coverage).
(2) In the alternative, the plan can pro-
vide continued coverage and treat the
1999–8 I.R.B.45February 22, 1999

qualified beneficiary’s use of the facility
as a constructive election. In such a case,
the qualified beneficiary is obligated to
pay any applicable charge for the cover-
age, but only if the qualified beneficiary
is informed that use of the facility will be
a constructive election before using the
facility.
Q-4: Is a waiver before the end of the
election period effective to end a qualified
beneficiary’s election rights?
A-4: If, during the election period, a
qualified beneficiary waives COBRA
continuation coverage, the waiver can be
revoked at any time before the end of the
election period. Revocation of the waiver
is an election of COBRA continuation
coverage. However, if a waiver of
COBRA continuation coverage is later re-
voked, coverage need not be provided
retroactively (that is, from the date of the
loss of coverage until the waiver is re-
voked). Waivers and revocations of
waivers are considered made on the date
they are sent to the employer, employee
organization, or plan administrator, as ap-
plicable.
Q-5: Can an employer or employee or-
ganization withhold money or other bene-
fits owed to a qualified beneficiary until
the qualified beneficiary either waives
COBRA continuation coverage, elects
and pays for such coverage, or allows the
election period to expire?
A-5: No. An employer, and an em-
ployee organization, must not withhold
anything to which a qualified beneficiary
is otherwise entitled (by operation of law
or other agreement) in order to compel
payment for COBRA continuation cover-
age or to coerce the qualified beneficiary
to give up rights to COBRA continuation
coverage (including the right to use the
full election period to decide whether to
elect such coverage). Such a withholding
constitutes a failure to comply with the
COBRA continuation coverage require-
ments. Furthermore, any purported
waiver obtained by means of such a with-
holding is invalid.
Q-6: Can each qualified beneficiary
make an independent election under
COBRA?
A-6: Yes. Each qualified beneficiary
(including a child who is born to or placed
for adoption with a covered employee dur-
ing a period of COBRA continuation cov-
erage) must be offered the opportunity to
make an independent election to receive
COBRA continuation coverage. If the
plan allows similarly situated active em-
ployees with respect to whom a qualifying
event has not occurred to choose among
several options during an open enrollment
period (for example, to switch to another
group health plan or to another benefit
package under the same group health
plan), then each qualified beneficiary must
also be offered an independent election to
choose during an open enrollment period
among the options made available to simi-
larly situated active employees with re-
spect to whom a qualifying event has not
occurred. If a qualified beneficiary who is
either a covered employee or the spouse of
a covered employee elects COBRA con-
tinuation coverage and the election does
not specify whether the election is for self-
only coverage, the election is deemed to
include an election of COBRA continua-
tion coverage on behalf of all other quali-
fied beneficiaries with respect to that qual-
ifying event. An election on behalf of a
minor child can be made by the child’s
parent or legal guardian. An election on
behalf of a qualified beneficiary who is in-
capacitated or dies can be made by the
legal representative of the qualified bene-
ficiary or the qualified beneficiary’s es-
tate, as determined under applicable state
law, or by the spouse of the qualified ben-
eficiary. (See also Q&A-5 of
§54.4980B–7 relating to the independent
right of each qualified beneficiary with re-
spect to the same qualifying event to re-
ceive COBRA continuation coverage dur-
ing the disability extension.) The rules of
this Q&A-6 are illustrated by the follow-
ing examples; in each example each group
health plan is subject to COBRA:
Example 1.(i) Employee Hand H’s spouse are
covered under a group health plan immediately be-
fore H’s termination of employment (for reasons
other than gross misconduct). Coverage under the
plan will end as a result of the termination of em-
ployment.
(ii) Upon H’s termination of employment, both
Hand H’s spouse are qualified beneficiaries and
each must be allowed to elect COBRA continuation
coverage. Thus, Hmight elect COBRA continuation
coverage while the spouse declines to elect such
coverage, or Hmight elect COBRA continuation
coverage for both of them. In contrast, Hcannot de-
cline COBRA continuation coverage on behalf of
H’s spouse. Thus, if Hdoes not elect COBRA con-
tinuation coverage on behalf of the spouse, the
spouse must still be allowed to elect COBRA contin-
uation coverage.
Example 2. (i) An employer maintains a group
health plan under which all employees receive em-
ployer-paid coverage. Employees can arrange to
cover their families by paying an additional amount.
The employer also maintains a cafeteria plan, under
which one of the options is to pay part or all of the
employee share of the cost for family coverage
under the group health plan. Thus, an employee
might pay for family coverage under the group
health plan partly with before-tax dollars and partly
with after-tax dollars.
(ii) If an employee’s family is receiving cover-
age under the group health plan when a qualifying
event occurs, each of the qualified beneficiaries
must be offered an opportunity to elect COBRA con-
tinuation coverage, regardless of how that qualified
beneficiary’s coverage was paid for before the quali-
fying event.
§54.4980B–7 Duration of COBRA
continuation coverage.
The following questions-and-answers
address the duration of COBRA continua-
tion coverage:
Q-1: How long must COBRA continu-
ation coverage be made available to a
qualified beneficiary?
A-1: (a) Except for an interruption of
coverage in connection with a waiver, as
described in Q&A-4 of §54.4980B–6,
COBRA continuation coverage that has
been elected for a qualified beneficiary
must extend for at least the period begin-
ning on the date of the qualifying event
and ending not before the earliest of the
following dates –
(1) The last day of the maximum re-
quired period under section 4980B(f)-
(2)(B)(i) (the maximum coverage period)
and, if applicable, section 4980B(f)(8)
(relating to the optional extension of re-
quired periods in a case where coverage is
lost after the date of, instead of on the
date of, the qualifying event);
(2) The first day for which timely pay-
ment is not made to the plan with respect
to the qualified beneficiary (see Q&A-5
in §54.4980B–8);
(3) The date upon which the employer
or employee organization ceases to pro-
vide any group health plan (including suc-
cessor plans) to any employee;
(4) The date, after the date of the elec-
tion, upon which the qualified beneficiary
first becomes covered under any other
group health plan, as described in Q&A-2
of this section; and
(5) The date, after the date of the elec-
tion, upon which the qualified beneficiary
first becomes entitled to Medicare bene-
February 22, 1999461999–8 I.R.B.

fits, as described in Q&A-3 of this sec-
tion.
(b) However, a group health plan can
terminate for cause the coverage of a
qualified beneficiary receiving COBRA
continuation coverage on the same basis
that the plan terminates for cause the cov-
erage of similarly situated nonCOBRA
beneficiaries. For example, if a group
health plan terminates the coverage of ac-
tive employees for the submission of a
fraudulent claim, then the coverage of a
qualified beneficiary can also be termi-
nated for the submission of a fraudulent
claim. Notwithstanding the preceding
two sentences, the coverage of a qualified
beneficiary can be terminated for failure
to make timely payment to the plan only
if payment is not timely under the rules of
Q&A-5 in §54.4980B–8.
(c) In the case of an individual who is
not a qualified beneficiary and who is re-
ceiving coverage under a group health
plan solely because of the individual’s re-
lationship to a qualified beneficiary, if the
plan’s obligation to make COBRA contin-
uation coverage available to the qualified
beneficiary ceases under this section, the
plan is not obligated to make coverage
available to the individual who is not a
qualified beneficiary.
Q-2: When may a plan terminate a
qualified beneficiary’s COBRA continua-
tion coverage due to coverage under an-
other group health plan?
A-2: (a) If a qualified beneficiary first
becomes covered under another group
health plan (including for this purpose
any group health plan of a governmental
employer or employee organization) after
the date on which COBRA continuation
coverage is elected for the qualified bene-
ficiary and the other coverage satisfies the
requirements of paragraphs (b), (c), and
(d) of this Q&A-2, then the plan may ter-
minate the qualified beneficiary’s
COBRA continuation coverage upon the
date on which the qualified beneficiary
first becomes covered under the other
group health plan (even if the other cover-
age is less valuable to the qualified bene-
ficiary). By contrast, if a qualified benefi-
ciary first becomes covered under another
group health plan on or before the date on
which COBRA continuation coverage is
elected, then the other coverage cannot be
a basis for terminating the qualified bene-
ficiary’s COBRA continuation coverage.
(b) The requirement of this paragraph
(b) is satisfied if the qualified beneficiary
is actually covered, rather than merely eli-
gible to be covered, under the other group
health plan.
(c) The requirement of this paragraph
(c) is satisfied if the other group health
plan is a plan that is not maintained by the
employer or employee organization that
maintains the plan under which COBRA
continuation coverage must otherwise be
made available.
(d) The requirement of this paragraph
(d) is satisfied if the other group health
plan does not contain any exclusion or
limitation with respect to any preexisting
condition of the qualified beneficiary
(other than such an exclusion or limitation
that does not apply to, or is satisfied by,
the qualified beneficiary by reason of the
provisions in section 9801 (relating to
limitations on preexisting condition ex-
clusion periods in group health plans)).
(e) The rules of this Q&A-2 are illus-
trated by the following examples:
Example 1.(i) Employer Xmaintains a group
health plan subject to COBRA. Cis an employee
covered under the plan. Cis also covered under a
group health plan maintained by Employer Y, the
employer of C’s spouse. Cterminates employment
(for reasons other than gross misconduct), and the
termination of employment causes Cto lose cover-
age under X’s plan (and, thus, is a qualifying event).
Celects to receive COBRA continuation coverage
under X’s plan.
(ii) Under these facts, X’s plan cannot terminate
C’s COBRA continuation coverage on the basis of
C’s coverage under Y’s plan.
Example 2. (i) Employer Wmaintains a group
health plan subject to COBRA. Dis an employee
covered under the plan. Dterminates employment
(for reasons other than gross misconduct), and the
termination of employment causes Dto lose cover-
age under W’s plan (and, thus, is a qualifying event).
Delects to receive COBRA continuation coverage
under W’s plan. Later Dbecomes employed by Em-
ployer Vand is covered under V’s group health plan.
D’s coverage under V’s plan is not subject to any ex-
clusion or limitation with respect to any preexisting
condition of D.
(ii) Under these facts, Wcan terminate D’s
COBRA continuation coverage on the date Dbe-
comes covered under V’s plan.
Example 3. (i) The facts are the same as in Exam-
ple 2,except that Dbecomes employed by Vand be-
comes covered under V’s group health plan before D
elects COBRA continuation coverage under W’s plan.
(ii) Because the termination of employment is a
qualifying event, Dmust be offered COBRA continu-
ation coverage under W’s plan, and Wis not permitted
to terminate D’s COBRA continuation coverage on
account of D’s coverage under V’s plan because D
first became covered under V’s plan before COBRA
continuation coverage was elected for D.
Q-3: When may a plan terminate a
qualified beneficiary’s COBRA continua-
tion coverage due to the qualified benefi-
ciary’s entitlement to Medicare benefits?
A-3: (a) If a qualified beneficiary first
becomes entitled to Medicare benefits
under Title XVIII of the Social Security
Act (42 U.S.C. 1395-1395ggg) after the
date on which COBRA continuation cov-
erage is elected for the qualified benefi-
ciary, then the plan may terminate the
qualified beneficiary’s COBRA continua-
tion coverage upon the date on which the
qualified beneficiary becomes so entitled.
By contrast, if a qualified beneficiary first
becomes entitled to Medicare benefits on
or before the date that COBRA continua-
tion coverage is elected, then the qualified
beneficiary’s entitlement to Medicare
benefits cannot be a basis for terminating
the qualified beneficiary’s COBRA con-
tinuation coverage.
(b) A qualified beneficiary becomes
entitled to Medicare benefits upon the ef-
fective date of enrollment in either part A
or B, whichever occurs earlier. Thus,
merely being eligible to enroll in Medi-
care does not constitute being entitled to
Medicare benefits.
Q-4: [Reserved]
A-4: [Reserved]
Q-5: How does a qualified beneficiary
become entitled to a disability extension?
A-5: (a) A qualified beneficiary be-
comes entitled to a disability extension if
the requirements of paragraphs (b), (c),
and (d) of this Q&A-5 are satisfied with
respect to the qualified beneficiary. If the
disability extension applies with respect
to a qualifying event, it applies with re-
spect to each qualified beneficiary enti-
tled to COBRA continuation coverage be-
cause of that qualifying event. Thus, for
example, the 29-month maximum cover-
age period applies to each qualified bene-
ficiary who is not disabled as well as to
the qualified beneficiary who is disabled,
and it applies independently with respect
to each of the qualified beneficiaries. See
Q&A-1 in §54.4980B–8, which permits a
plan to require payment of an increased
amount during the disability extension.
(b) The requirement of this paragraph
(b) is satisfied if a qualifying event occurs
that is a termination, or reduction of hours,
of a covered employee’s employment.
(c) The requirement of this paragraph
(c) is satisfied if an individual (whether or
1999–8 I.R.B.47February 22, 1999

not the covered employee) who is a quali-
fied beneficiary in connection with the
qualifying event described in paragraph
(b) of this Q&A-5 is determined under
Title II or XVI of the Social Security Act
(42 U.S.C. 401–433 or 1381–1385) to
have been disabled at any time during the
first 60 days of COBRA continuation cov-
erage. For this purpose, the period of the
first 60 days of COBRA continuation cov-
erage is measured from the date of the
qualifying event described in paragraph
(b) of this Q&A-5 (except that if a loss of
coverage would occur at a later date in the
absence of an election for COBRA con-
tinuation coverage and if the plan pro-
vides for the extension of the required pe-
riods in accordance with section
4980B(f)(8), then the period of the first
60 days of COBRA continuation coverage
is measured from the date on which the
coverage would be lost). However, in the
case of a qualified beneficiary who is a
child born to or placed for adoption with a
covered employee during a period of
COBRA continuation coverage, the pe-
riod of the first 60 days of COBRA con-
tinuation coverage is measured from the
date of birth or placement for adoption.
For purposes of this paragraph (c), an in-
dividual is determined to be disabled
within the first 60 days of COBRA con-
tinuation coverage if the individual has
been determined under Title II or XVI of
the Social Security Act to have been dis-
abled before the first day of COBRA con-
tinuation coverage and has not been deter-
mined to be no longer disabled at any
time between the date of that disability
determination and the first day of
COBRA continuation coverage.
(d) The requirement of this paragraph
(d) is satisfied if any of the qualified ben-
eficiaries affected by the qualifying event
described in paragraph (b) of this Q&A-5
provides notice to the plan administrator
of the disability determination on a date
that is both within 60 days after the date
the determination is issued and before the
end of the original 18-month maximum
coverage period that applies to the quali-
fying event.
Q-6: Under what circumstances can
the maximum coverage period be ex-
panded?
A-6: (a) The maximum coverage pe-
riod can be expanded if the requirements
of Q&A-5 of this section (relating to the
disability extension ) or paragraph (b) of
this Q&A-6 are satisfied.
(b) The requirements of this paragraph
(b) are satisfied if a qualifying event that
gives rise to an 18-month maximum cov-
erage period (or a 29-month maximum
coverage period in the case of a disability
extension) is followed, within that 18-
month period (or within that 29-month
period, in the case of a disability exten-
sion), by a second qualifying event (for
example, a death or a divorce) that gives
rise to a 36-month maximum coverage
period. (Thus, a termination of employ-
ment following a qualifying event that is a
reduction of hours of employment cannot
be a second qualifying event that expands
the maximum coverage period; the bank-
ruptcy of the employer also cannot be a
second qualifying event that expands the
maximum coverage period.) In such a
case, the original 18-month period (or 29-
month period, in the case of a disability
extension) is expanded to 36 months, but
only for those individuals who were qual-
ified beneficiaries under the group health
plan in connection with the first qualify-
ing event and who are still qualified bene-
ficiaries at the time of the second qualify-
ing event. No qualifying event (other
than a qualifying event that is the bank-
ruptcy of the employer) can give rise to a
maximum coverage period that ends more
than 36 months after the date of the first
qualifying event (or more than 36 months
after the date of the loss of coverage, in
the case of a plan that provides for the ex-
tension of the required periods). For ex-
ample, if an employee covered by a group
health plan that is subject to COBRA ter-
minates employment (for reasons other
than gross misconduct) on December 31,
2000, the termination is a qualifying
event giving rise to a maximum coverage
period that extends for 18 months to June
30, 2002. If the employee dies after the
employee and the employee’s spouse and
dependent children have elected COBRA
continuation coverage and on or before
June 30, 2002, the spouse and dependent
children (except anyone among them
whose COBRA continuation coverage
had already ended for some other reason)
will be able to receive COBRA continua-
tion coverage through December 31,
2003.
Q-7: If health coverage is provided to a
qualified beneficiary after a qualifying
event without regard to COBRA continu-
ation coverage (for example, as a result of
state or local law, the Uniformed Services
Employment and Reemployment Rights
Act of 1994 (38 U.S.C. 4315), industry
practice, a collective bargaining agree-
ment, severance agreement, or plan pro-
cedure), will such alternative coverage
extend the maximum coverage period?
A-7: (a) No. The end of the maximum
coverage period is measured solely as de-
scribed in Q&A-1 and Q&A-6 of this sec-
tion, which is generally from the date of
the qualifying event.
(b) If the alternative coverage does not
satisfy all the requirements for COBRA
continuation coverage, or if the amount
that the group health plan requires to be
paid for the alternative coverage is greater
than the amount required to be paid by
similarly situated nonCOBRA beneficia-
ries for the coverage that the qualified
beneficiary can elect to receive as
COBRA continuation coverage, the plan
covering the qualified beneficiary imme-
diately before the qualifying event must
offer the qualified beneficiary receiving
the alternative coverage the opportunity
to elect COBRA continuation coverage.
See Q&A-1 of §54.4980B–6.
(c) If an individual rejects COBRA
continuation coverage in favor of alterna-
tive coverage, then, at the expiration of
the alternative coverage period, the indi-
vidual need not be offered a COBRA
election. However, if the individual re-
ceiving alternative coverage is a covered
employee and the spouse or a dependent
child of the individual would lose that al-
ternative coverage as a result of a qualify-
ing event (such as the death of the cov-
ered employee), the spouse or dependent
child must be given an opportunity to
elect to continue that alternative cover-
age, with a maximum coverage period of
36 months measured from the date of that
qualifying event.
Q-8: Must a qualified beneficiary be
given the right to enroll in a conversion
health plan at the end of the maximum
coverage period for COBRA continuation
coverage?
A-8: If a qualified beneficiary’s
COBRA continuation coverage under a
group health plan ends as a result of the
expiration of the maximum coverage pe-
riod, the group health plan must, during
the 180-day period that ends on that expi-
February 22, 1999481999–8 I.R.B.

ration date, provide the qualified benefi-
ciary the option of enrolling under a con-
version health plan if such an option is
otherwise generally available to similarly
situated nonCOBRA beneficiaries under
the group health plan. If such a conver-
sion option is not otherwise generally
available, it need not be made available to
qualified beneficiaries.
§54.4980B–8 Paying for COBRA
continuation coverage.
The following questions-and-answers
address paying for COBRA continuation
coverage:
Q-1: Can a group health plan require
payment for COBRA continuation cover-
age?
A-1: (a) Yes. For any period of
COBRA continuation coverage, a group
health plan can require the payment of an
amount that does not exceed 102 percent
of the applicable premium for that period.
(See paragraph (b) of this Q&A-1 for a
rule permitting a plan to require payment
of an increased amount due to the disabil-
ity extension.) The applicable premiumis
defined in section 4980B(f)(4). A group
health plan can terminate a qualified ben-
eficiary’s COBRA continuation coverage
as of the first day of any period for which
timely payment is not made to the plan
with respect to that qualified beneficiary
(see Q&A-1 of §54.4980B–7). For the
meaning of timely payment,see Q&A-5
of this section.
(b) A group health plan is permitted to
require the payment of an amount that
does not exceed 150 percent of the applic-
able premium for any period of COBRA
continuation coverage covering a dis-
abled qualified beneficiary (for example,
whether single or family coverage) if the
coverage would not be required to be
made available in the absence of a disabil-
ity extension. (See Q&A-5 of §54.4980B–
7 for rules to determine whether a quali-
fied beneficiary is entitled to a disability
extension.) A plan is not permitted to
require the payment of an amount that ex-
ceeds 102 percent of the applicable pre-
mium for any period of COBRA continu-
ation coverage to which a qualified
beneficiary is entitled without regard to
the disability extension. Thus, if a quali-
fied beneficiary entitled to a disability ex-
tension experiences a second qualifying
event within the original 18-month maxi-
mum coverage period, then the plan is not
permitted to require the payment of an
amount that exceeds 102 percent of the
applicable premium for any period of
COBRA continuation coverage. By con-
trast, if a qualified beneficiary entitled to
a disability extension experiences a sec-
ond qualifying event after the end of the
original 18-month maximum coverage
period, then the plan may require the pay-
ment of an amount that is up to 150 per-
cent of the applicable premium for the re-
mainder of the period of COBRA
continuation coverage (that is, from the
beginning of the 19th month through the
end of the 36th month) as long as the dis-
abled qualified beneficiary is included in
that coverage. The rules of this paragraph
(b) are illustrated by the following exam-
ples; in each example the group health
plan is subject to COBRA:
Example 1. (i) An employer maintains a group
health plan. The plan determines the cost of cover-
ing individuals under the plan by reference to two
categories, individual coverage and family cover-
age, and the applicable premium is determined for
those two categories. An employee and members of
the employee’s family are covered under the plan.
The employee experiences a qualifying event that is
the termination of the employee’s employment. The
employee’s family qualifies for the disability exten-
sion because of the disability of the employee’s
spouse. (Timely notice of the disability is provided
to the plan administrator.) Timely payment of the
amount required by the plan for COBRA continua-
tion coverage for the family (which does not exceed
102 percent of the cost of family coverage under the
plan) was made to the plan with respect to the em-
ployee’s family for the first 18 months of COBRA
continuation coverage, and the disabled spouse and
the rest of the family continue to receive COBRA
continuation coverage through the 29th month.
(ii) Under these facts, the plan may require pay-
ment of up to 150 percent of the applicable premium
for family coverage in order for the family to receive
COBRA continuation coverage from the 19th month
through the 29th month. If the plan determined the
cost of coverage by reference to three categories
(such as employee, employee-plus-one-dependent,
employee-plus-two-or-more-dependents) or more
than three categories, instead of two categories, the
plan could still require, from the 19th month through
the 29th month of COBRA continuation coverage,
the payment of 150 percent of the cost of coverage
for the category of coverage that included the dis-
abled spouse.
Example 2.(i) The facts are the same as in Ex-
ample 1,except that only the covered employee
elects and pays for the first 18 months of COBRA
continuation coverage.
(ii) Even though the employee’s disabled spouse
does not elect or pay for COBRA continuation cov-
erage, the employee satisfies the requirements for
the disability extension to apply with respect to the
employee’s qualifying event. Under these facts, the
plan may not require the payment of more than 102
percent of the applicable premium for individual
coverage for the entire period of the employee’s
COBRA continuation coverage, including the period
from the 19th month through the 29th month. If
COBRA continuation coverage had been elected and
paid for with respect to other nondisabled members
of the employee’s family, then the plan could not re-
quire the payment of more than 102 percent of the
applicable premium for family coverage (or for any
other appropriate category of coverage that might
apply to that group of qualified beneficiaries under
the plan, such as employee-plus-one-dependent or
employee-plus-two-or-more-dependents) for those
family members to continue their coverage from the
19th month through the 29th month.
(c) A group health plan does not fail to
comply with section 9802(b) and
§54.9802–1T(b) (which generally pro-
hibit an individual from being charged, on
the basis of health status, a higher pre-
mium than that charged for similarly situ-
ated individuals enrolled in the plan) with
respect to a qualified beneficiary entitled
to the disability extension merely because
the plan requires payment of an amount
permitted under paragraph (b) of this
Q&A-1.
Q-2: When is the applicable premium
determined and when can a group health
plan increase the amount it requires to be
paid for COBRA continuation coverage?
A-2: (a) The applicable premium for
each determination period must be com-
puted and fixed by a group health plan be-
fore the determination period begins. A
determination period is any 12-month pe-
riod selected by the plan, but it must be
applied consistently from year to year.
The determination period is a single pe-
riod for any benefit package. Thus, each
qualified beneficiary does not have a sep-
arate determination period beginning on
the date (or anniversaries of the date) that
COBRA continuation coverage begins for
that qualified beneficiary.
(b) During a determination period, a
plan can increase the amount it requires to
be paid for a qualified beneficiary’s
COBRA continuation coverage only in
the following three cases:
(1) The plan has previously charged
less than the maximum amount permitted
under Q&A-1 of this section and the in-
creased amount required to be paid does
not exceed the maximum amount permit-
ted under Q&A-1 of this section;
(2) The increase occurs during the dis-
ability extension and the increased
amount required to be paid does not ex-
1999–8 I.R.B.49February 22, 1999

ceed the maximum amount permitted
under paragraph (b) of Q&A-1 of this sec-
tion; or
(3) A qualified beneficiary changes the
coverage being received (see paragraph
(c) of this Q&A-2 for rules on how the
amount the plan requires to be paid may
or must change when a qualified benefi-
ciary changes the coverage being re-
ceived).
(c) If a plan allows similarly situated
active employees who have not experi-
enced a qualifying event to change the
coverage they are receiving, then the plan
must also allow each qualified beneficiary
to change the coverage being received on
the same terms as the similarly situated ac-
tive employees. (See Q&A-4 in
§54.4980B–5.) If a qualified beneficiary
changes coverage from one benefit pack-
age (or a group of benefit packages) to an-
other benefit package (or another group of
benefit packages), or adds or eliminates
coverage for family members, then the
following rules apply. If the change in
coverage is to a benefit package, group of
benefit packages, or coverage unit (such
as family coverage, self-plus-one-depen-
dent, or self-plus-two-or-more-depen-
dents) for which the applicable premium
is higher, then the plan may increase the
amount that it requires to be paid for
COBRA continuation coverage to an
amount that does not exceed the amount
permitted under Q&A-1 of this section as
applied to the new coverage. If the change
in coverage is to a benefit package, group
of benefit packages, or coverage unit
(such as individual or self-plus-one-de-
pendent) for which the applicable pre-
mium is lower, then the plan cannot re-
quire the payment of an amount that
exceeds the amount permitted under
Q&A-1 of this section as applied to the
new coverage.
Q-3: Must a plan allow payment for
COBRA continuation coverage to be
made in monthly installments?
A-3: Yes. A group health plan must
allow payment for COBRA continuation
coverage to be made in monthly install-
ments. A group health plan is permitted
to also allow the alternative of payment
for COBRA continuation coverage being
made at other intervals (for example,
weekly, quarterly, or semiannually).
Q-4: Is a plan required to allow a qual-
ified beneficiary to choose to have the
first payment for COBRA continuation
coverage applied prospectively only?
A-4: No. A plan is permitted to apply
the first payment for COBRA continua-
tion coverage to the period of coverage
beginning immediately after the date on
which coverage under the plan would
have been lost on account of the qualify-
ing event. Of course, if the group health
plan allows a qualified beneficiary to
waive COBRA continuation coverage for
any period before electing to receive
COBRA continuation coverage, the first
payment is not applied to the period of the
waiver.
Q-5: What is timely payment for
COBRA continuation coverage?
A-5: (a) Except as provided in this
paragraph (a) or in paragraph (b) or (d) of
this Q&A-5, timely payment for a period
of COBRA continuation coverage under a
group health plan means payment that is
made to the plan by the date that is 30
days after the first day of that period.
Payment that is made to the plan by a later
date is also considered timely payment if
either –
(1) Under the terms of the plan, cov-
ered employees or qualified beneficiaries
are allowed until that later date to pay for
their coverage for the period; or
(2) Under the terms of an arrangement
between the employer or employee orga-
nization and an insurance company,
health maintenance organization, or other
entity that provides plan benefits on the
employer’s or employee organization’s
behalf, the employer or employee organi-
zation is allowed until that later date to
pay for coverage of similarly situated
nonCOBRA beneficiaries for the period.
(b) Notwithstanding paragraph (a) of
this Q&A-5, a plan cannot require pay-
ment for any period of COBRA continua-
tion coverage for a qualified beneficiary
earlier than 45 days after the date on
which the election of COBRA continua-
tion coverage is made for that qualified
beneficiary.
(c) If, after COBRA continuation cov-
erage has been elected for a qualified ben-
eficiary, a provider of health care (such as
a physician, hospital, or pharmacy) con-
tacts the plan to confirm coverage of a
qualified beneficiary for a period for
which the plan has not yet received pay-
ment, the plan must give a complete re-
sponse to the health care provider about
the qualified beneficiary’s COBRA con-
tinuation coverage rights, if any, described
in paragraphs (a), (b), and (d) of this
Q&A-5. For example, if the plan provides
coverage during the 30- and 45-day grace
periods described in paragraphs (a) and (b)
of this Q&A-5 but cancels coverage
retroactively if payment is not made by
the end of the applicable grace period,
then the plan must inform a provider with
respect to a qualified beneficiary for
whom payment has not been received that
the qualified beneficiary is covered but
that the coverage is subject to retroactive
termination if timely payment is not made.
Similarly, if the plan cancels coverage if it
has not received payment by the first day
of a period of coverage but retroactively
reinstates coverage if payment is made by
the end of the grace period for that period
of coverage, then the plan must inform the
provider that the qualified beneficiary cur-
rently does not have coverage but will
have coverage retroactively to the first
date of the period if timely payment is
made. (See paragraph (b) of Q&A-3 in
§54.4980B–6 for similar rules that the
plan must follow in confirming coverage
during the election period.)
(d) If timely payment is made to the
plan in an amount that is not significantly
less than the amount the plan requires to
be paid for a period of coverage, then the
amount paid is deemed to satisfy the
plan’s requirement for the amount that
must be paid, unless the plan notifies the
qualified beneficiary of the amount of the
deficiency and grants a reasonable period
of time for payment of the deficiency to
be made. For this purpose, as a safe har-
bor, 30 days after the date the notice is
provided is deemed to be a reasonable pe-
riod of time.
(e) Payment is considered made on the
date on which it is sent to the plan.
PART 602 – OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In §602.101, paragraph (c) is
amended by adding entries in numerical
order to the table to read as follows:
February 22, 1999501999–8 I.R.B.

§602.101 OMB Control numbers.
*****
(c) * * *
CFR part or section Current OMB
where identified control No.
and described
*****
54.4980B–6 . . . . . . . . . . . . . 1545–1581
54.4980B–7 . . . . . . . . . . . . . 1545–1581
54.4980B–8 . . . . . . . . . . . . . 1545–1581
*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 28, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on Feb-
ruary 2, 1999, 8:45 a.m., and published in the issue
of the Federal Register for February 3, 1999, 64 F.R.
5160)
Section 6038B.—Notice of
Certain Transfers to Foreign
Persons
26 CFR 1.6038B–2: Reporting of certain transfers
to foreign partnerships.
T.D. 8817
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Notice of Certain Transfers to
Foreign Partnerships and
Foreign Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations under section 6038B re-
lating to information reporting require-
ments for certain transfers by United
States persons to foreign partnerships.
The regulations implement amendments
made by the Taxpayer Relief Act of 1997
that require a United States person who
transfers property to a foreign partnership
to furnish certain information with respect
to such transfer. This document also con-
tains final regulations that require certain
cash transfers to foreign corporations to
be reported. The regulations provide
guidance needed to comply with the re-
porting requirements with respect to
transfers of cash to foreign corporations
and transfers of property to foreign part-
nerships.
DATES: Effective Dates: These regula-
tions are effective January 1, 1998, except
that the amendments to §1.6038B-1 are
effective February 5, 1999.
Dates of Applicability: For dates of ap-
plicability of the amendments to
§1.6038B–1, see §1.6038B–1(g). For
dates of applicability of §1.6038B–2, see
§1.6038B–2(j).
FOR FURTHER INFORMATION CON-
TACT: Eliana Dolgoff, 202-622-3860
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1615. Responses to these collec-
tions of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
The collections of information con-
tained in these final regulations are in
§§1.6038B–1(b) and 1.6038B–2. The
burden of complying with the collection
of information required to be reported on
Form 8865 is reflected in the burden for
Form 8865. The burden of complying
with the collection of information re-
quired to be reported on Form 926 is re-
flected in the burden for Form 926.
Comments concerning the accuracy of
the burden estimates and suggestions for
reducing the burden should be sent to the
Internal Revenue Service,Attn: IRS Re-
ports Clearance Officer, OP:FS:FP, Wash-
ington, DC 20224, and to the Office of
Management and Budget,Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to these col-
lections of information must be retained
as long as their contents may become ma-
terial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On September 9, 1998, the IRS pub-
lished in the Federal Registerproposed
regulations (REG–118926–97, 1998–39
I.R.B. 23) relating to the reporting of cer-
tain transfers to foreign corporations and
foreign partnerships under section 6038B.
A public hearing was held on November
10, 1998, even though no requests to
speak at the hearing were received. Writ-
ten comments regarding the proposed reg-
ulations, however, were received. After
consideration of all of the comments re-
ceived, the proposed regulations under
section 6038B are adopted as revised by
this Treasury decision. The revisions are
discussed below.
Public Comments
Some commentators suggested that the
final regulations provide that state and
local government employee retirement
plans be exempt from the section 6038B
reporting requirements, asserting that
contributions from such plans to foreign
partnerships will not have federal income
tax consequences. The final regulations
provide that trusts relating to state and
local government employee retirement
plans are not required to report transfers
to foreign partnerships under section
6038B, unless required to do so in the in-
structions to Form 8865.
One commentator noted that under the
proposed regulations, if a United States
person transfers property other than cash
with a value in excess of $100,000 to a
foreign partnership, such person must re-
port the names and addresses of all the
1999–8 I.R.B.51February 22, 1999

other partners of the partnership, regard-
less of the size of the person’s ownership
interest in the foreign partnership after the
transfer. The commentator requested that
the final regulations provide that if a
United States person owns less than a 10
percent interest in the foreign partnership
after the transfer, regardless of the type of
property transferred, such person does not
have to report the names and addresses of
all the other partners. Alternatively, the
commentator requested that it be recog-
nized that a person that makes a good
faith effort to obtain such information will
have reasonable cause preventing the im-
position of any penalties under section
6038B if such person fails to obtain and
submit the information.
The final regulations do not adopt the
commentator’s recommendations. As in
the proposed regulations, the final regula-
tions contain a reasonable cause excep-
tion that, if satisfied, prevents the IRS
from imposing penalties under section
6038B. Whether reasonable cause exists
for a failure to comply with the require-
ments of section 6038B is determined by
the district director under all the facts and
circumstances. Although the final regula-
tions do not explicitly say so, a failure to
submit the names and addresses of the
other partners will constitute a failure to
comply with the requirements of section
6038B and therefore will always be sub-
ject to the reasonable cause exception.
Commentators also questioned whether
United States persons must report indirect
transfers from a foreign partnership to an-
other foreign partnership. The final regu-
lations reserve on such reporting. If a for-
eign partnership transfers property to
another foreign partnership, a United
States person that is a partner of the trans-
feror partnership is not required to report
that transfer until such time as the IRS and
Treasury implement rules requiring such
reporting. However, the IRS remains con-
cerned about transfers from one foreign
partnership to another. In conjunction
with its study of section 721(c), the IRS is
evaluating whether there is a need for the
reporting of transfers from foreign part-
nerships to foreign partnerships.
The final regulations also clarify that if
a domestic partnership contributes prop-
erty to a foreign partnership, the partners
of the domestic partnership will be con-
sidered to have contributed a proportion-
ate share of the property transferred.
Therefore, the partners of the transferor
domestic partnership may be required to
report under section 6038B transfers
made by the transferor partnership. The
proposed regulations provide, however,
that an indirect transferor does not have to
report the contribution on Form 8865 if
certain conditions are satisfied, including
the filing by the indirect transferor of a
statement with the IRS. In an attempt to
reduce the burden imposed on taxpayers,
the final regulations eliminate the require-
ment that indirect transferors must file a
statement. If the domestic transferor part-
nership properly reports the transfer of
property to a foreign partnership, a United
States person that is an indirect transferor
need not report the transfer.
The final regulations also modify the
reporting requirements with respect to
deemed contributions. The proposed reg-
ulations provided that if by reason of an
adjustment under section 482 a contribu-
tion required to be reported under section
6038B is deemed to have been made, the
information required to be reported will
be furnished timely if filed by the due
date (including extensions) of the income
tax return for the taxable year during
which the adjustment is made. The final
regulations provide that deemed contribu-
tions resulting from IRS-initiated section
482 adjustments are not required to be re-
ported under section 6038B. However,
taxpayers must report deemed contribu-
tions resulting from taxpayer-initiated ad-
justments. Such information will be fur-
nished timely if filed by the due date,
including extensions, for filing the tax-
payer’s income tax return for the year in
which the taxpayer makes the section 482
adjustment.
Additionally, the final regulations clar-
ify that a transfer to a foreign partnership
made on or after January 1, 1998, but be-
fore January 1, 1999, will be considered
timely reported either if it is reported on a
Form 8865 attached to the taxpayer’s in-
come tax return for the first taxable year
beginning on or after January 1, 1999, or it
is reported on a Form 926 attached to the
taxpayer’s income tax return for the tax-
able year in which the transfer occurred.
The final regulations also clarify that
transfers that were made between August
5, 1997, and January 1, 1998, may be re-
ported in accordance with the provisions
of the final section 6038B regulations or
in accordance with Notice 98-17(1998-11
IRB 6).
Special Analyses
It has been determined that this regula-
tion is not a significant regulatory action
as defined in EO 12866. Therefore, a reg-
ulatory assessment is not required. It is
hereby certified that the collections of in-
formation contained in this regulation will
not have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that these final regulations reduce or elim-
inate the reporting requirements for cer-
tain United States persons. Moreover, in
general, only a United States person that
owns a significant interest in a foreign
partnership, or transfers a substantial
amount to a foreign partnership, will be
subject to these regulations. Thus, a Reg-
ulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on the impact of the
proposed regulations on small business.
Drafting Information
The principal authors of these regula-
tions are Eliana Dolgoff and Philip Tretiak
of the Office of Associate Chief Counsel
(International). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6038B–1 also issued under
26 U.S.C. 6038B.
Section 1.6038B–2 also issued under
26 U.S.C. 6038B. * * *
February 22, 1999521999–8 I.R.B.

Par. 2. Section 1.6038B-1 is amended
as follows:
1. The section heading is revised.
2. Paragraph (b)(1)(i), first sentence, is
revised.
3. The text of paragraph (b)(3) is
added.
4. Paragraph (c), first sentence, is re-
vised
5. Paragraph (g) is revised.
The additions and revisions read as fol-
lows:
§1.6038B–1 Reporting of certain
transfers to foreign corporations.
* * * * *
(b) Time and manner of reporting—(1)
In general—(i) Reporting procedure.Ex-
cept for stock or securities qualifying
under the special reporting rule of para-
graph (b)(2) of this section, or cash,
which is subject to special rules contained
in paragraph (b)(3) of this section, any
U.S. person that makes a transfer de-
scribed in section 6038B(a)(1)(A), 367(d)
or (e)(1), is required to report pursuant to
section 6038B and the rules of this section
and must attach the required information
to Form 926, “Return by Transferor of
Property to a Foreign Corporation.” * * *
* * * * *
(3) Special rule for transfers of cash.A
U.S. person that transfers cash to a for-
eign corporation must report the transfer
if—
(i) Immediately after the transfer such
person holds directly, indirectly, or by at-
tribution (determined under the rules of
section 318(a), as modified by section
6038(e)(2)) at least 10 percent of the total
voting power or the total value of the for-
eign corporation; or
(ii) The amount of cash transferred by
such person or any related person (deter-
mined under section 267(b)(1) through
(3) and (10) through (12)) to such foreign
corporation during the 12-month period
ending on the date of the transfer exceeds
$100,000. * * * * *
(c) Information required with respect to
transfers described in section 6038B(a)-
(1)(A). A United States person that trans-
fers property to a foreign corporation in
an exchange described in section
6038B(a)(1)(A) (including cash and other
unappreciated property) must provide the
following information, in paragraphs la-
beled to correspond with the number or
letter set forth in this paragraph (c) and
§1.6038B–1T(c)(1) through (5). * * *
* * * * *
(g) Effective dates.This section ap-
plies to transfers occurring on or after
July 20, 1998, except that the first sen-
tence of paragraph (b)(1)(i), paragraph
(b)(3), and the first sentence of paragraph
(c) apply to transfers occurring in taxable
years beginning after February 5, 1999.
See §1.6038B–1T for transfers occurring
prior to July 20, 1998.
Par. 3. Section 1.6038B–2 is added to
read as follows:
§1.6038B–2 Reporting of certain
transfers to foreign partnerships.
(a) Reporting requirements—(1) Re-
quirement to report transfers. A United
States person that transfers property to a
foreign partnership in a contribution de-
scribed in section 721 (including section
721(b)) must report that transfer on Form
8865 “Information Return of U.S. Persons
With Respect To Certain Foreign Partner-
ships” pursuant to section 6038B and the
rules of this section, if—
(i) Immediately after the transfer, the
United States person owns, directly, indi-
rectly, or by attribution, at least a 10-per-
cent interest in the partnership, as defined
in section 6038(e)(3)(C) and the regula-
tions thereunder; or
(ii) The value of the property trans-
ferred, when added to the value of any
other property transferred in a section 721
contribution by such person (or any re-
lated person) to such partnership during
the 12-month period ending on the date of
the transfer, exceeds $100,000.
(2) Indirect transfer through a domestic
partnership—For purposes of this sec-
tion, if a domestic partnership transfers
property to a foreign partnership in a sec-
tion 721 transaction, the domestic part-
nership’s partners shall be considered to
have transferred a proportionate share of
the property to the foreign partnership.
However, if the domestic partnership
properly reports all of the information re-
quired under this section with respect to
the contribution, no partner of the trans-
feror partnership, whether direct or indi-
rect (through tiers of partnerships), is also
required to report under this section. For
illustrations of this rule, see Examples 4
and 5 of paragraph (a)(7) of this section.
(3) Indirect transfer through a foreign
partnership. [Reserved]
(4) Requirement to report dis-
positions—(i) In general.If a United
States person was required to report a
transfer to a foreign partnership of appre-
ciated property under paragraph (a)(1) or
(2) of this section, and the foreign part-
nership disposes of the property while
such United States person remains a di-
rect or indirect partner, that United States
person must report the disposition by fil-
ing Form 8865. The form must be at-
tached to, and filed by the due date (in-
cluding extensions) of, the United States
person’s income tax return for the year in
which the disposition occurred.
(ii) Disposition of contributed property
in nonrecognition transaction. If a for-
eign partnership disposes of contributed
appreciated property in a nonrecognition
transaction and substituted basis property
is received in exchange, and the substi-
tuted basis property has built-in gain
under §1.704–3(a)(8), the original trans-
feror is not required to report the disposi-
tion. However, the transferor must report
the disposition of the substituted basis
property in the same manner as provided
for the contributed property.
(5) Time for filing Form 8865—(i)
General rule.The Form 8865 on which a
transfer is reported must be attached to
the transferor’s timely filed (including ex-
tensions) income tax return (including a
partnership return of income) for the tax
year that includes the date of the transfer.
(ii) Time for filing when transferor also
required to report information about the
partnership under section 6038.If the
United States person required to file
under this section is also required to file a
Form 8865 under section 6038 for the pe-
riod in which the transfer occurs, then the
United States person must report under
this section on the Form 8865 for the for-
eign partnership’s annual accounting pe-
riod in which the transfer occurred (not its
own taxable year) and file with its income
tax return for that year as provided in Sec-
tion 6038 and the regulations thereunder.
(6) Returns to be made—(i) Separate
returns for each partnership. If a United
States person transfers property re-
portable under this section to more than
1999–8 I.R.B.53February 22, 1999

one foreign partnership in a taxable year,
the United States person must submit a
separate Form 8865 for each partnership.
(ii) Duplicate form to be filed.If re-
quired by the instructions accompanying
Form 8865, a duplicate Form 8865 (in-
cluding attachments and schedules) must
also be filed by the due date for submit-
ting the original Form 8865 under para-
graph (a)(5)(i) or (ii) of this section, as
applicable.
(7) Examples.The application of this
paragraph (a) may be illustrated by the
following examples:
Example 1. On November 1, 2001, US,a United
States person that uses the calendar year as its tax-
able year, contributes $200,000 to FP, a foreign
partnership, in a transaction subject to section 721.
After the contribution, USowns a 5% interest in FP.
USmust report the contribution by filing Form 8865
for its taxable year ending December 31, 2001. On
March 1, 2002, USmakes a $40,000 section 721
contribution to FP, after which USowns a 6% inter-
est in FP. USmust report the $40,000 contribution
by filing Form 8865 for its taxable year ending De-
cember 31, 2002, because the contribution, when
added to the value of the other property contributed
by USto FPduring the 12-month period ending on
the date of the transfer, exceeds $100,000.
Example 2. F,a nonresident alien, is the brother
of US, a United States person. Fowns a 15% inter-
est in FP, a foreign partnership. UScontributes
$99,000 to FP, in exchange for a 1-percent partner-
ship interest. Under sections 6038(e)(3)(C) and
267(c)(2), USis considered to own at least a 10-per-
cent interest in FPand, therefore, USmust report the
$99,000 contribution under this section.
Example 3. US, a United States person, owns 40
percent of FC, a foreign corporation. FCowns a 20-
percent interest in FP, a foreign partnership. Under
section 267(c)(1), US is considered to own 8 percent
of FPdue to its ownership of FC. UScontributes
$50,000 to FPin exchange for a 5-percent partner-
ship interest. Immediately after the contribution, US
is considered to own at least a 10-percent interest in
FPand, therefore, must report the $50,000 contribu-
tion under this section.
Example 4. US,a United States person, owns a
60-percent interest in USP, a domestic partnership.
On March 1, 2001, USPcontributes $200,000 to FP,
a foreign partnership, in exchange for a 5-percent
partnership interest. Under paragraph (a)(2) of this
section, USis considered as having contributed
$120,000 to FP($200,000 360%). However,
under paragraph (a)(2), if USPproperly reports the
contribution to FP, USis not required to report its
$120,000 contribution. If USdirectly contributes
$5,000 to FPon June 10, 2001, USmust report the
$5,000 contribution because USis considered to
have contributed more than $100,000 to FPin the
12-month period ending on the date of the $5,000
contribution.
Example 5. US, a United States person, owns an
80-percent interest in USP, a domestic partnership.
USPowns an 80-percent interest in USP1, a domes-
tic partnership. On March 1, 2001, USP1con-
tributes $200,000 to FP, a foreign partnership, in ex-
change for a 3-percent partnership interest. Under
paragraph (a)(2) of this section, USPis considered
to have contributed $160,000 ($200,000 380%) to
FP. USis considered to have contributed $128,000
to FP($200,000 380% 380%). However, if
USP1reports the transfer of the $200,000 to FP,
neither USnor USPare required to report under this
section the amounts they are considered to have con-
tributed. Additionally, regardless of whether USP1
reports the $200,000 contribution, if USPreports the
$160,000 contribution it is considered to have made,
USdoes not have to report under this section the
$128,000 contribution USis considered to have
made.
(b) Transfers by trusts relating to state
and local government employee retire-
ment plans.Trusts relating to state and
local government employee retirement
plans are not required to report transfers
under this section, unless otherwise speci-
fied in the instructions to Form 8865.
(c) Information required with respect to
transfers of property.With respect to
transfers required to be reported under
paragraph (a)(1) or (2) of this section, the
return must contain information in such
form or manner as Form 8865 (and its ac-
companying instructions) prescribes with
respect to reportable events, including—
(1) The name, address, and U.S. tax-
payer identification number of the United
States person making the transfer;
(2) The name, U.S. taxpayer identifica-
tion number (if any), and address of the
transferee foreign partnership, and the
type of entity and country under whose
laws the partnership was created or orga-
nized;
(3) A general description of the trans-
fer, and of any wider transaction of which
it forms a part, including the date of trans-
fer;
(4) The names and addresses of the
other partners in the foreign partnership,
unless the transfer is solely of cash and
the transferor holds less than a 10-percent
interest in the transferee foreign partner-
ship immediately after the transfer;
(5) A description of the partnership in-
terest received by the United States per-
son, including a change in partnership in-
terest;
(6) A separate description of each item
of contributed property that is appreciated
property subject to the allocation rules of
section 704(c)(except to the extent that
the property is permitted to be aggregated
in making allocations under section
704(c)), or is intangible property, includ-
ing its estimated fair market value and ad-
justed basis.
(7) A description of other contributed
property, not specified in paragraph (c)(6)
of this section, aggregated by the follow-
ing categories (with, in each case, a brief
description of the property)—
(i) Stock in trade of the transferor (in-
ventory);
(ii) Tangible property (other than stock
in trade) used in a trade or business of the
transferor;
(iii) Cash;
(iv) Stock, notes receivable and
payable, and other securities; and
(v) Other property.
(d) Information required with respect to
dispositions of property. In respect of dis-
positions required to be reported under
paragraph (a)(4) of this section, the return
must contain information in such form or
manner as Form 8865 (and its accompa-
nying instructions) prescribes with re-
spect to reportable events, including–-
(1) The date and manner of disposi-
tion;
(2) The gain and depreciation recap-
ture amounts, if any, realized by the part-
nership; and
(3) Any such amounts allocated to the
United States person.
(e) Method of reporting.Except as oth-
erwise provided on Form 8865, or the ac-
companying instructions, all amounts re-
ported as required under this section must
be expressed in United States currency,
with a statement of the exchange rates
used. All statements required on or with
Form 8865 pursuant to this section must
be in the English language.
(f) Reporting under this section not re-
quired of partnerships excluded from the
application of subchapter K—(1) Elec-
tion to be wholly excluded. The reporting
requirements of this section will not apply
to any United States person in respect of
an eligible partnership as described in
§1.761–2(a), if such partnership has
validly elected to be excluded from all of
the provisions of subchapter K of chapter
1 of the Internal Revenue Code in the
manner specified in §1.761–2(b)(2)(i).
(2) Deemed excluded. The reporting re-
quirements of this section will not apply
to any United States person in respect of
an eligible partnership as described in
§1.761–2(a), if such partnership is validly
February 22, 1999541999–8 I.R.B.

deemed to have elected to be excluded
from all of the provisions of subchapter K
of chapter 1 of the Internal Revenue Code
in accordance with the provisions of
§1.761–2(b)(2)(ii).
(g) Deemed contributions.Deemed
contributions resulting from IRS-initiated
section 482 adjustments are not required
to be reported under section 6038B.
However, taxpayers must report deemed
contributions resulting from taxpayer-ini-
tiated adjustments. Such information will
be furnished timely if filed by the due
date, including extensions, for filing the
taxpayer’s income tax return for the year
in which the adjustment is made.
(h) Failure to comply with reporting re-
quirements—(1) Consequences of failure.
If a United States person is required to file
a return under paragraph (a) of this sec-
tion and fails to comply with the reporting
requirements of section 6038B and this
section, then such person is subject to the
following penalties:
(i) The United States person is subject
to a penalty equal to 10 percent of the fair
market value of the property at the time of
the contribution. Such penalty with re-
spect to a particular transfer is limited to
$100,000, unless the failure to comply
with respect to such transfer was due to
intentional disregard.
(ii) The United States person must rec-
ognize gain (reduced by the amount of
any gain recognized, with respect to that
property, by the transferor after the trans-
fer) as if the contributed property had
been sold for fair market value at the time
of the contribution. Adjustments to the
basis of the partnership’s assets and any
relevant partner’s interest as a result of
gain being recognized under this provi-
sion will be made as though the gain was
recognized in the year in which the failure
to report was finally determined.
(2) Failure to comply.A failure to
comply with the requirements of section
6038B includes—
(i) The failure to report at the proper
time and in the proper manner any infor-
mation required to be reported under the
rules of this section; and
(ii) The provision of false or inaccurate
information in purported compliance with
the requirements of this section.
(3)Reasonable cause exception.
Under section 6038B(c)(2) and this sec-
tion, the provisions of paragraph (h)(1) of
this section will not apply if the transferor
shows that a failure to comply was due to
reasonable cause and not willful neglect.
The transferor may attempt to do so by
providing a written statement to the dis-
trict director having jurisdiction of the
taxpayer’s return for the year of the trans-
fer, setting forth the reasons for the failure
to comply. Whether a failure to comply
was due to reasonable cause will be deter-
mined by the district director under all the
facts and circumstances.
(4) Statute of limitations.For excep-
tions to the limitations on assessment in
the event of a failure to provide informa-
tion under section 6038B, see section
6501(c)(8).
(i) Definitions—(1) Appreciated prop-
erty.Appreciated property is property
that has a fair market value in excess of
basis.
(2) Domestic partnership. A domestic
partnership is a partnership described in
section 7701(a)(4).
(3) Foreign partnership.A foreign
partnership is a partnership described in
section 7701(a)(5).
(4) Related person.Persons are related
persons if they bear a relationship de-
scribed in section 267(b)(1) through (3) or
(10) through (12), after application of sec-
tion 267(c) (except for (c)(3)), or in sec-
tion 707(b)(1)(B).
(5) Substituted basis property. Substi-
tuted basis property is property described
in section 7701(a)(42).
(6) Taxpayer-initiated adjustment.A
taxpayer-initiated adjustment is a section
482 adjustment that is made by the tax-
payer pursuant to §1.482–1(a)(3).
(7) United States person.A United
States person is a person described in sec-
tion 7701(a)(30).
(j) Effective dates—(1) In general.
This section applies to transfers made on
or after January 1, 1998. However, for a
transfer made on or after January 1, 1998,
but before January 1, 1999, the filing re-
quirements of this section may be satis-
fied by—
(i) Filing a Form 8865 with the tax-
payer’s income tax return (including a
partnership return of income) for the first
taxable year beginning on or after January
1, 1999; or
(ii) Filing a Form 926 with the tax-
payer’s income tax return (including a
partnership return of income) for the tax-
able year in which the transfer occurred.
(2) Transfers made between August 5,
1997 and January 1, 1998. A United
States person that made a transfer of prop-
erty between August 5, 1997, and January
1, 1998, that is required to be reported
under section 6038B may satisfy its re-
porting requirement by reporting in accor-
dance with the provisions of this section
or in accordance with the provisions of
Notice 98–17 (1998–11 IRB 6)(see
§601.601(d)(2) of this chapter).
* * * * *
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (c) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section Current OMB
where identified andcontrol No.
described
* * * * *
1.6038B–1 . . . . . . . . . . . . . . 1545–1615
* * * * *
1.6038B–2 . . . . . . . . . . . . . . 1545–1615
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved January 29, 1999.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on Feb-
ruary 4, 1999, 8:45 a.m., and published in the issue
of the Federal Register for February 5, 1999, 64 F.R.
5713)
1999–8 I.R.B.55February 22, 1999

February 22, 1999561999–8 I.R.B.
Weighted Average Interest Rate
Update
Notice 99-11
Notice 88-73 provides guidelines for
determining the weighted average interest
rate and the resulting permissible range of
interest rates used to calculate current lia-
bility for the purpose of the full funding
limitation of § 412(c)(7) of the Internal
Revenue Code as amended by the Om-
nibus Budget Reconciliation Act of 1987
and as further amended by the Uruguay
Round Agreements Act, Pub. L. 103-465
(GATT).
The average yield on the 30-year Trea-
sury Constant Maturities for January 1999
is 5.16 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
Part III. Administrative, Procedural, and Miscellaneous
90% to 105%90% to 110%
WeightedPermissible Permissible
MonthYearAverageRangeRange
February19996.195.57 to 6.505.57 to 6.81
Drafting Information
The principal author of this notice is
Todd Newman of the Employee Plans Di-
vision. For further information regarding
this notice, call (202) 622-6076 between
2:30 and 3:30 p.m. Eastern time (not a
toll-free number). Mr. Newman’s number
is (202) 622-8458 (also not a toll-free
number).

1999–8 I.R.B.57February 22, 1999
Notice of Proposed Rulemaking
and Notice of Public Hearing
Consolidated Returns —
Consolidated Overall Foreign
Losses and Separate Limitation
Losses
REG–106902–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing; notice of proposed rulemaking by
cross-reference to temporary regulations;
and notice of public hearing
SUMMARY: This document contains
proposed consolidated return regulations
relating to the treatment of overall foreign
losses and separate limitation losses in the
computation of the foreign tax credit limi-
tation. The proposed rules are necessary
to modify existing guidance with respect
to overall foreign losses and to provide
guidance with respect to separate limita-
tion losses. These proposed regulations
affect consolidated groups that compute
the foreign tax credit limitation or that
dispose of property used in a foreign trade
or business. This document also provides
notice of a public hearing on these pro-
posed regulations.
DATES: Written comments must be re-
ceived by February 10, 1999. Outlines of
oral comments to be discussed at the pub-
lic hearing scheduled for 10 a.m. on Feb-
ruary 17, 1999, must be received by Janu-
ary 27, 1999.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–106902–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–106902–98),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS In-
ternet site at http://www.irs.ustreas.gov/
prod/tax_regs/comments. html. The pub-
lic hearing will be held in room 2615, In-
ternal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations in gen-
eral, Trina Dang of the Office of Associ-
ate Chief Counsel (International), (202)
622-3850; concerning submissions of
comments, the hearing, and/or to be
placed on the building access list to attend
the hearing, LaNita Van Dyke, (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Com-
ments on the collection of information
should be sent to the Office of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service,Attn: IRS
Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224. Comments on
the collection of information should be re-
ceived by March 1, 1999. Comments are
specifically requested concerning:
Whether the proposed collection of infor-
mation is necessary for the proper perfor-
mance of the Internal Revenue Service,
including whether the information will
have practical utility;
The accuracy of the estimated burden as-
sociated with the proposed collection of
information (see below);
How the quality, utility, and clarity of the
information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of service to provide information.
The collection of information in this
proposed regulation is in §1.1502–9(c)-
(2)(iv). This information is required to
help the Internal Revenue Service moni-
tor compliance with the provisions of the
proposed regulations and to ensure that
taxpayers use consistent asset valuations
in applying the proposed regulations.
This information will be used for tax ad-
ministration purposes. The collection of
information is mandatory. The likely re-
spondents are business or other for-profit
institutions.
Estimated total annual reporting burden:
3,000 hours.
Estimated average annual burden per re-
spondent: 1.5 hours.
Estimated number of respondents: 2,000.
Estimated annual frequency of responses:
on occasion.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained so
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains proposed con-
solidated return regulations under section
1502 of the Internal Revenue Code. The
regulations provide guidance concerning
the application of the overall foreign loss
(OFL) and separate limitation loss (SLL)
rules of section 904(f) in the context of a
consolidated group.
On January 12, 1998, the IRS and Trea-
sury published in the Federal Register
(T.D. 8751, 63 FR 1740, 1998–10 I.R.B.
23) temporary regulations modifying the
rules governing the absorption of certain
tax attributes, including OFL accounts
and foreign tax credit carryovers and car-
rybacks. The temporary regulations elim-
inated the limitation on OFL recapture
and foreign tax credit utilization with re-
spect to separate return limitation years
(SRLYs). As explained in the preamble to
Part IV. Items of General Interest

February 22, 1999581999–8 I.R.B.
those temporary regulations, one reason
for the repeal of the SRLY limitation for
the foreign tax credit attributes was the
conceptual and practical difficulty of
measuring a member’s contribution to a
group’s ability to absorb these attributes
in light of foreign tax credit provisions
that allocate interest expense and certain
other expenses (and intercompany interest
income) of a member based upon the en-
tire group’s assets or activities. The pre-
amble to those regulations noted that
these expense allocation provisions also
create similar problems with respect to
the notional account method of apportion-
ing OFL accounts to a member ceasing to
be a member of a group and stated that the
IRS and Treasury expected to modify
these rules in the near future.
Overview
The proposed regulations modify the
existing regulations under §1.1502–9,
which were promulgated in 1987 (the
1987 regulations). The 1987 regulations
are proposed to be amended in three
major respects: the notional account
method for apportioning OFL accounts to
a departing member is replaced by an
asset-based allocation method, the inter-
action between the intercompany transac-
tion rules and the disposition rules of sec-
tion 904(f)(3) and (5)(F) is simplified and
refined, and guidance is provided con-
cerning the computation of a group’s
SLLs (whereas the 1987 regulations ad-
dressed only OFLs).
The 1987 regulations allocated an OFL
account to a departing member based
upon the member’s “notional” OFL ac-
count. A separate notional account was
established for each member of a group
that contributed to a consolidated OFL ac-
count. The accounts were adjusted annu-
ally. A member was considered to have
contributed to a group’s OFL account if
the member had an overall foreign loss
(deductions allocated against foreign-
source income exceeded foreign-source
gross income) in a year in which the
group added to its consolidated OFL ac-
count.
At the time the 1987 regulations were
being drafted, however, Congress sub-
stantially changed the rules for allocating
interest expense in the Tax Reform Act of
1986. Congress believed that corpora-
tions were borrowing in ways designed to
inappropriately minimize the amount of
interest expense allocated against foreign-
source income, thus inflating the amount
of foreign-source income that could be
sheltered from U.S. tax by foreign tax
credits. In the case of an affiliated group,
Congress was concerned that interest ex-
pense allocation could be manipulated by
placing the borrowing function in group
members with no foreign assets, while di-
verting available equity in the group to
members with substantial foreign assets.
Congress therefore enacted section
864(e), which requires an affiliated group
to allocate interest expense of each mem-
ber as if all such members were a single
corporation. Under this rule, although the
borrowing corporation incurs the interest
expense, that expense is allocated among
U.S. and foreign income based upon the
assets of the group as a whole. (Group-
based expense allocation is also required
for research and experimental expendi-
tures under section 864(f) and expenses
not directly allocable to specific income
under section 864(e)(6).)
Due in large measure to these group-
based expense allocation provisions, the
notional account method can result in a
member taking from a group an OFL or
SLL account that is unrelated to either the
member’s activities or future income. For
example, assume that P holds all the stock
of S and S holds all the stock of R. P, S,
and R file a consolidated return. P has no
assets other than the stock of S. S’s oper-
ations are foreign and R’s operations are
entirely domestic. S’s assets have a tax
book value of $600 and R’s assets have a
tax book value of $400. S is entirely eq-
uity financed, but R borrows funds from
an unrelated lender. S earns $100 for-
eign-source income and incurs $100 of
foreign-allocated expense. R earns $200
U.S.-source income and incurs $100 of
interest expense. Under section 864(e)(1)
and §1.861–11T, the $100 of interest ex-
pense is allocated to R’s U.S. and foreign-
source gross income based upon the as-
sets of the group as a whole. Thus R, with
no foreign operations, is treated as having
a $60 foreign loss (no foreign income and
$60 foreign expense), but S, the only
member with foreign operations, does not
have a foreign loss. R’s notional OFL ac-
count would thus be $60 (100 percent of
the consolidated OFL account) and, if R
left the group, R would take the entire
consolidated OFL account with it. The
group, however, would retain the foreign
assets and the OFL account might never
be recaptured.
As described in more detail below, the
proposed regulations do not apply the no-
tional account approach, but instead ap-
portion accounts to a departing member
based upon the member’s share of the
group’s foreign assets that produce for-
eign-source income that would be subject
to recapture. The new approach does not
attempt to measure a member’s “contribu-
tion” to the group’s consolidated account;
rather, the asset approach associates an
OFL or SLL account with a member’s for-
eign assets that produce income subject to
recapture and measures each member’s
share of the group OFL or SLL account
based upon the member’s share of these
assets. This approach is more in keeping
with the interest allocation provisions for
affiliated groups enacted in 1986.
The proposed regulations also modify
the interaction between section 904(f) and
the intercompany transaction rules of
§1.1502–13. Under the 1987 regulations,
a consolidated OFL account could trigger
gain recognition with respect to an other-
wise tax-free intercompany transaction
(such as a member’s contribution under
section 351 to another member of the
group) that is a disposition subject to sec-
tion 904(f)(3) or (5)(F). This gain recog-
nition could occur even though the gain
would not be taken into account currently
under §1.1502–13. Because the gain is
not taken into account, however, the con-
solidated OFL account is not reduced.
Since the consolidated OFL account is not
reduced, it can continue to recharacterize
foreign-source income or trigger gain
recognition with respect to subsequent
dispositions subject to section 904(f)(3)
or (5)(F). This regime thus has the poten-
tial to multiply the effects of a consoli-
dated OFL account. This rule was neces-
sary under the notional account system of
apportioning OFL accounts to a departing
member because otherwise a member
with a notional OFL account could con-
tribute appreciated foreign assets to a new
subsidiary, and the new subsidiary could
then leave the group unencumbered by
the OFL account, contrary to the purpose
of section 904(f)(3). As described in
more detail below, the proposed regula-

1999–8 I.R.B.59February 22, 1999
tions ease the section 904(f)(3) and (5)(F)
disposition rules in the case of intercom-
pany transactions.
Finally, the proposed regulations pro-
vide computational rules and nomenclature
for SLLs as well as OFLs. Because the
regulations issued in 1987 were actually
drafted prior to the enactment of the SLL
rules in 1986, the 1987 regulations provide
rules only for OFLs, although rules for
SLLs could be derived by analogy.
Explanation of Provisions
The proposed regulations do not pro-
vide comprehensive guidance under sec-
tion 904(f) and address only particular
section 904(f) issues that arise in the con-
text of a consolidated group. The pro-
posed regulations must be read in con-
junction with general guidance under
section 904(f), such as Notice 89–3
(1989–1 C.B. 623).
Proposed §1.1502–9(b)(1) through (4)
provides computational rules for consoli-
dated OFL and SLL accounts. Generally,
a group applies section 904(f) on a group-
wide basis. Thus, it nets together all
members’ income and losses from the
same separate limitation income category
(or basket) to determine its consolidated
separate limitation income or loss for the
basket. Pursuant to section 904(f)(5), the
group then nets any consolidated separate
limitation loss for a basket (a loss basket)
against consolidated separate limitation
income for all other baskets (the income
baskets) on a proportionate basis. Such
netting creates a consolidated SLL ac-
count (a CSLL account) for the loss bas-
ket with respect to one or more income
baskets. The group then nets any remain-
ing consolidated separate limitation loss
for a loss basket against its U.S.-source
income. Such netting creates a consoli-
dated OFL account (a COFL account) for
the loss basket. The group recaptures a
COFL or CSLL account as required by
section 904(f).
Proposed §1.1502–9(b)(5) addresses
the interaction between section 904(f) and
the intercompany transaction rules. In the
case of an intercompany transaction in
which gain is recognized but not currently
taken into account, the gain is treated as
subject to section 904(f)(3) or (5)(F) only
when taken into account under §1.1502–
13, to the extent of the COFL or CSLL ac-
count existing at that time. In the case of
an intercompany transaction in which
gain is not recognized (such as a section
351 contribution), section 904(f) will not
trigger gain recognition.
Proposed §1.1502–9(c) provides rules
for members becoming or ceasing to be
members of a group. Consistent with the
temporary regulations issued in January
1998, and modified in March 1998 and in
temporary regulations T.D. 8800, 1999–4
I.R.B. 20, a member that enters a group
with an OFL or SLL account adds this ac-
count to the consolidated account, with-
out any SRLY limitation. A departing
member takes a portion of the group’s
COFL and CSLL accounts based upon the
member’s share of the group’s assets that
generate income subject to recapture (i.e.,
assets that generate income in the same
basket as the loss basket). The proposed
regulations rely on the characterization
principles of §§1.861–9T(g)(3) and
1.861–12T to identify the member’s share
of assets that generate foreign-source in-
come subject to recapture in each basket.
The value of the foreign assets is deter-
mined under the asset valuation rules of
§1.861– 9T(g)(1) and (2) using either tax
book value or fair market value under the
method chosen by the group for purposes
of interest apportionment as provided in
§1.861–9T(g)(1)(ii). Although actual
market values generally provide a better
means of apportioning accounts than tax
book values (since market values more
accurately represent the projected future
earnings of an asset), apportionment
based upon tax book value is permitted in
the interest of administrative conve-
nience. For groups using tax book value,
however, an upper limitation is placed
upon a member’s share of the consoli-
dated accounts to prevent extreme situa-
tions in which disparities between tax
book value and fair market value could
result in the removal of excessive OFL or
SLL accounts from the group. The pro-
posed regulations provide an anti-abuse
rule that is designed to prevent taxpayers
from manipulating the COFL and CSLL
account apportionment rules to achieve
results inconsistent with the purpose of
the OFL and SLL rules.
Proposed §1.1502–9(c)(2)(i) provides
that a group apportions COFL and CSLL
accounts to a departing member only after
the group makes the annual additions or
reductions to the accounts to reflect cur-
rent-year foreign-source income or loss.
To the extent this rule conflicts with the
ordering rules of §1.904(f)–1(e)(1), the
proposed rule, when finalized, is intended
to supersede the existing regulations.
Proposed Effective Dates
These regulations are proposed to
apply to consolidated return years for
which a return is due after the date final
regulations are published in the Federal
Register.However, §1.1502–9(b)(5) (in-
tercompany transactions) is not applicable
for intercompany transactions that occur
before January 28, 1999. Also, §1.1502–
9(c)(2) (apportionment of consolidated
account to departing member) is not ap-
plicable for members ceasing to be mem-
bers of a group before January 28, 1999.
Election to Defer Repeal of SRLY
Limitation
Temporary regulations T.D. 8800 per-
mit consolidated groups to elect to con-
tinue to apply the SRLY limitation for
overall foreign loss accounts for consoli-
dated years beginning before January 1,
1998, as announced in Notice 98–40
(1998–35 I.R.B. 7). The text of those
temporary regulations also serves as the
text of these proposed regulations. The
preamble to the temporary regulations ex-
plains the temporary regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory impact analysis is not required. It is
hereby certified that these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact that
these regulations principally affect corpo-
rations filing consolidated federal income
tax returns that have overall foreign losses
or separate limitation losses. Available
data indicates that many consolidated re-
turn filers are large companies (not small
businesses). In addition, the data indi-
cates that an insubstantial number of con-
solidated return filers that are smaller
companies have overall foreign losses or
separate limitation losses. Therefore, a
Regulatory Flexibility Analysis under the

February 22, 1999601999–8 I.R.B.
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small businesses.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments that are submitted timely to the IRS
(a signed original and eight (8) copies).
In particular, the IRS and Treasury re-
quest comments on the clarity of the pro-
posed rules and how they may be made
easier to understand. All comments will
be available for public inspection and
copying.
A public hearing has been scheduled for
February 17, 1999, beginning at 10 a.m. in
room 2615 of the Internal Revenue Build-
ing, 1111 Constitution Avenue, NW,
Washington, DC. Due to building security
procedures, visitors must enter at the 10th
Street entrance, located between Constitu-
tion and Pennsylvania Avenues, NW. In
addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate en-
trance area more than 15 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION CON-
TACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written comments and an outline
of the topics to be discussed and the time
to be devoted to each topic (signed origi-
nal and eight (8) copies) by January 27,
1999. A period of 10 minutes will be al-
lotted to each person for making com-
ments. An agenda showing the schedul-
ing of the speakers will be prepared after
the deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these regula-
tions are Seth B. Goldstein and Trina
Dang, of the Office of the Associate Chief
Counsel (International), IRS. However,
other personnel from the IRS and Trea-
sury Department participated in their de-
velopment.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR Part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-9 also issued under 26
U.S.C. 1502. * * *
Section 1.1502-9A also issued under 26
U.S.C. 1502. * * *
Par. 2. Section 1.1502–3, as proposed
to be amended at 63 F.R. 12717, March
16, 1998, is further amended by removing
the last sentence of paragraph (c)(4) and
adding two sentences in its place to read
as follows:
§1.1502–3 Consolidated investment
credit.
* * * * *
(c) * * *
(4) * * * [The last two sentences of pro-
posed paragraph (c)(4) is the same as the
last two sentences of §1.1502–3T(c)(4)
published in T.D. 8800.]
* * * * *
Par. 3. Immediately following
§1.1504–4 an undesignated center head-
ing is added to read as follows:
REGULATIONS APPLICABLE FOR
TAX YEARS FOR WHICH A RE-
TURN IS DUE ON OR BEFORE THE
DATE FINAL REGULATIONS ARE
PUBLISHED IN THE FEDERAL
REGISTER
Par. 4. Section 1.1502–9 is redesig-
nated as §1.1502–9A and added under the
new undesignated center heading.
Par. 5. Newly designated §1.1502–9A
is amended by:
1. Revising the section heading.
2. Redesignating the heading and text
of paragraph (a) as the heading and text of
paragraph (a)(2).
3. Adding a new heading to paragraph
(a), and new paragraphs (a)(1), (b)(1)(v)
and (b)(1)(vi).
The revisions and additions read as fol-
lows:
§1.1502–9A Application of overall
foreign loss recapture rules to
corporations filing consolidated returns
due on or before the date final
regulations are published in the Federal
Register.
(a) Scope—(1) Effective date.This
section applies only to consolidated return
years for which the due date of the in-
come tax return (without extensions) is on
or before the date final regulations are
published in the Federal Register.
(2) In general.* * *
(b) * * *
(1) * * *
(v) [The text of this proposed para-
graph (b)(1)(v) is the same as the text of
§1.1502–9T(b)(1)(v) published in T.D.
8800.]
(vi) [The text of this proposed para-
graph (b)(1)(vi) is the same as the text of
§1.1502–9T(b)(1)(vi) published in T.D.
8800.]
* * * * *
Par. 6. New §1.1502-9 is added to read
as follows:
§1.1502–9 Consolidated overall foreign
losses and separate limitation losses.
(a) In general. This section provides
rules for applying section 904(f) (includ-
ing its definitions and nomenclature) to a
group and its members. Generally, sec-
tion 904(f) concerns rules relating to
overall foreign losses (OFLs) and sepa-
rate limitation losses (SLLs) and the con-
sequences of such losses. As provided in
section 904(f)(5), losses are computed
separately in each category of income de-
scribed in section 904(d)(1) (basket).
Paragraph (b) of this section defines terms
and provides computational and account-
ing rules, including rules regarding recap-
ture. Paragraph (c) of this section pro-
vides rules that apply to OFLs and SLLs
when a member becomes or ceases to be a
member of a group. Paragraph (d) of this
section provides a predecessor and suc-
cessor rule. Paragraph (e) of this section
provides effective dates.

1999–8 I.R.B.61February 22, 1999
(b) Consolidated application of section
904(f).A group applies section 904(f) for
a consolidated return year in accordance
with that section, subject to the following
rules:
(1) Computation of CSLI or CSLL and
consolidated U.S. source income or loss.
The group computes its consolidated sep-
arate limitation income (CSLI) or consoli-
dated separate limitation loss (CSLL) for
each basket under the principles of
§1.1502–11 by aggregating each mem-
ber’s foreign-source taxable income or
loss in such basket computed under the
principles of §1.1502–12, and taking into
account the foreign portion of the consoli-
dated items described in §1.1502–
11(a)(2) through (8) for such basket. The
group computes its consolidated U.S.-
source taxable income or loss under simi-
lar principles.
(2) Netting CSLLs, CSLIs, and consoli-
dated U.S. source taxable income or loss.
The group applies section 904(f)(5) to de-
termine the extent to which a CSLL for a
basket reduces CSLI for another basket or
consolidated U.S.-source taxable income.
(3) CSLL and COFL accounts. To the
extent provided in section 904(f), the
amount by which a CSLL for a basket (the
loss basket) reduces CSLI for another bas-
ket (the income basket) shall result in the
creation of (or addition to) a CSLL ac-
count for the loss basket with respect to
the income basket. Likewise, the amount
by which a CSLL for a loss basket reduces
consolidated U.S.-source income will cre-
ate (or add to) a consolidated overall for-
eign loss account (a COFL account).
(4) Recapture of COFL and CSLL ac-
counts.In the case of a COFL account for
a loss basket, section 904(f)(1) and (3)
recharacterizes some or all of the foreign-
source income in the loss basket as U.S.-
source income. In the case of a CSLL ac-
count for a loss basket with respect to an
income basket, section 904(f)(5)(C) and
(F) recharacterizes some or all of the for-
eign- source income in the loss basket as
foreign-source income in the income bas-
ket. The COFL account or CSLL account
is reduced to the extent amounts are
recharacterized with respect to such ac-
count.
(5) Intercompany transactions—(i)
Nonapplication of section 904(f) disposi-
tion rules.Neither section 904(f)(3) (in
the case of a COFL account) nor (5)(F)
(in the case of a CSLL account) applies at
the time of a disposition that is an inter-
company transaction to which §1.1502–
13 applies. Instead, section 904(f)(3) and
(5)(F) applies only at such time and only
to the extent that the group is required
under §1.1502–13 (without regard to sec-
tion 904(f)(3) and (5)(F)) to take into ac-
count any intercompany items resulting
from the disposition, based on the COFL
or CSLL account existing at the end of the
consolidated return year during which the
group takes the intercompany items into
account.
(ii) Example.Paragraph (b)(5)(i) of
this section is illustrated by the following
examples. The identity of the parties and
the basic assumptions set forth in
§1.1502–13(c)(7)(i) apply to the exam-
ples. Except as otherwise stated, assume
further that the consolidated group recog-
nizes no foreign-source income other than
as a result of the transactions described.
The examples are as follows:
Example 1.(i) On June 10, Year 1, S transfers
nondepreciable property with a basis of $100 and a
fair market value of $250 to B in a transaction to
which section 351 applies. The property was pre-
dominantly used without the United States in a trade
or business, within the meaning of section 904(f)(3).
B continues to use the property without the United
States. The group has a COFL account in the rele-
vant loss basket of $120 as of December 31, Year 1.
(ii) Because the contribution from S to B is an in-
tercompany transaction, section 904(f)(3) does not
apply to result in any gain recognition in Year 1. See
paragraph (b)(5)(i) of this section.
(iii) On January 10, Year 4, B ceases to be a
member of the group. Because S did not recognize
gain in Year 1 under section 351, no gain is taken
into account in Year 4 under §1.1502-13(d). Thus,
no portion of the group’s COFL account is recap-
tured in Year 4. For rules requiring apportionment
of a portion of the COFL account to B, see para-
graph (c)(2) of this section.
Example 2.(i) The facts are the same as in para-
graph (i) of Example 1.On January 10, Year 4, B
sells the property to X for $300. As of December
31, Year 4, the group’s COFL account is $40. (The
COFL account was reduced between Year 1 and
Year 4 due to unrelated foreign-source income taken
into account by the group.)
(ii) B takes into account gain of $200 in Year 4.
The $40 COFL account in Year 4 recharacterizes
$40 of the gain as U.S. source. See section
904(f)(3).
Example 3. (i) On June 10, Year 1, S sells nonde-
preciable property with a basis of $100 and a fair
market value of $250 to B for $250 cash. The prop-
erty was predominantly used without the United
States in a trade or business, within the meaning of
section 904(f)(3). The group has a COFL account in
the relevant loss basket of $120 as of December 31,
Year 1. B predominately uses the property in a trade
or business without the United States.
(ii) Because the sale is an intercompany transac-
tion, section 904(f)(3) does not require the group to
take into account any gain in Year 1. Thus, under
paragraph (b)(5)(i) of this section, the COFL ac-
count is not reduced in Year 1.
(iii) On January 10, Year 4, B sells the property to
X for $300. As of December 31, Year 4, the group’s
COFL account is $60. (The COFL account was re-
duced between Year 1 and Year 4 due to unrelated
foreign-source income taken into account by the
group.)
(iv) In Year 4, S’s $150 intercompany gain and
B’s $50 corresponding gain are taken into account to
produce the same effect on consolidated taxable in-
come as if S and B were divisions of a single corpo-
ration. See §1.1502–13(c). All of B’s $50 corre-
sponding gain is recharacterized under section
904(f)(3). If S and B were divisions of a single cor-
poration and the intercompany sale were a transfer
between the divisions, B would succeed to S’s $100
basis in the property and would have $200 of gain
($60 of which would be recharacterized under sec-
tion 904(f)(3)), instead of a $50 gain. Consequently,
S’s $150 intercompany gain and B’s $50 corre-
sponding gain are taken into account, and $10 of S’s
gain is recharacterized under section 904(f)(3) as
U.S. source to reflect the $10 difference between B’s
$50 recharacterized gain and the $60 recomputed
gain that would have been recharacterized.
(c) Becoming or ceasing to be a mem-
ber of a group—(1) Adding separate ac-
counts on becoming a member.At the
time that a corporation becomes a mem-
ber of a group (a new member), the group
adds to the balance of its COFL or CSLL
account the balance of the new member’s
corresponding OFL account or SLL ac-
count. A new member’s OFL account
corresponds to a COFL account if the ac-
count is for the same loss basket. A new
member’s SLL account corresponds to a
CSLL account if the account is for the
same loss basket and with respect to the
same income basket. If the group does
not have a COFL or CSLL account corre-
sponding to the new member’s account, it
creates a COFL or CSLL account with a
balance equal to the balance of the mem-
ber’s account.
(2) Apportionment of consolidated ac-
count to departing member—(i) In gen-
eral.A group apportions to a member
that ceases to be a member (a departing
member) a portion of each COFL and
CSLL account as of the end of the year
during which the member ceases to be a
member and after the group makes the ad-
ditions or reductions to such account re-
quired under paragraphs (b)(3), (b)(4) and

February 22, 1999621999–8 I.R.B.
(c)(1) of this section (other than an addi-
tion under paragraph (c)(1) of this section
attributable to a member becoming a
member after the departing member
ceases to be a member). The group com-
putes such portion under paragraph
(c)(2)(ii) of this section, as limited by
paragraph (c)(2)(iii) of this section. The
departing member carries such portion to
its first separate return year after it ceases
to be a member. Also, the group reduces
each account by such portion and carries
such reduced amount to its first consoli-
dated return year beginning after the year
in which the member ceases to be a mem-
ber. If two or more members cease to be
members in the same year, the group
computes the portion allocable to each
such member (and reduces its accounts by
such portion) in the order that the mem-
bers cease to be members.
(ii) Departing member’s portion of
group’s account.A departing member’s
portion of a group’s COFL or CSLL ac-
count for a loss basket is computed based
upon the member’s share of the group’s
assets that generate income subject to re-
capture at the time that the member ceases
to be a member. Under the characteriza-
tion principles of §§1.861–9T(g)(3) and
1.861–12T, the group identifies the assets
of the departing member and the remain-
ing members that generate foreign-source
income (foreign assets) in each basket.
The assets are characterized based upon
the income that the assets are reasonably
expected to generate after the member
ceases to be a member. The member’s
portion of a group’s COFL or CSLL ac-
count for a loss basket is the group’s
COFL or CSLL account, respectively,
multiplied by a fraction, the numerator of
which is the value of the member’s for-
eign assets for the loss basket and the de-
nominator of which is the value of the for-
eign assets of the group (including the
departing member) for the loss basket.
The value of the foreign assets is deter-
mined under the asset valuation rules of
§1.861-9T(g)(1) and (2) using either tax
book value or fair market value under the
method chosen by the group for purposes
of interest apportionment as provided in
§1.861–9T(g)(1)(ii). For purposes of this
paragraph (c)(2)(ii), §1.861–9T(g)(2)(iv)
(assets in intercompany transactions)
shall apply, but §1.861–9T(g)(2)(iii) (ad-
justments for directly allocated interest)
shall not apply. If the group uses the tax
book value method, the member’s por-
tions of COFL and CSLL accounts are
limited by paragraph (c)(2)(iii) of this
section. The assets should be valued at
the time the member ceases to be a mem-
ber, but values on other dates may be used
unless this creates substantial distortions.
For example, if a member ceases to be a
member in the middle of the group’s con-
solidated return year, an average of the
values of assets at the beginning and end
of the year (as provided in §1.861–
9T(g)(2)) may be used or, if a member
ceases to be a member in the early part of
the group’s consolidated return year, val-
ues at the beginning of the year may be
used, unless this creates substantial dis-
tortions.
(iii) Limitation on member’s portion for
groups using tax book value method. If a
group uses the tax book value method of
valuing assets for purposes of paragraph
(c)(2)(ii) of this section and the aggregate
of a member’s portions of COFL and
CSLL accounts for a loss basket (with re-
spect to one or more income baskets) de-
termined under paragraph (c)(2)(ii) of this
section exceeds 150 percent of the actual
fair market value of the member’s foreign
assets in the loss basket, the member’s
portion of the COFL or CSLL accounts
for the loss basket shall be reduced (pro-
portionately, in the case of multiple ac-
counts) by such excess. This rule does
not apply if the departing member and all
other members that cease to be members
as part of the same transaction own all (or
substantially all) the foreign assets in the
loss basket.
(iv) Determination of values of foreign
assets binding on departing member. The
group’s determination of the value of the
member’s and the group’s foreign assets
for a loss basket is binding on the mem-
ber, unless the District Director concludes
that the determination is not appropriate.
The common parent of the group must at-
tach a statement to the return for the tax-
able year that the departing member
ceases to be a member of the group that
sets forth the name and taxpayer identifi-
cation number of the departing member,
the amount of each COFL or CSLL for
each loss basket that is apportioned to the
departing member under this paragraph
(c)(2), the method used to determine the
value of the member’s and the group’s
foreign assets in each such loss basket,
and the value of the member’s and the
group’s foreign assets in each such loss
basket. The common parent must also
furnish a copy of the statement to the de-
parting member.
(v) Anti-abuse rule.If a corporation
becomes a member and ceases to be a
member, and a principal purpose of the
corporation becoming and ceasing to be a
member is to transfer the corporation’s
OFL account or SLL account to the group
or to transfer the group’s COFL or CSLL
account to the corporation, appropriate
adjustments will be made to eliminate the
benefit of such a transfer of accounts.
Similarly, if any member acquires assets
or disposes of assets (including a transfer
of assets between members of the group
and the departing member) with a princi-
pal purpose of affecting the apportion-
ment of accounts under paragraph
(c)(2)(i) of this section, appropriate ad-
justments will be made to eliminate the
benefit of such acquisition or disposition.
(vi) Examples.The following exam-
ples illustrate this paragraph (c):
Example 1. (i) On November 6, Year 1, S, a
member of the P group, a consolidated group with a
calendar consolidated return year, ceases to be a
member of the group. On December 31, Year 1, the
P group has a $40 COFL account for the general
limitation basket, a $20 CSLL account for the gen-
eral limitation basket (i.e., the loss basket) with re-
spect to the passive basket (i.e., the income basket),
and a $10 CSLL account for the shipping income
basket (i.e., the loss basket) with respect to the pas-
sive basket, (i.e., the income basket). No member of
the group has foreign-source income or loss in Year
1. The group apportions its interest expense accord-
ing to the tax book value method.
(ii) On November 6, Year 1, the group identifies
S’s assets and its own assets (including S’s assets)
expected to produce foreign general limitation in-
come. Use of end-of-the-year values will not create
substantial distortions in determining the relative
values of S’s and the group’s relevant assets on No-
vember 6, Year 1. The group determines that S’s rel-
evant assets have a tax book value of $2,000 and a
fair market value of $2,200. Also, the group’s rele-
vant assets (including S’s assets) have a tax book
value of $8,000. On November 6, Year 1, S has no
assets expected to produce foreign shipping income.
(iii) Under paragraph (c)(2)(ii) of this section, S
takes a $10 COFL account for the general limitation
basket ($40 3$2000/$8000) and a $5 CSLL ac-
count for the general limitation basket with respect
to the passive basket ($20 3$2000/$8000). S does
not take any portion of the shipping income basket
CSLL account. The limitation described in para-
graph (c)(2)(iii) of this section does not apply be-
cause the aggregate of the COFL and CSLL ac-
counts for the general limitation basket that are

apportioned to S ($15) is less than 150 percent of the
actual fair market value of S’s general limitation for-
eign assets ($2,200 3150%).
Example 2.(i) Assume the same facts as in Ex-
ample 1,except that the fair market value of S’s gen-
eral limitation foreign assets is $4 as of November 6,
Year 1.
(ii) Under paragraph (c)(2)(iii) of this section, S’s
COFL and CSLL accounts for the general limitation
basket must be reduced by $9, which is the excess of
$15 (the aggregate amount of the accounts appor-
tioned under paragraph (c)(2)(ii) of this section)
over $6 (150 percent of the $4 actual fair market
value of S’s general limitation foreign assets). S
thus takes a $4 COFL account for the general limi-
tation basket ($10 – ($9 3$10/$15)) and a $2 CSLL
account for the general limitation basket with re-
spect to the passive basket ($5 – ($9 3$5/$15)).
(d) Predecessor and successor.A refer-
ence to a member includes, as the context
may require, a reference to a predecessor
or successor of the member. See
§1.1502–1(f).
(e) Effective dates.This section applies
to consolidated return years for which the
due date of the income tax return (without
extensions) is after the date final regula-
tions are published in the Federal Regis-
ter. However, paragraph (b)(5) of this
section (intercompany transactions) is not
applicable for intercompany transactions
that occur before January 28, 1999. A
group applies the principles of §1.1502–
9A(e) to a disposition which is an inter-
company transaction to which §1.1502–
13 applies and that occurs before January
28, 1999. Also, paragraph (c)(2) of this
section (apportionment of consolidated
account to departing member) is not ap-
plicable for members ceasing to be mem-
bers of a group before January 28, 1999.
A group applies the principles of
§1.1502–9A (rather than paragraph (c)(2)
of this section) to determine the amount
of a consolidated account that is appor-
tioned to a member that ceases to be a
member of the group before January 28,
1999 (and reduces its consolidated ac-
count by such apportioned amount) be-
fore applying paragraph (c)(2) of this sec-
tion to members that cease to be members
on or after January 28, 1999.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on De-
cember 28, 1998, 8:45 a.m., and published in the
issue of the Federal Register for December 29, 1998,
63 F.R. 71609)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Continuation Coverage
Requirements Applicable to
Group Health Plans
REG–121865–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations that provide guid-
ance under section 4980B of the Internal
Revenue Code relating to the COBRA
continuation coverage requirements ap-
plicable to group health plans. The pro-
posed regulations in this document sup-
plement final regulations being published
in T.D. 8812, page 19 of this Bulletin.
The regulations will generally affect
sponsors of and participants in group
health plans, and they provide plan spon-
sors and plan administrators with guid-
ance necessary to comply with the law.
DATES: Written or electronic comments
and outlines of topics to be discussed at
the public hearing scheduled for June 8,
1999 at 10 a.m. must be received by May
14, 1999.
ADDRESSES: Send Submissions to:
CC:DOM:CORP:R (REG–121865–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–121865–98), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
The public hearing scheduled for June 8,
1999 will be held in room 2615 of the In-
ternal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Yurlinda Mathis at 202-622-4695; con-
cerning submissions of comments, the
hearing, or to be placed on the building
access list to attend the hearing, LaNita
Van Dyke at 202-622-7190 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
The Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA)
amended the Internal Revenue Code
(Code) to add health care continuation
coverage requirements. These provisions,
now set forth in section 4980B,
1
generally
apply to a group health plan maintained
by an employer or employee organization,
with certain exceptions, and require such
a plan to offer each qualified beneficiary
who would otherwise lose coverage as a
result of a qualifying event an opportunity
to elect, within the applicable election pe-
riod, COBRA continuation coverage. The
COBRA continuation coverage require-
ments were amended on various occa-
sions,
2
most recently under the Health In-
surance Portability and Accountability
Act of 1996 (HIPAA).
Proposed regulations providing guid-
ance under the continuation coverage re-
quirements as originally enacted by
COBRA, and as amended by the Tax Re-
form Act of 1986, were published as pro-
posed Treasury Regulation §1.162–26 in
the Federal Registerof June 15, 1987
1999–8 I.R.B.63February 22, 1999
1
The COBRA continuation coverage require-
ments were initially set forth in section 162(k), but
were moved to section 4980B by the Technical and
Miscellaneous Revenue Act of 1988 (TAMRA).
TAMRA changed the sanction for failure to comply
with the continuation coverage requirements of the
Internal Revenue Code from disallowance of certain
employer deductions under section 162 (and denial
of the income exclusion under section 106(a) to cer-
tain highly compensated employees of the em-
ployer) to an excise tax under section 4980B.
2
Changes affecting the COBRA continuation
coverage provisions were made under the Omnibus
Budget Reconciliation Act of 1986, the Tax Reform
Act of 1986, the Technical and Miscellaneous Rev-
enue Act of 1988, the Omnibus Budget Reconcilia-
tion Act of 1989, the Omnibus Budget Reconcilia-
tion Act of 1990, the Small Business Job Protection
Act of 1996, and the Health Insurance Portability
and Accountability Act of 1996. The statutory con-
tinuation coverage requirements have also been af-
fected by an amendment made to the definition of
group health plan in section 5000(b)(1) by the Om-
nibus Budget Reconciliation Act of 1993; that defin-
ition is incorporated by reference in section
4980B(g)(2).

(52 F.R. 22716). Supplemental proposed
regulations were published as proposed
Treasury Regulation §54.4980B–1 in the
Federal Registerof January 7, 1998 (63
F.R. 708). Final regulations are being
published in T.D. 8812.
The new set of proposed regulations
being published in this notice of proposed
rulemaking addresses how the COBRA
continuation coverage requirements apply
in business reorganizations. Also pro-
posed are rules relating to the interaction
of the COBRA continuation coverage re-
quirements and the Family and Medical
Leave Act of 1993, which were previ-
ously published as Notice 94–103 (1994–
2 C.B. 569), and certain other issues.
These provisions in the new set of pro-
posed regulations are summarized in the
explanation below. For a summary of the
new proposed regulations integrated with
a summary of the final regulations, see
the “Explanation of Provisions” section of
the preamble to the final regulations pub-
lished in T.D. 8812.
Explanation of Provisions
Plans That Must Comply
The new proposed regulations would
make a number of changes to the section
in the final regulations that addresses
which plans must comply with the
COBRA continuation coverage require-
ments. The principal changes being pro-
posed are to add rules simplifying the
determination of whether the small-
employer plan exception applies, giving
employers and employee organizations
broad discretion to determine the number
of group health plans that they maintain,
and providing an exception for certain
health flexible spending accounts.
In determining whether a plan is eligi-
ble for the small-employer plan excep-
tion, part-time employees, as well as full-
time employees, must be taken into
account. Several commenters on the
1987 proposed regulations requested clar-
ification of how to count part-time em-
ployees for the small-employer plan ex-
ception, and the new proposed regulations
provide guidance on this issue. Under the
new proposed regulations, instead of each
part-time employee counting as a full em-
ployee, each part-time employee counts
as a fraction of an employee, with the
fraction equal to the number of hours that
the part-time employee works for the em-
ployer divided by the number of hours
that an employee must work in order to be
considered a full-time employee. The
number of hours that must be worked to
be considered a full-time employee is de-
termined in a manner consistent with the
employer’s general employment prac-
tices, although for this purpose not more
than eight hours a day or 40 hours a week
may be used. An employer may count
employees for each typical business day
or may count employees for a pay period
and attribute the total number of employ-
ees for that pay period to each typical
business day that falls within the pay pe-
riod. The employer must use the same
method for all employees and for the en-
tire year for which the small-employer
plan determination is made.
The new proposed regulations provide
guidance, for purposes of the COBRA
continuation coverage requirements, on
how to determine the number of group
health plans that an employer or em-
ployee organization maintains. Under
these rules, the employer or employee or-
ganization is generally permitted to estab-
lish the separate identity and number of
group health plans under which it pro-
vides health care benefits to employees.
Thus, if an employer or employee organi-
zation provides a variety of health care
benefits to employees, it generally may
aggregate the benefits into a single group
health plan or disaggregate benefits into
separate group health plans. The status of
health care benefits as part of a single
group health plan or as separate plans is
determined by reference to the instru-
ments governing those arrangements. If
it is not clear from the instruments gov-
erning an arrangement or arrangements to
provide health care benefits whether the
benefits are provided under one plan or
more than one plan, or if there are no in-
struments governing the arrangement or
arrangements, all such health care bene-
fits (other than those for qualified long-
term care services) provided by a single
entity (determined without regard to the
controlled group rules) constitute a single
group health plan.
Under the new proposed regulations, a
multiemployer plan and a plan other than
a multiemployer plan are always separate
plans. In addition, any treatment of health
care benefits as constituting separate
group health plans will be disregarded if a
principal purpose of the treatment is to
evade any requirement of law. Of course,
an employer’s flexibility to treat benefits
as part of separate plans may be limited
by the operation of other laws, such as the
prohibition in section 9802 on condition-
ing eligibility to enroll in a group health
plan on the basis of any health factor of an
individual.
Many commenters on the 1987 pro-
posed regulations requested clarification
of the application of COBRA to health
care benefits provided under flexible
spending arrangements (health FSAs).
Some commentators argued that health
FSAs should not be subject to COBRA.
Health FSAs satisfy the definition of
group health plan in section 5000(b)(1)
and, accordingly, are generally subject to
the COBRA continuation coverage re-
quirements. However, COBRA is in-
tended to ensure that a qualified benefi-
ciary has guaranteed access to coverage
under a group health plan and that the cost
of that coverage is no greater than 102
percent of the applicable premium.
The IRS and Treasury believe that the
purposes of COBRA are not furthered by
requiring an employer to offer COBRA
for a plan year if the amount that the em-
ployer could require to be paid for the
COBRA coverage for the plan year would
exceed the maximum benefit that the
qualified beneficiary could receive under
the FSA for that plan year and if the qual-
ified beneficiary could not avoid a break
in coverage, for purposes of the HIPAA
portability provisions
3
, by electing
COBRA coverage under the FSA. Ac-
cordingly, the new proposed regulations
contain a rule limiting the application of
the COBRA continuation coverage re-
quirements in the case of health FSAs.
Under this proposed rule, if the health
FSA satisfies two conditions, the health
FSA need not make COBRA continuation
coverage available to a qualified benefi-
ciary for any plan year after the plan year
February 22, 1999641999–8 I.R.B.
3
Under HIPAA, a qualified beneficiary who
maintains coverage after termination of employment
under a group health plan that is subject to HIPAA
can avoid a break in coverage and thereby avoid be-
coming subject to a preexisting condition exclusion
upon later becoming covered by another health plan.

in which the qualifying event occurs. The
first condition that the health FSA must
satisfy for this exception to apply is that
the health FSA is not subject to the
HIPAA portability provisions in sections
9801 though 9833 because the benefits
provided under the health FSA are ex-
cepted benefits. (See sections 9831 and
9832.)
4
The second condition is that, in
the plan year in which the qualifying
event of a qualified beneficiary occurs,
the maximum amount that the health FSA
could require to be paid for a full plan
year of COBRA continuation coverage
equals or exceeds the maximum benefit
available under the health FSA for the
year. It is contemplated that this second
condition will be satisfied in most cases.
Moreover, if a third condition is satis-
fied, the health FSA need not make
COBRA continuation coverage available
with respect to a qualified beneficiary at
all. This third condition is satisfied if, as
of the date of the qualifying event, the
maximum benefit available to the quali-
fied beneficiary under the health FSA for
the remainder of the plan year is not more
than the maximum amount that the plan
could require as payment for the remain-
der of that year to maintain coverage
under the health FSA.
Duration of COBRA Continuation
Coverage
The new proposed regulations would
make two principal changes to the section
in the final regulations addressing the du-
ration of COBRA continuation coverage.
The 1987 proposed regulations reflect
the statutory rules that were then in effect
for the maximum period that a plan is re-
quired to make COBRA continuation cov-
erage available. Since then the statute has
been amended to add the disability exten-
sion, to permit plans to extend the notice
period if the maximum coverage period is
also extended (referred to as the optional
extension of the required periods), and to
add a special rule in the case of Medicare
entitlement preceding a qualifying event
that is the termination or reduction of
hours of employment. The new proposed
regulations reflect these statutory
changes. The maximum coverage period
for a qualifying event that is the bank-
ruptcy of the employer has also been
added to the new proposed regulations.
The 1987 proposed regulations incor-
porate the statutory bases for terminating
COBRA continuation coverage except the
rule (added in 1989 and amended in 1996)
that COBRA coverage can be terminated
in the month that is more than 30 days
after a final determination that a qualified
beneficiary is no longer disabled. The
new proposed regulations add this statu-
tory basis for terminating COBRA cover-
age, with two clarifications. First, the
new proposed regulations clarify that a
determination that a qualified beneficiary
is no longer disabled allows termination
of COBRA continuation coverage for all
qualified beneficiaries who were entitled
to the disability extension by reason of the
disability of the qualified beneficiary who
has been determined to no longer be dis-
abled. Second, the new proposed regula-
tions clarify that such a determination
does not allow termination of the COBRA
continuation coverage of a qualified bene-
ficiary before the end of the maximum
coverage period that would apply without
regard to the disability extension.
Business Reorganizations
The 1987 proposed regulations provide
little direct guidance on the allocation of
responsibility for COBRA continuation
coverage in the event of corporate trans-
actions, such as a sale of stock of a sub-
sidiary or a sale of substantial assets.
Commenters on the 1987 proposed regu-
lations requested further guidance on cor-
porate transactions, pointing out that the
existing degree of uncertainty tends to
drive up the costs and risks of a transac-
tion to both buyers and sellers. The IRS
and Treasury share this view and believe
also that greater certainty helps to protect
the rights of qualified beneficiaries in
these transactions. The IRS has been con-
tacted by many qualified beneficiaries
whose COBRA continuation coverage has
been dropped or denied in the context of a
corporate transaction. In many cases,
these qualified beneficiaries have been
told by each of the buyer and the seller
that the other party is the one responsible
for providing them with COBRA continu-
ation coverage.
The preamble to the 1998 proposed
regulations requested comments on a pos-
sible approach to allocating responsibility
for COBRA continuation coverage in cor-
porate transactions. Commenters sug-
gested that, in a stock sale, as in an asset
sale, it would be consistent with standard
commercial practice to provide that the
seller retains liability for all existing qual-
ified beneficiaries, including those for-
merly associated with the subsidiary
being sold. The IRS and Treasury have
studied the comments and given consider-
ation to several alternatives with a view to
establishing rules that will minimize the
administrative burden and transaction
costs for the parties to transactions while
protecting the rights of qualified benefi-
ciaries and maintaining consistency with
the statute.
Accordingly, the new proposed regula-
tions make clear that the parties to a trans-
action are free to allocate the responsibil-
ity for providing COBRA continuation
coverage by contract, even if the contract
imposes responsibility on a different party
than would the new proposed regulations.
So long as the party to whom the contract
allocates responsibility performs its oblig-
ations, the other party will have no respon-
sibility for providing COBRA continua-
tion coverage. If, however, the party
allocated responsibility under the contract
defaults on its obligation, and if, under the
new proposed regulations, the other party
would have the obligation to provide
COBRA continuation coverage in the ab-
sence of a contractual provision, then the
other party would retain that obligation.
This approach would avoid prejudicing
the rights of qualified beneficiaries to
COBRA continuation coverage based
upon the provisions of a contract to which
they were not a party and under which the
employer with the underlying obligation
under the regulations to provide COBRA
continuation coverage could otherwise
contract away that obligation to a party
that fails to perform. Moreover, the party
with the underlying responsibility under
1999–8 I.R.B.65February 22, 1999
4
The IRS and Treasury together with the U.S.
Department of Labor and the U.S. Department of
Health and Human Services, have issued a notice
(62 F.R. 67688) holding that a health FSA is exempt
from HIPAA because the benefits provided under it
are excepted benefits under sections 9831 and 9832
if the employer also provides another group health
plan, the benefits under the other plan are not limited
to excepted benefits, and the maximum remiburse-
ment under the health FSA is not greater than two
times the employee’s salary reduction election (or if
greater, the employee’s salary reduction election
plus five hundred dollars).

the regulations can insist on appropriate
security and, of course, could pursue con-
tractual remedies against the defaulting
party.
The new proposed regulations provide,
for both sales of stock and sales of sub-
stantial assets, such as a division or plant
or substantially all the assets of a trade or
business, that the seller retains the obliga-
tion to make COBRA continuation cover-
age available to existing qualified benefi-
ciaries. In addition, in situations in which
the seller ceases to provide any group
health plan to any employee in connection
with the sale – whether such a cessation is
in connection with the sale is determined
on the basis of the facts and circum-
stances of each case – and thus is not re-
sponsible for providing COBRA continu-
ation coverage, the new proposed
regulations provide that the buyer is re-
sponsible for providing COBRA continu-
ation coverage to existing qualified bene-
ficiaries. This secondary liability for the
buyer applies in all stock sales and in all
sales of substantial assets in which the
buyer continues the business operations
associated with the assets without inter-
ruption or substantial change.
A particular type of asset sale raises is-
sues for which the new proposed regula-
tions do not provide any special rules.
(Thus, the general rules in the new pro-
posed regulations for business reorganiza-
tions would apply to this type of transac-
tion.) This type of asset sale is one in
which, after purchasing a business as a
going concern, the buyer continues to em-
ploy the employees of that business and
continues to provide those employees ex-
actly the same health coverage that they
had before the sale (either by providing
coverage through the same insurance con-
tract or by establishing a plan that mirrors
the one that provided benefits before the
sale). The application of the rules in the
new proposed regulations to this type of
asset sale would require the seller to make
COBRA continuation coverage available
to the employees continuing in employ-
ment with the buyer (and to other family
members who are qualified beneficiaries).
Ordinarily, the continuing employees (or
their family members) would be very un-
likely to elect COBRA continuation cover-
age from the seller when they can receive
the same coverage (usually at much lower
cost) as active employees of the buyer.
Consideration is being given to
whether, under appropriate circum-
stances, such an asset sale would be con-
sidered not to result in a loss of coverage
for those employees who continue in em-
ployment with the buyer after the sale. A
countervailing concern, however, relates
to those qualified beneficiaries who might
have a reason to elect COBRA continua-
tion coverage from the seller. An exam-
ple of such a qualified beneficiary would
be an employee who continues in employ-
ment with the buyer, whose family is
likely to have medical expenses that ex-
ceed the cost of COBRA coverage, and
who has significant questions about the
solvency of the buyer or other concerns
about how long the buyer might continue
to provide the same health coverage.
Under one possible approach, a loss of
coverage would be considered not to have
occurred so long as the purchasing em-
ployer in an asset sale continued to main-
tain the same group health plan coverage
that the seller maintained before the sale
without charging the employees any
greater percentage of the total cost of cov-
erage than the seller had charged before
the sale. For this purpose, the coverage
would be considered unchanged if there
was no obligation to provide a summary
of material modifications within 60 days
after the change due to a material reduc-
tion in covered services or benefits under
the rules that apply under Title I of
ERISA. If these conditions were satisfied
for the maximum coverage period that
would otherwise apply to the seller’s ter-
mination of employment of the continuing
employees (generally 18 months from the
date of the sale), then those terminations
of employment would never be considered
qualifying events. If the conditions were
not satisfied for the full maximum cover-
age period, then on the date when they
ceased to be satisfied the seller would be
obligated to make COBRA continuation
coverage available for the balance of the
maximum coverage period.
Comments are invited on the utility of
such a rule, either in situations in which
the seller retains an ownership interest in
the buyer after the sale (for example, a
sale of assets from a 100-percent owned
subsidiary to a 75-percent owned sub-
sidiary) or, more generally, in situations in
which the seller and the buyer are unre-
lated. Suggestions are also solicited for
other rules that would protect qualified
beneficiaries while providing relief to em-
ployers in these situations.
Although the new proposed regulations
address how COBRA obligations are af-
fected by a sale of stock (and a sale of
substantial assets), the new proposed reg-
ulations do not address how the obligation
to make COBRA continuation coverage
available is affected by the transfer of an
ownership interest in a noncorporate en-
tity that causes the noncorporate entity to
cease to be a member of a group of trades
or businesses under common control
(whether or not it becomes a member of a
different group of trades or business
under common control). Comments are
invited on this issue.
Employer Withdrawals From
Multiemployer Plans
The new proposed regulations also ad-
dress COBRA obligations in connection
with an employer’s cessation of contribu-
tions to a multiemployer group health
plan. The new proposed regulations pro-
vide that the multiemployer plan gener-
ally continues to have the obligation to
make COBRA continuation coverage
available to qualified beneficiaries associ-
ated with that employer. (There generally
would not be any obligation to make
COBRA continuation coverage available
to continuing employees in this situation
because a cessation of contributions is not
a qualifying event.) However, once the
employer provides group health coverage
to a significant number of employees who
were formerly covered under the multi-
employer plan, or starts contributing to
another multiemployer plan on their be-
half, the employer’s plan (or the new mul-
tiemployer plan) would have the obliga-
tion to make COBRA continuation
coverage available to the existing quali-
fied beneficiaries. This rule is contrary to
the holding in In re Appletree Markets,
Inc.,19 F.3d 969 (5th Cir. 1994), which
held that the multiemployer plan contin-
ued to have the COBRA obligations with
respect to existing qualified beneficiaries
after the withdrawing employer estab-
lished a plan for the same class of em-
ployees previously covered under the
multiemployer plan.
February 22, 1999661999–8 I.R.B.

Interaction of FMLA and COBRA
The new proposed regulations set forth
rules regarding the interaction of the
COBRA continuation coverage require-
ments with the provisions of the Family
and Medical Leave Act of 1993 (FMLA).
The rules under the new proposed regula-
tions are substantially the same as those
set forth in Notice 94–103. The last two
questions-and-answers in that notice have
not been included in the new proposed
regulations because they relate to general
subject matter that is addressed elsewhere
in the regulations.
Under the new proposed regulations,
the taking of FMLA leave by a covered
employee is not itself a qualifying event.
Instead, a qualifying event occurs when
an employee who is covered under a
group health plan immediately prior to
FMLA leave (or who becomes covered
under a group health plan during FMLA
leave) does not return to work with the
employer at the end of FMLA leave and
would, but for COBRA continuation cov-
erage, lose coverage under the group
health plan. (As under the general rules
of COBRA, this would also constitute a
qualifying event with respect to the
spouse or any dependent child of the em-
ployee.) The qualifying event is deemed
to occur on the last day of the employee’s
FMLA leave, and the maximum coverage
period generally begins on that day. (The
new proposed regulations provide a spe-
cial rule for cases where coverage is not
lost until a later date and the plan provides
for the optional extension of the required
periods.) In the case of such a qualifying
event, the employer cannot condition the
employee’s rights to COBRA continua-
tion coverage on the employee’s reim-
bursement of any premiums paid by the
employer to maintain the employee’s
group health plan coverage during the pe-
riod of FMLA leave.
Any lapse of coverage under the group
health plan during the period of FMLA
leave and any state or local law requiring
that group health plan coverage be pro-
vided for a period longer than that re-
quired by the FMLA are disregarded in
determining whether the employee has a
qualifying event on the last day of that
leave. However, the employee’s loss of
coverage at the end of FMLA leave will
not constitute a qualifying event if, prior
to the employee’s return from FMLA
leave, the employer has eliminated group
health plan coverage for the class of em-
ployees to which the employee would
have belonged if she or he had not taken
FMLA leave.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulations
do not impose a collection of information
requirement on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Therefore, a Regulatory
Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of
proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments that are submitted timely (a signed
original and eight (8) copies) to the IRS.
Comments are specifically requested on
the clarity of the proposed regulations and
how they may be made easier to under-
stand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled for
June 8, 1999, beginning at 10 a.m. in room
2615 of the Internal Revenue Building,
1111 Constitution Avenue, NW, Washing-
ton, DC. Due to building security proce-
dures, visitors must enter at the 10th Street
entrance, located between Constitution
and Pennsylvania Avenues, NW. In addi-
tion, all visitors must present photo identi-
fication to enter the building. Because of
access restrictions, visitors will not be ad-
mitted beyond the immediate entrance
area more than 15 minutes before the
hearing starts. For information about hav-
ing your name placed on the building ac-
cess list to attend the hearing, see the
“FOR FURTHER INFORMATION CON-
TACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written comments and an outline
of the topics to be discussed and the time
to be devoted to each topic (signed origi-
nal and eight (8) copies) by May 14,
1999. A period of 10 minutes will be al-
lotted to each person for making com-
ments. An agenda showing the schedul-
ing of the speakers will be prepared after
the deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Russ Weinheimer, Office of
the Associate Chief Counsel (Employee
Benefits and Exempt Organizations).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 54 is pro-
posed to be amended as follows:
PART 54—PENSION EXCISE TAXES
Paragraph 1. The authority citation for
part 54 is amended in part by adding en-
tries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.4980B–9 also issued under
26 U.S.C. 4980B.
Section 54.4980B–10 also issued under
26 U.S.C. 4980B. * * *
Par. 2. Section 54.4980B–0 is
amended by:
1. Revising the introductory text.
2. Adding entries for §§54.4980B–9
and 54.4980B–10 at the end of the list of
sections.
3. Revising the entries for Q-3 and Q-6
of §54.4980B–2 in the list of questions.
4. Revising the entry for Q-4 of
§54.4980B–7 in the list of questions.
5. Adding an entry for the section
heading for §54.4980B–9 in the list of
questions.
6. Adding an entry for the section
heading for §54.4980B–10 in the list of
questions.
1999–8 I.R.B.67February 22, 1999

The additions and revisions read as fol-
lows:
§54.4980B–0 Table of contents.
This section contains first a list of the
section headings and then a list of the
questions in each section in §§54.4980B–
1 through 54.4980B–10.
LIST OF SECTIONS
*****
§54.4980B–9 Business reorganizations
and employer withdrawals from
multiemployer plans.
§54.4980B–10 Interaction of FMLA and
COBRA.
LIST OF QUESTIONS
*****
§54.4980B–2 Plans that must comply.
*****
Q-3: What is a multiemployer plan?
*****
Q-6: For purposes of COBRA, how is the
number of group health plans that
an employer or employee organiza-
tion maintains determined?
*****
§54.4980B–7 Duration of COBRA
continuation coverage.
*****
Q-4: When does the maximum coverage
period end?
*****
§54.4980B–9 Business reorganizations
and employer withdrawals from
multiemployer plans.
Q-1: For purposes of this section, what
are a business reorganization, a
stock sale, and an asset sale?
Q-2: In the case of a stock sale, what are
the selling group, the acquired orga-
nization, and the buying group?
Q-3: In the case of an asset sale, what are
the selling group and the buying
group?
Q-4: Who is an M&A qualified benefi-
ciary?
Q-5: In the case of a stock sale, is the sale
a qualifying event with respect to a
covered employee who is employed
by the acquired organization before
the sale and who continues to be
employed by the acquired organiza-
tion after the sale, or with respect to
the spouse or dependent children of
such a covered employee?
Q-6: In the case of an asset sale, is the
sale a qualifying event with respect
to a covered employee whose em-
ployment immediately before the
sale was associated with the pur-
chased assets, or with respect to the
spouse or dependent children of
such a covered employee who are
covered under a group health plan
of the selling group immediately be-
fore the sale?
Q-7: In a business reorganization, are the
buying group and the selling group
permitted to allocate by contract the
responsibility to make COBRA con-
tinuation coverage available to
M&A qualified beneficiaries?
Q-8: Which group health plan has the
obligation to make COBRA contin-
uation coverage available to M&A
qualified beneficiaries in a business
reorganization?
Q-9: Can the cessation of contributions
by an employer to a multiemployer
group health plan be a qualifying
event?
Q-10: If an employer stops contributing
to a multiemployer group health
plan, does the multiemployer plan
have the obligation to make
COBRA continuation coverage
available to a qualified beneficiary
who was receiving coverage under
the multiemployer plan on the day
before the cessation of contribu-
tions and who is, or whose qualify-
ing event occurred in connection
with, a covered employee whose
last employment prior to the quali-
fying event was with the employer
that has stopped contributing to the
multiemployer plan?
§54.4980B–10 Interaction of FMLA and
COBRA.
Q-1: In what circumstances does a quali-
fying event occur if an employee
does not return from leave taken
under FMLA?
Q-2: If a qualifying event described in
Q&A-1 of this section occurs, when
does it occur, and how is the maxi-
mum coverage period measured?
Q-3: If an employee fails to pay the em-
ployee portion of premiums for cov-
erage under a group health plan dur-
ing FMLA leave or declines
coverage under a group health plan
during FMLA leave, does this affect
the determination of whether or
when the employee has experienced
a qualifying event?
Q-4: Is the application of the rules in
Q&A-1 through Q&A-3 of this sec-
tion affected by a requirement of
state or local law to provide a period
of coverage longer than that re-
quired under FMLA?
Q-5: May COBRA continuation cover-
age be conditioned upon reimburse-
ment of the premiums paid by the
employer for coverage under a
group health plan during FMLA
leave?
Par. 3. Section 54.4980B–1, A-1 is
amended by:
1. Removing the language “54.4980B–
8” and adding “54.4980B–10” in its place
in the last sentence of paragraph (a).
2. Removing the language “54.4980B–
8” and adding “54.4980B–10” in its place
in the third sentence and last sentence of
paragraph (b).
3. Removing the last sentence of para-
graph (c) and adding two sentences in its
place to read as follows:
§54.4980B–1 COBRA in general.
******
A-1: * * *
(c) * * * Section 54.4980B–9 contains
special rules for how COBRA applies in
connection with business reorganizations
and employer withdrawals from a multi-
employer plan, and §54.4980B–10 ad-
dresses how COBRA applies for individu-
als who take leave under the Family and
Medical Leave Act of 1993. Unless the
context indicates otherwise, any reference
in §§54.4980B–1 through §54.4980B–10
to COBRA refers to section 4980B (as
amended) and to the parallel provisions of
ERISA.
*****
February 22, 1999681999–8 I.R.B.

Par. 4. Section 54.4980B–2 is amended
by:
1. Revising paragraph (a) in A-1.
2. Removing the language “54.4980B–
8” and adding “54.4980B–10” in its place
in the first sentence of paragraph (b) in
A-1.
3. Revising A-2.
4. Adding Q&A-3.
5. Removing the language “54.4980B–
8” and adding “54.4980B–10” in its place
in the last sentence of paragraph (a) in
A-4.
6. Adding a sentence immediately be-
fore the last sentence of the introductory
text of paragraph (a) in A-5.
7. Removing the language “54.4980B–
8” and adding “54.4980B–10” in its place
in the last sentence of paragraph (c) in
A-5.
8. Adding paragraphs (d), (e), and (f)
in A-5.
9. Adding Q&A-6.
10. Revising A-8.
11. Revising paragraph (a) in A-10.
The additions and revisions read as fol-
lows:
§54.4980B–2 Plans that must comply.
*****
A-1: (a) For purposes of section
4980B, a group health plan is a plan
maintained by an employer or employee
organization to provide health care to in-
dividuals who have an employment-re-
lated connection to the employer or em-
ployee organization or to their families.
Individuals who have an employment-re-
lated connection to the employer or em-
ployee organization consist of employees,
former employees, the employer, and oth-
ers associated or formerly associated with
the employer or employee organization in
a business relationship (including mem-
bers of a union who are not currently em-
ployees). Health care is provided under a
plan whether provided directly or through
insurance, reimbursement, or otherwise,
and whether or not provided through an
on-site facility (except as set forth in para-
graph (d) of this Q&A-1), or through a
cafeteria plan (as defined in section 125)
or other flexible benefit arrangement.
(See paragraphs (b) through (e) in Q&A-8
of this section for rules regarding the ap-
plication of the COBRA continuation
coverage requirements to certain health
flexible spending arrangements.) For
purposes of this Q&A-1, insurance in-
cludes not only group insurance policies
but also one or more individual insurance
policies in any arrangement that involves
the provision of health care to two or
more employees. A plan maintained by
an employer or employee organization is
any plan of, or contributed to (directly or
indirectly) by, an employer or employee
organization. Thus, a group health plan is
maintained by an employer or employee
organization even if the employer or em-
ployee organization does not contribute to
it if coverage under the plan would not be
available at the same cost to an individual
but for the individual’s employment-re-
lated connection to the employer or em-
ployee organization. These rules are fur-
ther explained in paragraphs (b) through
(d) of this Q&A-1. An exception for
qualified long-term care services is set
forth in paragraph (e) of this Q&A-1, and
for medical savings accounts in paragraph
(f) of this Q&A-1. See Q&A-6 of this
section for rules to determine the number
of group health plans that an employer or
employee organization maintains.
*****
A-2: (a) For purposes of section
4980B, employer refers to –
(1) A person for whom services are
performed;
(2) Any other person that is a member
of a group described in section 414(b),
(c), (m), or (o) that includes a person de-
scribed in paragraph (a)(1) of this Q&A-
2; and
(3) Any successor of a person de-
scribed in paragraph (a)(1) or (2) of this
Q&A-2.
(b) An employer is a successor em-
ployer if it results from a consolidation,
merger, or similar restructuring of the em-
ployer or if it is a mere continuation of the
employer. See paragraph (c) in Q&A-8 of
§54.4980B–9 for rules describing the cir-
cumstances in which a purchaser of sub-
stantial assets is a successor employer to
the employer selling the assets.
Q-3: What is a multiemployer plan?
A-3: For purposes of §§54.4980B–1
through 54.4980B–10, a multiemployer
plan is a plan to which more than one em-
ployer is required to contribute, that is
maintained pursuant to one or more col-
lective bargaining agreements between
one or more employee organizations and
more than one employer, and that satisfies
such other requirements as the Secretary
of Labor may prescribe by regulation.
Whenever reference is made in
§§54.4980B–1 through 54.4980B–10 to a
plan of or maintained by an employer or
employee organization, the reference in-
cludes a multiemployer plan.
*****
A-5: (a) * * * See Q&A-6 of this sec-
tion for rules to determine the number of
plans that an employer or employee orga-
nization maintains. * * *
*****
(d) In determining the number of the
employees of an employer, each full-time
employee is counted as one employee and
each part-time employee is counted as a
fraction of an employee, determined in
accordance with paragraph (e) of this
Q&A-5.
(e) An employer may determine the
number of its employees on a daily basis
or a pay period basis. The basis used by
the employer must be used with respect to
all employees of the employer and must
be used for the entire year for which the
number of employees is being deter-
mined. If an employer determines the
number of its employees on a daily basis,
it must determine the actual number of
full-time employees on each typical busi-
ness day and the actual number of part-
time employees and the hours worked by
each of those part-time employees on
each typical business day. Each full-time
employee counts as one employee on
each typical business day and each part-
time employee counts as a fraction, with
the numerator of the fraction equal to the
number of hours worked by that em-
ployee and the denominator equal to the
number of hours that must be worked on a
typical business day in order to be consid-
ered a full-time employee. If an employer
determines the number of its employees
on a pay period basis, it must determine
the actual number of full-time employees
employed during that pay period and the
actual number of part-time employees
employed and the hours worked by each
of those part-time employees during the
pay period. For each day of that pay pe-
1999–8 I.R.B.69February 22, 1999

riod, each full-time employee counts as
one employee and each part-time em-
ployee counts as a fraction, with the nu-
merator of the fraction equal to the num-
ber of hours worked by that employee
during that pay period and the denomina-
tor equal to the number of hours that must
be worked during that pay period in order
to be considered a full-time employee.
The determination of the number of hours
required to be considered a full-time em-
ployee is based upon the employer’s em-
ployment practices, except that in no
event may the hours required to be con-
sidered a full-time employee exceed eight
hours for any day or 40 hours for any
week.
(f) In the case of a multiemployer plan,
the determination of whether the plan is a
small-employer plan on any particular
date depends on which employers are
contributing to the plan on that date and
on the workforce of those employers dur-
ing the preceding calendar year. If a plan
that is otherwise subject to COBRA
ceases to be a small-employer plan be-
cause of the addition during a calendar
year of an employer that did not normally
employ fewer than 20 employees on a
typical business day during the preceding
calendar year, the plan ceases to be ex-
cepted from COBRA immediately upon
the addition of the new employer. In con-
trast, if the plan ceases to be a small-em-
ployer plan by reason of an increase dur-
ing a calendar year in the workforce of an
employer contributing to the plan, the
plan ceases to be excepted from COBRA
on the January 1 immediately following
the calendar year in which the employer’s
workforce increased.
*****
Q-6: For purposes of COBRA, how is
the number of group health plans that an
employer or employee organization main-
tains determined?
A-6: (a) The rules of this Q&A-6
apply, for purposes of COBRA, in deter-
mining the number of group health plans
that an employer or employee organiza-
tion maintains. Except as provided in
paragraph (c) of this Q&A-6, in the case
of health care benefits provided under an
arrangement or arrangements of an em-
ployer or employee organization, the
number of group health plans pursuant to
which those benefits are provided is de-
termined by the instruments governing
the arrangement or arrangements. How-
ever, a multiemployer plan and a nonmul-
tiemployer plan are always separate
plans. All references elsewhere in
§§54.4980B–1 through 54.4980B–10 to a
group health plan are references to a
group health plan as determined under
Q&A-1 of this section and this Q&A-6.
(b) If it is not clear from the instru-
ments governing an arrangement or
arrangements to provide health care bene-
fits whether the benefits are provided
under one plan or more than one plan, or
if there are no instruments governing the
arrangement or arrangements, all such
health care benefits, except benefits for
qualified long-term care services (as de-
fined in section 7702B(c)), provided by a
corporation, partnership, or other entity or
trade or business, or by an employee orga-
nization, constitute one group health plan.
(c) Notwithstanding paragraph (a) of
this Q&A-6, if a principal purpose of es-
tablishing separate plans is to evade any
requirement of law, then the separate plans
will be considered a single plan to the ex-
tent necessary to prevent the evasion.
(d) The significance of treating an
arrangement as two or more separate
group health plans is illustrated by the fol-
lowing examples:
Example 1.(i) Employer Xmaintains a single
group health plan, which provides major medical
and prescription drug benefits. Employer Ymain-
tains two group health plans; one provides major
medical benefits and the other provides prescription
drug benefits.
(ii) X’s plan could comply with the COBRA con-
tinuation coverage requirements by giving a quali-
fied beneficiary experiencing a qualifying event
with respect to X’s plan the choice of either electing
both major medical and prescription drug benefits or
not receiving any COBRA continuation coverage
under X’s plan. By contrast, for Y’s plans to comply
with the COBRA continuation coverage require-
ments, a qualified beneficiary experiencing a quali-
fying event with respect to each of Y’s plans must be
given the choice of electing COBRA continuation
coverage under either the major medical plan or the
prescription drug plan or both.
Example 2. If a joint board of trustees adminis-
ters one multiemployer plan, that plan will fail to
qualify for the small-employer plan exception if any
one of the employers whose employees are covered
under the plan normally employed 20 or more em-
ployees during the preceding calendar year. How-
ever, if the joint board of trustees maintains two or
more multiemployer plans, then the exception would
be available with respect to each of those plans in
which each of the employers whose employees are
covered under the plan normally employed fewer
than 20 employees during the preceding calendar
year.
*****
A-8: (a) The provision of health care
benefits does not fail to be a group health
plan merely because those benefits are of-
fered under a cafeteria plan (as defined in
section 125) or under any other arrange-
ment under which an employee is offered a
choice between health care benefits and
other taxable or nontaxable benefits. How-
ever, the COBRA continuation coverage
requirements apply only to the type and
level of coverage under the cafeteria plan
or other flexible benefit arrangement that a
qualified beneficiary is actually receiving
on the day before the qualifying event. See
paragraphs (b) through (e) of this Q&A-8
for rules limiting the obligations of certain
health flexible spending arrangements.
The rules of this paragraph (a) are illus-
trated by the following example:
Example: (i) Under the terms of a cafeteria plan,
employees can choose among life insurance cover-
age, membership in a health maintenance organiza-
tion (HMO), coverage for medical expenses under
an indemnity arrangement, and cash compensation.
Of these available choices, the HMO and the indem-
nity arrangement are the arrangements providing
health care. The instruments governing the HMO
and indemnity arrangements indicate that they are
separate group health plans. These group health
plans are subject to COBRA. The employer does
not provide any group health plan outside of the
cafeteria plan. Band Care unmarried employees. B
has chosen the life insurance coverage, and Chas
chosen the indemnity arrangement.
(ii) Bdoes not have to be offered COBRA con-
tinuation coverage upon terminating employment,
nor is a subsequent open enrollment period for ac-
tive employees required to be made available to B.
However, if Cterminates employment and the termi-
nation constitutes a qualifying event, Cmust be of-
fered an opportunity to elect COBRA continuation
coverage under the indemnity arrangement. If C
makes such an election and an open enrollment pe-
riod for active employees occurs while Cis still re-
ceiving the COBRA continuation coverage, Cmust
be offered the opportunity to switch from the indem-
nity arrangement to the HMO (but not to the life in-
surance coverage because that does not constitute
coverage provided under a group health plan).
(b) If a health flexible spending
arrangement (health FSA), within the
meaning of regulations project EE–130–
86 (1989–1 C.B. 944, 986) (see
§601.601(d)(2) of this chapter), satisfies
the two conditions in paragraph (c) of this
February 22, 1999701999–8 I.R.B.

Q&A-8 for a plan year, the obligation of
the health FSA to make COBRA continu-
ation coverage available to a qualified
beneficiary who experiences a qualifying
event in that plan year is limited in accor-
dance with paragraphs (d) and (e) of this
Q&A-8, as illustrated by an example in
paragraph (f) of this Q&A-8.
(c) The conditions of this paragraph (c)
are satisfied if –
(1) Benefits provided under the health
FSA are excepted benefits within the
meaning of sections 9831 and 9832; and
(2) The maximum amount that the
health FSA can require to be paid for a
year of COBRA continuation coverage
under Q&A-1 of §54.4980B–8 equals or
exceeds the maximum benefit available
under the health FSA for the year.
(d) If the conditions in paragraph (c) of
this Q&A-8 are satisfied for a plan year,
then the health FSA is not obligated to
make COBRA continuation coverage
available for any subsequent plan year to
any qualified beneficiary who experi-
ences a qualifying event during that plan
year.
(e) If the conditions in paragraph (c) of
this Q&A-8 are satisfied for a plan year,
the health FSA is not obligated to make
COBRA continuation coverage available
for that plan year to any qualified benefi-
ciary who experiences a qualifying event
during that plan year unless, as of the date
of the qualifying event, the qualified ben-
eficiary can become entitled to receive
during the remainder of the plan year a
benefit that exceeds the maximum
amount that the health FSA is permitted to
require to be paid for COBRA continua-
tion coverage for the remainder of the
plan year. In determining the amount of
the benefit that a qualified beneficiary can
become entitled to receive during the re-
mainder of the plan year, the health FSA
may deduct from the maximum benefit
available to that qualified beneficiary for
the year (based on the election made
under the health FSA for that qualified
beneficiary before the date of the qualify-
ing event) any reimbursable claims sub-
mitted to the health FSA for that plan year
before the date of the qualifying event.
(f) The rules of paragraphs (b), (c), (d),
and (e) of this Q&A-8 are illustrated by
the following example:
Example:(i) An employer maintains a group
health plan providing major medical benefits and a
group health plan that is a health FSA, and the plan
year for each plan is the calendar year. Both the plan
providing major medical benefits and the health
FSA are subject to COBRA. Under the health FSA,
during an open season before the beginning of each
calendar year, employees can elect to reduce their
compensation during the upcoming year by up to
$1200 per year and have that same amount con-
tributed to a health flexible spending account. The
employer contributes an additional amount to the ac-
count equal to the employee’s salary reduction elec-
tion for the year. Thus, the maximum amount avail-
able to an employee under the health FSA for a year
is two times the amount of the employee’s salary re-
duction election for the year. This amount may be
paid to the employee during the year as reimburse-
ment for health expenses not covered by the em-
ployer’s major medical plan (such as deductibles,
copayments, prescription drugs, or eyeglasses). The
employer determined, in accordance with section
4980B(f)(4), that a reasonable estimate of the cost of
providing coverage for similarly situated non-
COBRA beneficiaries for 2002 under this health
FSA is equal to two times their salary reduction
election for 2002 and, thus, that two times the salary
reduction election is the applicable premium for
2002.
(ii) Because the employer provides major med-
ical benefits under another group health plan, and
because the maximum benefit that any employee
can receive under the health FSA is not greater than
two times the employee’s salary reduction election
for the plan year, benefits under this health FSA are
excepted benefits within the meaning of sections
9831 and 9832. Thus, the first condition of para-
graph (c) of this Q&A-8 is satisfied for the year.
The maximum amount that a plan can require to be
paid for coverage (outside of coverage required to
be made available due to a disability extension)
under Q&A-1 of §54.4980B–8 is 102 percent of the
applicable premium. Thus, the maximum amount
that the health FSA can require to be paid for cover-
age for the 2002 plan year is 2.04 times the em-
ployee’s salary reduction election for the plan year.
Because the maximum benefit available under the
health FSA is 2.0 times the employee’s salary reduc-
tion election for the year, the maximum benefit
available under the health FSA for the year is less
than the maximum amount that the health FSA can
require to be paid for coverage for the year. Thus,
the second condition in paragraph (c) of this Q&A-8
is also satisfied for the 2002 plan year. Because both
conditions in paragraph (c) of this Q&A-8 are satis-
fied for 2002, with respect to any qualifying event
occurring in 2002, the health FSA is not obligated to
make COBRA continuation coverage available for
any year after 2002.
(iii) Whether the health FSA is obligated to make
COBRA continuation coverage available in 2002 to
a qualified beneficiary with respect to a qualifying
event that occurs in 2002 depends upon the maxi-
mum benefit that would be available to the qualified
beneficiary under COBRA continuation coverage
for that plan year. Case 1:Employee Bhas elected
to reduce B’s salary by $1200 for 2002. Thus, the
maximum benefit that Bcan become entitled to re-
ceive under the health FSA during the entire year is
$2400. Bexperiences a qualifying event that is the
termination of B’s employment on May 31, 2002.
As of that date, Bhad submitted $300 of reim-
bursable expenses under the health FSA. Thus, the
maximum benefit that Bcould become entitled to re-
ceive for the remainder of 2002 is $2100. The max-
imum amount that the health FSA can require to be
paid for COBRA continuation coverage for the re-
mainder of 2002 is 102 percent times 1/12 of the ap-
plicable premium for 2002 times the number of
months remaining in 2002 after the date of the quali-
fying event. In B’s case, the maximum amount that
the health FSA can require to be paid for COBRA
continuation coverage for 2002 is 2.04 times $1200,
or $2448. One-twelfth of $2448 is $204. Because
seven months remain in the plan year, the maximum
amount that the health FSA can require to be paid
for B’s coverage for the remainder of the year is
seven times $204, or $1428. Because $1428 is less
than the maximum benefit that Bcould become enti-
tled to receive for the remainder of the year ($2100),
the health FSA is required to make COBRA continu-
ation coverage available to Bfor the remainder of
2002 (but not for any subsequent year).
(iv) Case 2:The facts are the same as in Case 1
except that B had submitted $1000 of reimbursable
expenses as of the date of the qualifying event. In
that case, the maximum benefit available to Bfor the
remainder of the year would be $1400 instead of
$2100. Because the maximum amount that the
health FSA can require to be paid for B’s coverage is
$1428, and because the $1400 maximum benefit for
the remainder of the year does not exceed $1428, the
health FSA is not obligated to make COBRA contin-
uation coverage available to Bin 2002 (or any later
year). (Of course, the administrator of the health
FSA is permitted to make COBRA continuation cov-
erage available to every qualified beneficiary in the
year that the qualified beneficiary’s qualifying event
occurs in order to avoid having to determine the
maximum benefit available for each qualified bene-
ficiary for the remainder of the plan year.)
*****
A-10: (a) In general, the excise tax is
imposed on the employer maintaining the
plan, except that in the case of a multiem-
ployer plan (see Q&A-3 of this section for
a definition of multiemployer plan) the
excise tax is imposed on the plan.
*****
Par. 5. In §54.4980B–3, the language
“54.4980B–8” is removed and
“54.4980B–10” is added in its place in the
last sentence of paragraph (a)(3) and the
first sentence of paragraph (g) in A-1; in
the first and second sentences of para-
graph (a)(1), the first sentence of para-
graph (a)(2), and the first and last sen-
tences in paragraph (b) in A-2; and in A-3.
Par. 6. Section 54.4980B–4 is
amended by:
1. Adding a sentence at the end of
paragraph (a) in A-1.
1999–8 I.R.B.71February 22, 1999

2. Removing the language “Q&A-1”
and adding “Q&A-4” in its place in the
fifth sentence of paragraph (c) of A-1.
3. Revising the third sentence in para-
graph (e) of A-1.
The addition and revision read as fol-
lows:
§54.4980B–4 Qualifying events.
*****
A-1: (a) * * * See Q&A-1 through
Q&A-3 of §54.4980B–10 for special
rules in the case of leave taken under the
Family and Medical Leave Act of 1993
(29 U.S.C. 2601–2619).
*****
(e) * * * For example, an absence from
work due to disability, a temporary layoff,
or any other reason (other than due to
leave that is FMLA leave; see
§54.4980B–10) is a reduction of hours of
a covered employee’s employment if
there is not an immediate termination of
employment. * * *
*****
Par. 7. In §54.4980B–5, the penulti-
mate sentence in paragraph (a) of A-1 is
amended by removing the language
“54.4980B–8” and adding “54.4980B–
10” in its place.
Par. 8. In §54.4980B–6, the Examplein
paragraph (c) of A-1 is revised to read as
follows:
§54.4980B–6 Electing COBRA
continuation coverage.
*****
A-1: * * *
Example. (i) An unmarried employee without
children who is receiving employer-paid coverage
under a group health plan voluntarily terminates em-
ployment on June 1, 2001. The employee is not dis-
abled at the time of the termination of employment
nor at any time thereafter, and the plan does not pro-
vide for the extension of the required periods (as is
permitted under paragraph (b) of Q&A-4 of
§54.4980B–7).
(ii) Case 1: If the plan provides that the em-
ployer-paid coverage ends immediately upon the ter-
mination of employment, the election period must
begin not later than June 1, 2001, and must not end
earlier than July 31, 2001. If notice of the right to
elect COBRA continuation coverage is not provided
to the employee until June 15, 2001, the election pe-
riod must not end earlier than August 14, 2001.
(iii) Case 2:If the plan provides that the em-
ployer-paid coverage does not end until 6 months
after the termination of employment, the employee
does not lose coverage until December 1, 2001. The
election period can therefore begin as late as De-
cember 1, 2001, and must not end before January 30,
2002.
(iv) Case 3:If employer-paid coverage for 6
months after the termination of employment is of-
fered only to those qualified beneficiaries who waive
COBRA continuation coverage, the employee loses
coverage on June 1, 2001, so the election period is
the same as in Case 1. The difference between Case
2 and Case 3 is that in Case 2 the employee can re-
ceive 6 months of employer-paid coverage and then
elect to pay for up to an additional 12 months of
COBRA continuation coverage, while in Case 3 the
employee must choose between 6 months of em-
ployer-paid coverage and paying for up to 18 months
of COBRA continuation coverage. In all three cases,
COBRA continuation coverage need not be provided
for more than 18 months after the termination of em-
ployment (see Q&A-4 of §54.4980B–7), and in cer-
tain circumstances might be provided for a shorter
period (see Q&A-1 of §54.4980B–7).
*****
Par. 9. Section 54.4980B–7 is amended
by:
1. Revising paragraph (a) of A-1.
2. Adding Q&A-4.
3. Revising the second sentence in
paragraph (c) of A-5.
4. Revising paragraph (b) of Q&A-6.
5. Removing the language “Q&A-1”
and adding “Q&A-4” in its place in para-
graph (a) of A-7.
The addition and revisions read as fol-
lows:
§54.4980B–7 Duration of COBRA
continuation coverage.
*****
A-1: (a) Except for an interruption of
coverage in connection with a waiver, as
described in Q&A-4 of §54.4980B–6,
COBRA continuation coverage that has
been elected for a qualified beneficiary
must extend for at least the period begin-
ning on the date of the qualifying event
and ending not before the earliest of the
following dates –
(1) The last day of the maximum cov-
erage period (see Q&A-4 of this section);
(2) The first day for which timely pay-
ment is not made to the plan with respect
to the qualified beneficiary (see Q&A-5
in §54.4980B–8);
(3) The date upon which the employer
or employee organization ceases to pro-
vide any group health plan (including suc-
cessor plans) to any employee;
(4) The date, after the date of the elec-
tion, upon which the qualified beneficiary
first becomes covered under any other
group health plan, as described in Q&A-2
of this section;
(5) The date, after the date of the elec-
tion, upon which the qualified beneficiary
first becomes entitled to Medicare bene-
fits, as described in Q&A-3 of this sec-
tion; and
(6) In the case of a qualified benefi-
ciary entitled to a disability extension (see
Q&A-5 of this section), the later of—
(i) Either 29 months after the date of
the qualifying event, or the first day of the
month that is more than 30 days after the
date of a final determination under Title II
or XVI of the Social Security Act (42
U.S.C. 401–433 or 1381–1385) that the
disabled qualified beneficiary whose dis-
ability resulted in the qualified benefi-
ciary’s being entitled to the disability ex-
tension is no longer disabled, whichever
is earlier; or
(ii) The end of the maximum coverage
period that applies to the qualified benefi-
ciary without regard to the disability ex-
tension.
*****
Q-4: When does the maximum cover-
age period end?
A-4: (a) Except as otherwise provided
in this Q&A-4, the maximum coverage
period ends 36 months after the qualify-
ing event. The maximum coverage period
for a qualified beneficiary who is a child
born to or placed for adoption with a cov-
ered employee during a period of
COBRA continuation coverage is the
maximum coverage period for the quali-
fying event giving rise to the period of
COBRA continuation coverage during
which the child was born or placed for
adoption. Paragraph (b) of this Q&A-4
describes the starting point from which
the end of the maximum coverage period
is measured. The date that the maximum
coverage period ends is described in para-
graph (c) of this Q&A-4 in a case where
the qualifying event is a termination of
employment or reduction of hours of em-
ployment, in paragraph (d) of this Q&A-4
in a case where a covered employee be-
comes entitled to Medicare benefits under
Title XVIII of the Social Security Act (42
U.S.C. 1395–1395ggg) before experienc-
ing a qualifying event that is a termination
February 22, 1999721999–8 I.R.B.

of employment or reduction of hours of
employment, and in paragraph (e) of this
Q&A-4 in the case of a qualifying event
that is the bankruptcy of the employer.
See Q&A-8 of §54.4980B–2 for limita-
tions that apply to certain health flexible
spending arrangements. See also Q&A-6
of this section in the case of multiple
qualifying events. Nothing in
§§54.4980B–1 through 54.4980B–10 pro-
hibits a group health plan from providing
coverage that continues beyond the end of
the maximum coverage period.
(b)(1) The end of the maximum cover-
age period is measured from the date of
the qualifying event even if the qualifying
event does not result in a loss of coverage
under the plan until a later date. If, how-
ever, coverage under the plan is lost at a
later date and the plan provides for the ex-
tension of the required periods, then the
maximum coverage period is measured
from the date when coverage is lost. A
plan provides for the extension of the re-
quired periods if it provides both –
(i) That the 30-day notice period (dur-
ing which the employer is required to no-
tify the plan administrator of the occur-
rence of certain qualifying events such as
the death of the covered employee or the
termination of employment or reduction
of hours of employment of the covered
employee) begins on the date of the loss
of coverage rather than on the date of the
qualifying event; and
(ii) That the end of the maximum cov-
erage period is measured from the date of
the loss of coverage rather than from the
date of the qualifying event.
(2) In the case of a plan that provides
for the extension of the required periods,
whenever the rules of §§54.4980B-1
through 54.4980B-10 refer to the mea-
surement of a period from the date of the
qualifying event, those rules apply in such
a case by measuring the period instead
from the date of the loss of coverage.
(c) In the case of a qualifying event
that is a termination of employment or re-
duction of hours of employment, the max-
imum coverage period ends 18 months
after the qualifying event if there is no
disability extension, and 29 months after
the qualifying event if there is a disability
extension. See Q&A-5 of this section for
rules to determine if there is a disability
extension. If there is a disability exten-
sion and the disabled qualified benefi-
ciary is later determined to no longer be
disabled, then a plan may terminate the
COBRA continuation coverage of an af-
fected qualified beneficiary before the
end of the disability extension; see para-
graph (a)(6) in Q&A-1 of this section.
(d)(1) If a covered employee becomes
entitled to Medicare benefits under Title
XVIII of the Social Security Act (42
U.S.C. 1395–1395ggg) before experienc-
ing a qualifying event that is a termina-
tion of employment or reduction of hours
of employment, the maximum coverage
period for qualified beneficiaries other
than the covered employee ends on the
later of –
(i) 36 months after the date the covered
employee became entitled to Medicare
benefits; or
(ii) 18 months (or 29 months, if there
is a disability extension) after the date of
the covered employee’s termination of
employment or reduction of hours of em-
ployment.
(2) See paragraph (b) of Q&A-3 of this
section regarding when a covered em-
ployee becomes entitled to Medicare ben-
efits.
(e) In the case of a qualifying event
that is the bankruptcy of the employer, the
maximum coverage period for a qualified
beneficiary who is the retired covered em-
ployee ends on the date of the retired cov-
ered employee’s death. The maximum
coverage period for a qualified benefi-
ciary who is the spouse, surviving spouse,
or dependent child of the retired covered
employee ends on the earlier of –
(1) The date of the qualified benefi-
ciary’s death; or
(2) The date that is 36 months after the
death of the retired covered employee.
*****
A-5: * * *
(c) * * * For this purpose, the period of
the first 60 days of COBRA continuation
coverage is measured from the date of the
qualifying event described in paragraph
(b) of this Q&A-5 (except that if a loss of
coverage would occur at a later date in the
absence of an election for COBRA con-
tinuation coverage and if the plan pro-
vides for the extension of the required pe-
riods (as described in paragraph (b) of
Q&A-4 of this section) then the period of
the first 60 days of COBRA continuation
coverage is measured from the date on
which the coverage would be lost). * * *
*****
A-6: * * *
(b) The requirements of this paragraph
(b) are satisfied if a qualifying event that
gives rise to an 18-month maximum cov-
erage period (or a 29-month maximum
coverage period in the case of a disability
extension) is followed, within that 18-
month period (or within that 29-month
period, in the case of a disability exten-
sion), by a second qualifying event (for
example, a death or a divorce) that gives
rise to a 36-month maximum coverage
period. (Thus, a termination of employ-
ment following a qualifying event that is a
reduction of hours of employment cannot
be a second qualifying event that expands
the maximum coverage period; the bank-
ruptcy of an employer also cannot be a
second qualifying event that expands the
maximum coverage period.) In such a
case, the original 18-month period (or 29-
month period, in the case of a disability
extension) is expanded to 36 months, but
only for those individuals who were qual-
ified beneficiaries under the group health
plan in connection with the first qualify-
ing event and who are still qualified bene-
ficiaries at the time of the second qualify-
ing event. No qualifying event (other
than a qualifying event that is the bank-
ruptcy of the employer) can give rise to a
maximum coverage period that ends more
than 36 months after the date of the first
qualifying event (or more than 36 months
after the date of the loss of coverage, in
the case of a plan that provides for the ex-
tension of the required periods; see para-
graph (b) in Q&A-4 of this section). For
example, if an employee covered by a
group health plan that is subject to
COBRA terminates employment (for rea-
sons other than gross misconduct) on De-
cember 31, 2000, the termination is a
qualifying event giving rise to a maxi-
mum coverage period that extends for 18
months to June 30, 2002. If the employee
dies after the employee and the em-
ployee’s spouse and dependent children
have elected COBRA continuation cover-
age and on or before June 30, 2002, the
spouse and dependent children (except
anyone among them whose COBRA con-
tinuation coverage had already ended for
1999–8 I.R.B.73February 22, 1999

some other reason) will be able to receive
COBRA continuation coverage through
December 31, 2003. See Q&A-8(b) of
§54.4980B–2 for a special rule that ap-
plies to certain health flexible spending
arrangements.
*****
Par. 10. Sections 54.4980B–9 and
54.4980B–10 are added to read as fol-
lows:
§54.4980B–9 Business reorganizations
and employer withdrawals from
multiemployer plans.
The following questions-and-answers
address who has the obligation to make
COBRA continuation coverage available
to affected qualified beneficiaries in the
context of business reorganizations and
employer withdrawals from multiem-
ployer plans:
Q-1: For purposes of this section, what
are a business reorganization, a stock sale,
and an asset sale?
A-1: For purposes of this section:
(a) Abusiness reorganizationis a stock
sale or an asset sale.
(b) Astock saleis a transfer of stock in
a corporation that causes the corporation
to become a different employer or a mem-
ber of a different employer. (See Q&A-2
of §54.4980B–2, which defines employer
to include all members of a controlled
group of corporations.) Thus, for exam-
ple, a sale or distribution of stock in a cor-
poration that causes the corporation to
cease to be a member of one controlled
group of corporations, whether or not it
becomes a member of another controlled
group of corporations, is a stock sale.
(c) An asset saleis a sale of substantial
assets, such as a plant or division or
substantially all the assets of a trade or
business.
(d) The rules of §1.414(b)–1 of this
chapter apply in determining what consti-
tutes a controlled group of corporations,
and the rules of §§1.414(c)–1 through
1.414(c)–5 of this chapter apply in deter-
mining what constitutes a group of trades
or businesses under common control.
Q-2: In the case of a stock sale, what
are the selling group, the acquired organi-
zation, and the buying group?
A-2: In the case of a stock sale –
(a) The selling groupis the controlled
group of corporations, or the group of
trades or businesses under common con-
trol, of which a corporation ceases to be a
member as a result of the stock sale;
(b) The acquired organizationis the
corporation that ceases to be a member of
the selling group as a result of the stock
sale; and
(c) The buying groupis the controlled
group of corporations, or the group of
trades or businesses under common con-
trol, of which the acquired organization
becomes a member as a result of the stock
sale. If the acquired organization does not
become a member of such a group, the
buying group is the acquired organization.
Q-3: In the case of an asset sale, what
are the selling group and the buying
group?
A-3: In the case of an asset sale –
(a) The selling groupis the controlled
group of corporations or the group of
trades or businesses under common control
that includes the corporation or other trade
or business that is selling the assets; and
(b) The buying groupis the controlled
group of corporations or the group of
trades or businesses under common con-
trol that includes the corporation or other
trade or business that is buying the assets.
Q-4: Who is an M&A qualified benefi-
ciary?
A-4: (a) Asset sales: In the case of an
asset sale, an individual is an M&A quali-
fied beneficiary if the individual is a qual-
ified beneficiary whose qualifying event
occurred prior to or in connection with the
sale and who is, or whose qualifying
event occurred in connection with, a cov-
ered employee whose last employment
prior to the qualifying event was associ-
ated with the assets being sold.
(b) Stock sales: In the case of a stock
sale, an individual is an M&A qualified
beneficiary if the individual is a qualified
beneficiary whose qualifying event oc-
curred prior to or in connection with the
sale and who is, or whose qualifying
event occurred in connection with, a cov-
ered employee whose last employment
prior to the qualifying event was with the
acquired organization.
(c) In the case of a qualified benefi-
ciary who has experienced more than one
qualifying event with respect to her or his
current right to COBRA continuation cov-
erage, the qualifying event referred to in
paragraphs (a) and (b) of this Q&A-4 is
the first qualifying event.
Q-5: In the case of a stock sale, is the
sale a qualifying event with respect to a
covered employee who is employed by
the acquired organization before the sale
and who continues to be employed by the
acquired organization after the sale, or
with respect to the spouse or dependent
children of such a covered employee?
A-5: No. A covered employee who
continues to be employed by the acquired
organization after the sale does not expe-
rience a termination of employment as a
result of the sale. Accordingly, the sale is
not a qualifying event with respect to the
covered employee, or with respect to the
covered employee’s spouse or dependent
children, regardless of whether they are
provided with group health coverage after
the sale, and neither the covered em-
ployee, nor the covered employee’s
spouse or dependent children, become
qualified beneficiaries as a result of the
sale.
Q-6: In the case of an asset sale, is the
sale a qualifying event with respect to a
covered employee whose employment
immediately before the sale was associ-
ated with the purchased assets, or with re-
spect to the spouse or dependent children
of such a covered employee who are cov-
ered under a group health plan of the sell-
ing group immediately before the sale?
A-6: (a) Yes, unless –
(1) The buying group is a successor
employer under paragraph (c) of Q&A-8
of this section or Q&A-2 of §54.4980B–
2, and the covered employee is employed
by the buying group immediately after the
sale; or
(2) The covered employee (or the
spouse or any dependent child of the cov-
ered employee) does not lose coverage
(within the meaning of paragraph (c) in
Q&A-1 of §54.4980B–4) under a group
health plan of the selling group after the
sale.
(b) Unless the conditions in paragraph
(a)(1) or (2) of this Q&A-6 are satisfied,
such a covered employee experiences a
termination of employment with the sell-
ing group as a result of the asset sale, re-
gardless of whether the covered employee
is employed by the buying group or
whether the covered employee’s employ-
ment is associated with the purchased as-
sets after the sale. Accordingly, the cov-
ered employee, and the spouse and
dependent children of the covered em-
February 22, 1999741999–8 I.R.B.

ployee who lose coverage under a plan of
the selling group in connection with the
sale, are M&A qualified beneficiaries in
connection with the sale.
Q-7: In a business reorganization, are
the buying group and the selling group
permitted to allocate by contract the re-
sponsibility to make COBRA continua-
tion coverage available to M&A qualified
beneficiaries?
A-7: Yes. Nothing in this section pro-
hibits a selling group and a buying group
from allocating to one or the other of the
parties in a purchase agreement the re-
sponsibility to provide the coverage re-
quired under §§54.4980B–1 through
54.4980B–10. However, if and to the ex-
tent that the party assigned this responsi-
bility under the terms of the contract fails
to perform, the party who has the obliga-
tion under Q&A-8 of this section to make
COBRA continuation coverage available
to M&A qualified beneficiaries continues
to have that obligation.
Q-8: Which group health plan has the
obligation to make COBRA continuation
coverage available to M&A qualified ben-
eficiaries in a business reorganization?
A-8: (a) In the case of a business reor-
ganization (whether a stock sale or an
asset sale), so long as the selling group
maintains a group health plan after the
sale, a group health plan maintained by
the selling group has the obligation to
make COBRA continuation coverage
available to M&A qualified beneficiaries
with respect to that sale. This Q&A-8
prescribes rules for cases in which the
selling group ceases to provide any group
health plan to any employee in connection
with the sale. Paragraph (b) of this Q&A-
8 contains these rules for stock sales, and
paragraph (c) of this Q&A-8 contains
these rules for asset sales. Neither a stock
sale nor an asset sale has any effect on the
COBRA continuation coverage require-
ments applicable to any group health plan
for any period before the sale.
(b)(1) In the case of a stock sale, if the
selling group ceases to provide any group
health plan to any employee in connection
with the sale, a group health plan main-
tained by the buying group has the obliga-
tion to make COBRA continuation cover-
age available to M&A qualified
beneficiaries with respect to that stock
sale. A group health plan of the buying
group has this obligation beginning on the
later of the following two dates and con-
tinuing as long as the buying group con-
tinues to maintain a group health plan (but
subject to the rules in §54.4980B-7, relat-
ing to the duration of COBRA continua-
tion coverage) –
(i) The date the selling group ceases to
provide any group health plan to any em-
ployee; or
(ii) The date of the stock sale.
(2) The determination of whether the
selling group’s cessation of providing any
group health plan to any employee is in
connection with the stock sale is based on
all of the relevant facts and circum-
stances. A group health plan of the buy-
ing group does not, as a result of the stock
sale, have an obligation to make COBRA
continuation coverage available to those
qualified beneficiaries of the selling
group who are not M&A qualified benefi-
ciaries with respect to that sale.
(c)(1) In the case of an asset sale, if the
selling group ceases to provide any group
health plan to any employee in connection
with the sale and if the buying group con-
tinues the business operations associated
with the assets purchased from the selling
group without interruption or substantial
change, then the buying group is a succes-
sor employer to the selling group in con-
nection with that asset sale. If the buying
group is a successor employer, a group
health plan maintained by the buying
group has the obligation to make COBRA
continuation coverage available to M&A
qualified beneficiaries with respect to that
asset sale. A group health plan of the buy-
ing group has this obligation beginning on
the later of the following two dates and
continuing as long as the buying group
continues to maintain a group health plan
(but subject to the rules in §54.4980B-7,
relating to the duration of COBRA contin-
uation coverage) –
(i) The date the selling group ceases to
provide any group health plan to any em-
ployee; or
(ii) The date of the asset sale.
(2) The determination of whether the
selling group’s cessation of providing any
group health plan to any employee is in
connection with the asset sale is based on
all of the relevant facts and circum-
stances. A group health plan of the buy-
ing group does not, as a result of the asset
sale, have an obligation to make COBRA
continuation coverage available to those
qualified beneficiaries of the selling
group who are not M&A qualified benefi-
ciaries with respect to that sale.
(d) The rules of Q&A-1 through Q&A-
7 of this section and this Q&A-8 are illus-
trated by the following examples; in each
example, each group health plan is sub-
ject to COBRA:
Stock Sale Examples
Example 1.(i) Selling Group Sconsists of three
corporations, A, B,and C. Buying Group Pconsists
of two corporations, Dand E. Penters into a con-
tract to purchase all the stock of Cfrom Seffective
July 1, 2002. Before the sale of C, Smaintains a sin-
gle group health plan for the employees of A, B,and
C(and their families). Pmaintains a single group
health plan for the employees of Dand E(and their
families). Effective July 1, 2002, the employees of
C(and their families) become covered under P’s
plan. On June 30, 2002, there are 48 qualified bene-
ficiaries receiving COBRA continuation coverage
under S’s plan, 15 of whom are M&A qualified ben-
eficiaries with respect to the sale of C. (The other 33
qualified beneficiaries had qualifying events in con-
nection with a covered employee whose last em-
ployment before the qualifying event was with
either Aor B.)
(ii) Under these facts, S’s plan continues to have
the obligation to make COBRA continuation cover-
age available to the 15 M&A qualified beneficiaries
under S’s plan after the sale of Cto P. The employ-
ees who continue in employment with Cdo not ex-
perience a qualifying event by virtue of P’s acquisi-
tion of C. If they experience a qualifying event after
the sale, then the group health plan of Phas the
obligation to make COBRA continuation coverage
available to them.
Example 2. (i) Selling Group Sconsists of three
corporations, A, B,and C. Each of A, B,and C
maintains a group health plan for its employees
(and their families). Buying Group Pconsists of
two corporations, Dand E. Penters into a contract
to purchase all of the stock of Cfrom Seffective
July 1, 2002. As of June 30, 2002, there are 14 qual-
ified beneficiaries receiving COBRA continuation
coverage under C’s plan. C continues to employ all
of its employees and continues to maintain its group
health plan after being acquired by Pon July 1,
2002.
(ii) Under these facts, Cis an acquired organiza-
tion and the 14 qualified beneficiaries under C’s
plan are M&A qualified beneficiaries. A group
health plan of S(that is, either the plan maintained
by Aor the plan maintained by B) has the obligation
to make COBRA continuation coverage available to
the 14 M&A qualified beneficiaries. Sand Pcould
negotiate to have C’s plan continue to make
COBRA continuation coverage available to the 14
M&A qualified beneficiaries. In such a case, neither
A’s plan nor B’s plan would make COBRA continua-
tion coverage available to the 14 M&A qualified
beneficiaries unless C’s plan failed to fulfill its con-
tractual responsibility to make COBRA continuation
coverage available to the M&A qualified beneficia-
ries. C’s employees (and their spouses and depen-
dent children) do not experience a qualifying event
1999–8 I.R.B.75February 22, 1999

in connection with P’s acquisition of C, and conse-
quently no plan maintained by either Por Shas any
obligation to make COBRA continuation coverage
available to C’s employees (or their spouses or de-
pendent children) in connection with the transfer of
stock in Cfrom Sto P.
Example 3. (i) The facts are the same as in Ex-
ample 2, except that Cceases to employ two em-
ployees on June 30, 2002, and those two employees
never become covered under P’s plan.
(ii) Under these facts, the two employees experi-
ence a qualifying event on June 30, 2002 because
their termination of employment causes a loss of
group health coverage. A group health plan of S
(that is, either the plan maintained by Aor the plan
maintained by B) has the obligation to make
COBRA continuation coverage available to the two
employees (and to any spouse or dependent child of
the two employees who loses coverage under C’s
plan in connection with the termination of employ-
ment of the two employees) because they are M&A
qualified beneficiaries with respect to the sale of C.
Example 4. (i) Selling Group Sconsists of three
corporations, A, B,and C.Buying Group Pconsists
of two corporations, Dand E. Penters into a con-
tract to purchase all of the stock of Cfrom Seffec-
tive July 1, 2002. Before the sale of C, Smaintains a
single group health plan for the employees of A, B,
and C(and their families). Pmaintains a single
group health plan for the employees of Dand E
(and their families). Effective July 1, 2002, the em-
ployees of C(and their families) become covered
under P’s plan. On June 30, 2002, there are 25 qual-
ified beneficiaries receiving COBRA continuation
coverage under S’s plan, 20 of whom are M&A qual-
ified beneficiaries with respect to the sale of C. (The
other five qualified beneficiaries had qualifying
events in connection with a covered employee
whose last employment before the qualifying event
was with either Aor B.) Sterminates its group
health plan effective June 30, 2002 and begins to liq-
uidate the assets of Aand Band to lay off the em-
ployees of Aand B.
(ii) Under these facts, Sceases to provide a
group health plan to any employee in connection
with the sale of Cto P. Thus, beginning July 1,
2002 P’s plan has the obligation to make COBRA
continuation coverage available to the 20 M&A
qualified beneficiaries, but Pis not obligated to
make COBRA continuation coverage available to
the other 5 qualified beneficiaries with respect to S’s
plan as of June 30, 2002 or to any of the employees
of Aor Bwhose employment is terminated by S(or
to any of those employees’ spouses or dependent
children).
Asset Sale Examples
Example 5. (i) Selling Group Sprovides group
health plan coverage to employees at each of its op-
erating divisions. Ssells the assets of one of its divi-
sions to Buying Group P. Under the terms of the
group health plan covering the employees at the di-
vision being sold, their coverage will end on the date
of the sale. Phires all but one of those employees,
gives them the same positions that they had with S
before the sale, and provides them with coverage
under a group health plan. Immediately before the
sale, there are two qualified beneficiaries receiving
COBRA continuation coverage under a group health
plan of Swhose qualifying events occurred in con-
nection with a covered employee whose last em-
ployment prior to the qualifying event was associ-
ated with the assets sold to P.
(ii) These two qualified beneficiaries are M&A
qualified beneficiaries with respect to the asset sale to
P. Under these facts, a group health plan of Sretains
the obligation to make COBRA continuation cover-
age available to these two M&A qualified beneficia-
ries. In addition, the one employee Pdoes not hire as
well as all of the employees Phires (and the spouses
and dependent children of these employees) who
were covered under a group health plan of Son the
day before the sale are M&A qualified beneficiaries
with respect to the sale. A group health plan of Salso
has the obligation to make COBRA continuation cov-
erage available to these M&A qualified beneficiaries.
Example 6. (i) Selling Group Sprovides group
health plan coverage to employees at each of its op-
erating divisions. Ssells substantially all of the as-
sets of all of its divisions to Buying Group P, and S
ceases to provide any group health plan to any em-
ployee on the date of the sale. Phires all but one of
S’s employees on the date of the asset sale by S,
gives those employees the same positions that they
had with Sbefore the sale, and continues the busi-
ness operations of those divisions without substan-
tial change or interruption. Pprovides these em-
ployees with coverage under a group health plan.
Immediately before the sale, there are 10 qualified
beneficiaries receiving COBRA continuation cover-
age under a group health plan of Swhose qualifying
events occurred in connection with a covered em-
ployee whose last employment prior to the qualify-
ing event was associated with the assets sold to P.
(ii) These 10 qualified beneficiaries are M&A
qualified beneficiaries with respect to the asset sale
to P. Under these facts, Pis a successor employer
described in paragraph (c) of this Q&A-8. Thus, a
group health plan of Phas the obligation to make
COBRA continuation coverage available to these 10
M&A qualified beneficiaries.
(iii) The one employee that Pdoes not hire and
the family members of that employee are also M&A
qualified beneficiaries with respect to the sale. A
group health plan of Palso has the obligation to
make COBRA continuation coverage available to
these M&A qualified beneficiaries.
(iv) The employees who continue in employment
in connection with the asset sale (and their family
members) and who were covered under a group
health plan of Son the day before the sale are not
M&A qualified beneficiaries because Pis a succes-
sor employer to Sin connection with the asset sale.
Thus, no group health plan of Phas any obligation to
make COBRA continuation coverage available to
these continuing employees with respect to the quali-
fying event that resulted from their losing coverage
under S’s plan in connection with the asset sale.
Example 7.(i) Selling Group Sprovides group
health plan coverage to employees at each of its two
operating divisions. Ssells the assets of one of its
divisions to Buying Group P1. Under the terms of
the group health plan covering the employees at the
division being sold, their coverage will end on the
date of the sale. P1hires all but one of those em-
ployees, gives them the same positions that they had
with Sbefore the sale, and provides them with cov-
erage under a group health plan.
(ii) Under these facts, a group health plan of S
has the obligation to make COBRA continuation
coverage available to M&A qualified beneficiaries
with respect to the sale to P1.(If an M&A qualified
beneficiary first became covered under P1’s plan
after electing COBRA continuation coverage under
S’s plan, then S’s plan could terminate the COBRA
continuation coverage once the M&A qualified ben-
eficiary became covered under P1’s plan, provided
that the remaining conditions of Q&A-2 of
§54.4980B–7 were satisfied.)
(iii) Several months after the sale to P1, Ssells
the assets of its remaining division to Buying Group
P2,and Sceases to provide any group health plan to
any employee on the date of that sale. Thus, under
Q&A-1 of §54.4980B–7, Sceases to have an obliga-
tion to make COBRA continuation coverage avail-
able to any qualified beneficiary on the date of the
sale to P2. P1and P2are unrelated organizations.
(iv) Even if it was foreseeable that Swould sell
its remaining division to an unrelated third party
after the sale to P1, under these facts the cessation of
Sto provide any group health plan to any employee
on the date of the sale to P2is not in connection with
the asset sale to P1.Thus, even after the date S
ceases to provide any group health plan to any em-
ployee, no group health plan of P1has any obliga-
tion to make COBRA continuation coverage avail-
able to M&A qualified beneficiaries with respect to
the asset sale to P1by S. If P2is a successor em-
ployer under the rules of paragraph (c) of this Q&A-
8 and maintains one or more group health plans after
the sale, then a group health plan of P2would have
an obligation to make COBRA continuation cover-
age available to M&A qualified beneficiaries with
respect to the asset sale to P2by S(but in such a
case employees of Sbefore the sale who continued
working for P2after the sale would not be M&A
qualified beneficiaries). However, even in such a
case, no group health plan of P2would have an
obligation to make COBRA continuation coverage
available to M&A qualified beneficiaries with re-
spect to the asset sale to P1by S. Thus, under these
facts, after Shas ceased to provide any group health
plan to any employee, no plan has an obligation to
make COBRA continuation coverage available to
M&A qualified beneficiaries with respect to the
asset sale to P1.
Example 8. (i) Selling Group Sprovides group
health plan coverage to employees at each of its op-
erating divisions. Ssells substantially all of the as-
sets of all of its divisions to Buying Group P. P
hires most of S’s employees on the date of the pur-
chase of S’s assets, retains those employees in the
same positions that they had with Sbefore the pur-
chase, and continues the business operations of
those divisions without substantial change or inter-
ruption. Pprovides these employees with coverage
under a group health plan. Scontinues to employ a
few employees for the principal purpose of winding
up the affairs of Sin preparation for liquidation. S
continues to provide coverage under a group health
plan to these few remaining employees for several
weeks after the date of the sale and then ceases to
provide any group health plan to any employee.
(ii) Under these facts, the cessation by Sto pro-
vide any group health plan to any employee is in
connection with the asset sale to P. Because of this,
and because Pcontinued the business operations as-
February 22, 1999761999–8 I.R.B.

sociated with those assets without substantial
change or interruption, Pis a successor employer to
Swith respect to the asset sale. Thus, a group health
plan of Phas the obligation to make COBRA contin-
uation coverage available to M&A qualified benefi-
ciaries with respect to the sale beginning on the date
that Sceases to provide any group health plan to any
employee. (A group health plan of Sretains this
obligation for the several weeks after the date of the
sale until Sceases to provide any group health plan
to any employee.)
Q-9: Can the cessation of contributions
by an employer to a multiemployer group
health plan be a qualifying event?
A-9: The cessation of contributions by
an employer to a multiemployer group
health plan is not itself a qualifying event,
even though the cessation of contributions
may cause current employees (and their
spouses and dependent children) to lose
coverage under the multiemployer plan.
An event coinciding with the employer’s
cessation of contributions (such as a reduc-
tion of hours of employment in the case of
striking employees) will constitute a quali-
fying event if it otherwise satisfies the re-
quirements of Q&A-1 of §54.4980B–4.
Q-10: If an employer stops contribut-
ing to a multiemployer group health plan,
does the multiemployer plan have the
obligation to make COBRA continuation
coverage available to a qualified benefi-
ciary who was receiving coverage under
the multiemployer plan on the day before
the cessation of contributions and who is,
or whose qualifying event occurred in
connection with, a covered employee
whose last employment prior to the quali-
fying event was with the employer that
has stopped contributing to the multiem-
ployer plan?
A-10: (a) In general, yes. (See Q&A-
3 of §54.4980B–2 for a definition of
multiemployerplan.) If, however, the em-
ployer that stops contributing to the multi-
employer plan establishes one or more
group health plans (or starts contributing
to another multiemployer plan that is a
group health plan) covering a significant
number of the employer’s employees for-
merly covered under the multiemployer
plan, the plan established by the employer
(or the other multiemployer plan) has the
obligation to make COBRA continuation
coverage available to any qualified bene-
ficiary who was receiving coverage under
the multiemployer plan on the day before
the cessation of contributions and who is,
or whose qualifying event occurred in
connection with, a covered employee
whose last employment prior to the quali-
fying event was with the employer.
(b) The rules of Q&A-9 of this section
and this Q&A-10 are illustrated by the
following examples; in each example,
each group health plan is subject to
COBRA:
Example 1.(i) Employer Zemploys a class of
employees covered by a collective bargaining agree-
ment and participating in multiemployer group
health plan M.As required by the collective bar-
gaining agreement, Zhas been making contributions
to M. Zexperiences financial difficulties and stops
making contributions to Mbut continues to employ
all of the employees covered by the collective bar-
gaining agreement. Z’s cessation of contributions to
Mcauses those employees (and their spouses and
dependent children) to lose coverage under M. Z
does not establish any group health plan covering
any of the employees covered by the collective bar-
gaining agreement.
(ii) After Zstops contributing to M, Mcontinues
to have the obligation to make COBRA continuation
coverage available to any qualified beneficiary who
experienced a qualifying event that preceded or co-
incided with the cessation of contributions to Mand
whose coverage under Mon the day before the qual-
ifying event was due to an employment affiliation
with Z.The loss of coverage under Mfor those em-
ployees of Zwho continue in employment (and the
loss of coverage for their spouses and dependent
children) does not constitute a qualifying event.
Example 2. (i) Employer Yemploys a class of
employees covered by a collective bargaining agree-
ment and participating in multiemployer group
health plan M.As required by the collective bar-
gaining agreement, Yhas been making contributions
to M. Yexperiences financial difficulties and is
forced into bankruptcy by its creditors. Ycontinues
to employ all of the employees covered by the col-
lective bargaining agreement. Yalso continues to
make contributions to Muntil the current collective
bargaining agreement expires, on June 30, 2001, and
then Ystops making contributions to M. Y’s em-
ployees (and their spouses and dependent children)
lose coverage under Meffective July 1, 2001. Y
does not enter into another collective bargaining
agreement covering the class of employees covered
by the expired collective bargaining agreement. Ef-
fective September 1, 2001, Yestablishes a group
health plan covering the class of employees for-
merly covered by the collective bargaining agree-
ment. The group health plan also covers their
spouses and dependent children.
(ii) Under these facts, Mhas the obligation to
make COBRA continuation coverage available from
July 1, 2001 until August 31, 2001, and the group
health plan established by Yhas the obligation to
make COBRA continuation coverage available from
September 1, 2001 until the obligation ends (see
Q&A-1 of §54.4980B–7) to any qualified benefi-
ciary who experienced a qualifying event that pre-
ceded or coincided with the cessation of contribu-
tions to Mand whose coverage under Mon the day
before the qualifying event was due to an employ-
ment affiliation with Y. The loss of coverage under
Mfor those employees of Ywho continue in em-
ployment (and the loss of coverage for their spouses
and dependent children) does not constitute a quali-
fying event.
Example 3. (i) Employer Xemploys a class of
employees covered by a collective bargaining agree-
ment and participating in multiemployer group
health plan M.As required by the collective bar-
gaining agreement, Xhas been making contributions
to M.The employees covered by the collective bar-
gaining agreement vote to decertify their current
employee representative effective January 1, 2002
and vote to certify a new employee representative
effective the same date. As a consequence, on Janu-
ary 1, 2002 they cease to be covered under Mand
commence to be covered under multiemployer
group health plan N.
(ii) Effective January 1, 2002, Nhas the obliga-
tion to make COBRA continuation coverage avail-
able to any qualified beneficiary who experienced a
qualifying event that preceded or coincided with the
cessation of contributions to Mand whose coverage
under Mon the day before the qualifying event was
due to an employment affiliation with X. The loss of
coverage under Mfor those employees of Xwho
continue in employment (and the loss of coverage
for their spouses and dependent children) does not
constitute a qualifying event.
§54.4980B–10 Interaction of FMLA and
COBRA.
The following questions-and-answers
address how the taking of leave under the
Family and Medical Leave Act of 1993
(FMLA) (29 U.S.C. 2601–2619) affects
the COBRA continuation coverage re-
quirements:
Q-1: In what circumstances does a
qualifying event occur if an employee
does not return from leave taken under
FMLA?
A-1: (a) The taking of leave under
FMLA does not constitute a qualifying
event. A qualifying event under Q&A-1
of §54.4980B–4 occurs, however, if –
(1) An employee (or the spouse or a
dependent child of the employee) is cov-
ered on the day before the first day of
FMLA leave (or becomes covered during
the FMLA leave) under a group health
plan of the employee’s employer;
(2) The employee does not return to
employment with the employer at the end
of the FMLA leave; and
(3) The employee (or the spouse or a
dependent child of the employee) would,
in the absence of COBRA continuation
coverage, lose coverage under the group
health plan before the end of the maxi-
mum coverage period.
(b) However, the satisfaction of the
three conditions in paragraph (a) of this
Q&A-1 does not constitute a qualifying
1999–8 I.R.B.77February 22, 1999

event if the employer eliminates, on or
before the last day of the employee’s
FMLA leave, coverage under a group
health plan for the class of employees
(while continuing to employ that class of
employees) to which the employee would
have belonged if the employee had not
taken FMLA leave.
Q-2: If a qualifying event described in
Q&A-1 of this section occurs, when does
it occur, and how is the maximum cover-
age period measured?
A-2: A qualifying event described in
Q&A-1 of this section occurs on the last
day of FMLA leave. The maximum cov-
erage period (see Q&A-4 of §54.4980B–
7) is measured from the date of the quali-
fying event (that is, the last day of FMLA
leave). If, however, coverage under the
group health plan is lost at a later date and
the plan provides for the extension of the
required periods (see paragraph (b) of
Q&A-4 of §54.4980B–7), then the maxi-
mum coverage period is measured from
the date when coverage is lost. The rules
of this Q&A-2 are illustrated by the fol-
lowing examples:
Example 1.(i) Employee Bis covered under the
group health plan of Employer Xon January 31,
2001. Btakes FMLA leave beginning February 1,
2001. B’s last day of FMLA leave is 12 weeks later,
on April 25, 2001, and Bdoes not return to work
with Xat the end of the FMLA leave. If Bdoes not
elect COBRA continuation coverage, Bwill not be
covered under the group health plan of Xas of April
26, 2001.
(ii) Bexperiences a qualifying event on April 25,
2001, and the maximum coverage period is mea-
sured from that date. (This is the case even if, for
part or all of the FMLA leave, Bfails to pay the em-
ployee portion of premiums for coverage under the
group health plan of Xand is not covered under X’s
plan. See Q&A-3 of this section.)
Example 2.(i) Employee Cand C’s spouse are
covered under the group health plan of Employer Y
on August 15, 2001. Ctakes FMLA leave beginning
August 16, 2001. Cinforms Yless than 12 weeks
later, on September 28, 2001, that Cwill not be re-
turning to work. Under the FMLA regulations, 29
CFR Part 825 (§§825.100–825.800), C’s last day of
FMLA leave is September 28, 2001. Cdoes not re-
turn to work with Yat the end of the FMLA leave. If
Cand C’s spouse do not elect COBRA continuation
coverage, they will not be covered under the group
health plan of Yas of September 29, 2001.
(ii) Cand C’s spouse experience a qualifying
event on September 28, 2001, and the maximum
coverage period (generally 18 months) is measured
from that date. (This is the case even if, for part or
all of the FMLA leave, Cfails to pay the employee
portion of premiums for coverage under the group
health plan of Yand Cor C’s spouse is not covered
under Y’s plan. See Q&A-3 of this section.)
Q-3: If an employee fails to pay the
employee portion of premiums for cover-
age under a group health plan during
FMLA leave or declines coverage under a
group health plan during FMLA leave,
does this affect the determination of
whether or when the employee has expe-
rienced a qualifying event?
A-3: No. Any lapse of coverage under
a group health plan during FMLA leave is
irrelevant in determining whether a set of
circumstances constitutes a qualifying
event under Q&A-1 of this section or
when such a qualifying event occurs
under Q&A-2 of this section.
Q-4: Is the application of the rules in
Q&A-1 through Q&A-3 of this section af-
fected by a requirement of state or local
law to provide a period of coverage
longer than that required under FMLA?
A-4: No. Any state or local law that
requires coverage under a group health
plan to be maintained during a leave of
absence for a period longer than that re-
quired under FMLA (for example, for 16
weeks of leave rather than for the 12
weeks required under FMLA) is disre-
garded for purposes of determining when
a qualifying event occurs under Q&A-1
through Q&A-3 of this section.
Q-5: May COBRA continuation cover-
age be conditioned upon reimbursement
of the premiums paid by the employer for
coverage under a group health plan during
FMLA leave?
A-5: No. The U.S. Department of
Labor has published rules describing the
circumstances in which an employer may
recover premiums it pays to maintain cov-
erage, including family coverage, under a
group health plan during FMLA leave
from an employee who fails to return from
leave. See 29 CFR 825.213. Even if re-
covery of premiums is permitted under 29
CFR 825.213, the right to COBRA contin-
uation coverage cannot be conditioned
upon the employee’s reimbursement of the
employer for premiums the employer paid
to maintain coverage under a group health
plan during FMLA leave.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 2, 1999, 8:45 a.m., and published in the issue
of the Federal Register for February 3, 1999, 64 F.R.
5237)
Foundations Status of Certain
Organizations
Announcement 99–15
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of notices
under section 508(b) of the Code. This
listing does notindicate that the organiza-
tions have lost their status as organiza-
tions described in section 501(c)(3), eligi-
ble to receive deductible contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
E Doris Carney Scholarship Fund Inc.,
Warwick, RI
Eagle Council of North Carolina,
Charlotte, NC
Eagles – Drugs & AIDS HIV Support
Group, Bloomfield, CT
Early Childhood Facilities Fund of New
Jersey Inc., Pennington, NJ
Early Nutrition Training Pays Inc., San
Antonio, TX
Earth Angels Center Inc., Olathe, KS
Earth Living Foundation, Glenwood
Springs, CO
Earth Reclamation Institute Inc.,
Grapevine, TX
Earthbond, Irvine, CA
Earthcare San Diego Inc., Badger, CA
East Carroll Rural Housing Inc., Lake
Providence, LA
East High Band Boosters, Rockford, IL
East Hills Association No. 1 Youth
Institute, Pittsburgh, PA
East Main Street Revitalization
Association Inc., Bridgeport, CT
East Mound Community Development
Corporation, Newark, OH
East Orange Rowley Park Economic
Development Corporation, East
Orange, NJ
February 22, 1999781999–8 I.R.B.

East Tennessee Initiative Inc., Knoxville,
TN
East Texas Cheerful Giving Helping
Hand Association, Gilmer, TX
East-West Center At-Aspen Ltd., Aspen,
CO
Eastern Pennsylvania Renewal
Fellowship, Ambler, PA
Easton Cultural Education Foundation,
Easton, CT
Eastside Fighting Crime, San Antonio,
TX
Eastside Local Community Development
Corp EL-CDC, New York, NY
Ecosail Inc., Englewood, FL
Ecumenical Catholic Church of America,
Lincoln, NE
Ecumenical Trust of the World Council of
Churches and National C., New York,
NY
Edge Productions Inc., Philadelphia,
PA
Edgebrook-Sauganash Athletic
Association, Chicago, IL
Edison Education Foundation a New
Jersey Nonprofit Corporation, Edison,
NJ
Edison High School 1964 Alumni
Association Inc., Tulsa, OK
Edmonson County Middle-School
Academic Boosters, Brownsville, KY
Education Foundation for Brighton
Schools, Brighton, CO
Educational Advancement and
Supportive Efforts Foundation Inc.,
Tallahassee, FL
Educational Concepts Inc. 02-08-93,
Fort Collins, CO
Educational Leadership Foundation,
Washington, DC
Educational Publications Foundation,
Florence, OR
Elm Street Arts Inc., Manchester Center,
VT
Emanuel County Historic Preservation
Society Inc., Swainsboro, GA
Educational Resource Center a New
Jersey Non-Profit Corporation,
Willingboro, NJ
Educational Resource Foundation,
Normal, IL
Educational Solutions, Redwood City,
GA
Educational Support Organization Inc.,
New Orleans, LA
Educational Technology Systems,
Washington, DC
Edward J Bloustein School of Planning
and Public Policy Alumni, New
Brunswick, NJ
Edwin W Freitag Memorial Scholarship,
Ypsilanti, MI
Eels on Wheels Adaptive Scuba Club,
Austin, TX
EIBT Equality in Bank Treatment,
Laurel, MS
Eighth District Association Development
Board Inc., Alexandria, LA
El Andar Foundation, Santa Cruz, GA
El Campo Community Theatre, El
Campo, TX
El Futuro Del Latino, Chicago, IL
El Paso Juniors Volleyball Club, El Paso,
TX
Elder P A T H Inc., Baltimore, MD
Elder-Ride Inc., Lehigh Acres, FL
Electro-Drive Research Institute, Tucson,
AZ
Eleuthra Animal Rescue Association Inc.,
Boston, MA
Elf Cocoon Research & Technology Int
Ltd., Mt. Carmel, IL
Elgin Community Youth Soccer
Association Inc., Elgin, TX
Elgin Sharks Track Club, Elgin, IL
Eligeti Family Foundation Inc., Ocala,
FL
Elizabeth James Senior Housing, Seattle,
WA
Elizabeth S Henderson Living Challenge
Scholarship Fund, Charlotte, NC
Elkhorn American Legion Baseball
Association, Elkhorn, NE
Elkhorn Valley Recreational Project-
Kimball-Vivian Inc., Kimball, WV
Elm Fork Nature Preserve Association,
Carrollton, TX
Emergency Communicators Association
of Southeastern Minnesota, Rochester,
MN
Emergency Food Center Inc., Chicago,
IL
Emergency Medical Search and Rescue,
Meriden, CT
Emerging Business Institute, San
Francisco, CA
Emily Foster Enterprises Inc., Mt.
Pleasant, SC
Emmanuel El Shaddai Inc., West
Monroe, LA
Emmanuel House Inc., Dayton, TN
Emotional Ecology, Sheridan, WY
Employment Link Inc., Fort Worth,
TX
Empowerment for a Diverse Community
Inc., Cleveland, OH
Empowerment Inc., Norristown, PA
Endangered Wildlife Fund, Newport
Beach, CA
Endowment for Children in Crises Inc.,
Brookline, MA
Enhancing Life for Our Homeless Inc.,
Irving, TX
Enlightenment, Detroit, MI
Ensign Foundation, Sandy, UT
Entrepreneur Corps Inc., New York,
NY
Enviro League, Peoria, IL
Environmental Research & Awareness
Corp., Gautier, MS
Environmental Career Center Inc.,
Hampton, VA
Environmental Contribution Center,
San Diego, CA
Equal Vote, Brooklyn, NY
Equi Therapy Inc., West Babylon, NY
Eric Schiffer Youth Foundation Inc.,
San Jose, CA
Ernest Thompson Seton Foundation,
Sante Fe, NM
ERTEP Inc., Atlanta, GA
ERUV of San Antonio Inc., San Antonio,
TX
Escambia Released Time Bible Classes
Inc., Pensacola, FL
Escondido Community Dialogue,
Escondido, CA
Eskews Jack & Jill Day Care Center Inc.,
Waynesboro, GA
Estelle Brown Community Center,
Dittmer, MO
Estrellas Nacientes Inc., Brooklyn, NY
ETA Omega Foundation Inc., Louisville,
KY
Ethical Technologies Inc., Lexington, KY
ETS Youth Division Inc., Freeport, NY
Eugene Hash Ministries, Charlotte, NC
Evelyn Morris Parent Teacher
Partnership, Lincoln, DE
Everlasting Gospel, Des Plaines, IL
Excel Eco Inc., Houston, TX
Excel Programs Incorporated,
Wilmington, DE
Exceptional Family Resource Center Inc.,
San Diego, CA
Exchange Club Center for the Prevent of
Child Abuse of Shrv Bossier Inc.,
Bossier City, LA
Exchange Club of Chambersburg Fndtn
for the Prev of Child Abuse Inc.,
Chambersburg, PA
1999–8 I.R.B.79February 22, 1999

Expressive Women Inc., Plano, TX
Extra Virgin Performance Corporation
Inc., Richardson, TX
Eye Research Foundation, Albany, NY
Eyes & Ears of Nevada Inc., Las Vegas,
NV
Eyewitness for Life Ltd., Cedarburg, WI
Ezras Mamesh TR, Brooklyn, NY
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as a
private operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classi-
fication as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
vided in section 1.509(a)–7 of the Income
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin
New Form 8866, Interest
Computation Under the Look-
Back Method for Property
Depreciated Under the Income
Forecast Method, Is Now
Available
Announcement 99–16
New Form 8866, Interest Computation
Under the Look-Back Method for Prop-
erty Depreciated Under the Income Fore-
cast Method, is now available. The pur-
pose of the form is to figure the interest
due or refundable under the look-back
method of Internal Revenue Code section
167(g)(2).
If you depreciated certain property
placed in service after September 13,
1995, under the income forecast method,
you generally must file Form 8866 for the
3rd and 10th tax years beginning after the
tax year the property was placed in ser-
vice. If interest is due, file the form with
your Federal income tax return for that
year. If interest is to be refunded, file the
form separately.
You can obtain Form 8866 and its sepa-
rate instructions by telephone or by using
IRS electronic information services.
February 22, 1999801999–8 I.R.B.
Request by—Number or Address
Telephone1-800-TAX-FORM
(1-800-829-3676)
Personal computer:
World Wide Webwww.irs.ustreas.gov
File Transfer Protocolftp.irs.ustreas.gov
Telnetiris.irs.ustreas.gov
Direct Dial (by modem)703-321-8020

1999–8 I.R.B.81February 22, 1999
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with 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
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published 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 Contribution 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. Proc..—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral 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.
Definition of Terms

February 22, 1999821999–8 I.R.B.
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1998–1 through 1998–52
will be found in Internal Revenue Bulletin 1999–1,
dated January 4, 1999.
Numerical Finding List
1
Bulletins 1999–1 through 1999–7
Announcements:
99–1, 1999–2 I.R.B. 41
99–2, 1999–2 I.R.B. 44
99–3, 1999–3 I.R.B. 15
99–4, 1999–3 I.R.B. 15
99–5, 1999–3 I.R.B. 16
99–6, 1999–4 I.R.B.24
99–7, 1999–2 I.R.B. 45
99–8, 1999–4 I.R.B.24
99–9, 1999–4 I.R.B. 24
99–10, 1999–5 I.R.B. 63
99–11, 1999–5 I.R.B. 64
99–12, 1999–5 I.R.B. 65
99–13, 1999–6 I.R.B. 18
99–14, 1999–7 I.R.B.60
Notices:
99–1, 1999–2 I.R.B. 8
99–2, 1999–2 I.R.B. 8
99–3, 1999–2 I.R.B. 10
99–4, 1999–3 I.R.B. 9
99–5, 1999–3 I.R.B. 10
99–6, 1999–3 I.R.B. 12
99–7, 1999–4 I.R.B.23
99–8, 1999–5 I.R.B. 26
99–9, 1999–4 I.R.B. 23
99–10, 1999–6 I.R.B. 14
Proposed Regulations:
REG–111435–98, 1999–7 I.R.B. 55
REG–113694–98, 1999–7 I.R.B. 56
REG–114663–97, 1999–6 I.R.B. 15
REG–116824–98, 1999–7 I.R.B.57
REG–117620–98, 1999–7 I.R.B. 59
Revenue Procedures:
99–1, 1999–1 I.R.B. 6
99–2, 1999–1 I.R.B. 73
99–3, 1999–1 I.R.B. 103
99–4, 1999–1 I.R.B. 115
99–5, 1999–1 I.R.B. 158
99–6, 1999–1 I.R.B. 187
99–7, 1999–1 I.R.B. 226
99–8, 1999–1 I.R.B. 229
99–9, 1999–2 I.R.B. 17
99–10, 1999–2 I.R.B. 11
99–11, 1999–2 I.R.B. 14
99–12, 1999–3 I.R.B. 13
99–13, 1999–5 I.R.B. 52
99–14, 1999–5 I.R.B. 56
99–15, 1999–7 I.R.B. 42
99–16, 1999–7 I.R.B. 50
99–17, 1999–7 I.R.B. 52
Revenue Rulings:
99–1, 1999–2 I.R.B. 4
99–2, 1999–2 I.R.B. 5
99–3, 1999–3 I.R.B. 4
99–4, 1999–4 I.R.B.19
99–5, 1999–6 I.R.B.8
99–6, 1999–6 I.R.B. 6
99–7, 1999–5 I.R.B. 4
99–8, 1999–6 I.R.B.8
99–9, 1999–7 I.R.B.14
Treasury Decisions:
8789, 1999–3 I.R.B. 5
8791, 1999–5 I.R.B. 7
8792, 1999–7 I.R.B.36
8793, 1999–7 I.R.B.15
8794, 1999–7 I.R.B.4
8795, 1999–7 I.R.B.8
8796, 1999–4 I.R.B. 16
8797, 1999–5 I.R.B. 5
8799, 1999–6 I.R.B. 10
8800, 1999–4 I.R.B. 20
8801, 1999–4 I.R.B. 5
8802, 1999–4 I.R.B. 10
8805, 1999–5 I.R.B. 14
8806, 1999–6 I.R.B.4
8809, 1999–7 I.R.B.27
8810, 1999–7 I.R.B.19

1999–8 I.R.B.83February 22, 1999
Finding List of Current Action on
Previously Published Items
1
Bulletins 1999–1 through 1999–7
Revenue Procedures:
78–10
Obsoleted by
99–12, 1999–3 I.R.B. 13
94–56
Superseded by
99–9, 1999–2 I.R.B. 17
97–23
Superseded by
99–3, 1999–1 I.R.B. 103
98–1
Superseded by
99–1, 1999–1 I.R.B. 6
98–2
Superseded by
99–2, 1999–1 I.R.B. 73
98–3
Superseded by
99–3, 1999–1 I.R.B. 103
98–4
Superseded by
99–4, 1999–1 I.R.B. 115
98–5
Superseded by
99–5, 1999–1 I.R.B. 158
98–6
Superseded by
99–6, 1999–1 I.R.B. 187
98–7
Superseded by
99–7, 1999–1 I.R.B. 226
98–8
Superseded by
99–8, 1999–1 I.R.B. 229
98–22
Modified and amplified by
99–13, 1999–5 I.R.B. 52
98–56
Superseded by
99–3, 1999–1 I.R.B. 103
98–63
Modified by announcement
99–7, 1999–2 I.R.B. 45
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1998–1 through 1998–52 will be found in Internal
Revenue Bulletin 1999–1, dated January 4, 1999.

February 22, 1999841999–8 I.R.B.
NOTES

NOTES
1999–8 I.R.B.85February 22, 1999

NOTES
February 22, 1999861999–8 I.R.B.

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